25aggressive loosening of monetary policy. The very
next day, Aug. 1, Trump exacerbated the sell-off by
saying he would place tariffs on practically any U.S.
imports from China that don’t already have them,
starting in September. The response from Beijing on
Aug. 5 caused the biggest waves in global markets,
as the People’s Bank of China allowed its currency
to depreciate by the most since 2015 and reach more
than 7 per dollar, a threshold it had prevented the
yuan from crossing in recent years. China also asked
state-owned companies to suspend purchases of
U.S. crops, renewing pressure on the beaten-down
prices of American corn and soybeans.
With each of these collisions, the fragility of the
global economy and markets is exposed. It seems
increasingly possible that something big and import-
ant is broken. Investors who’d believed U.S.-China
relations were stabilizing, if not improving, were
caught on the wrong foot when tensions abruptly
escalated. The prevailing assumption that President
Trump won’t allow the trade war to continue
through the 2020 presidential campaign season is
being reconsidered, as the two sides appear fur-
ther apart than ever. Economists at Goldman Sachs
Group Inc., for example, no longer expect a trade
agreement before the election and see the Fed cut-
ting its benchmark interest rate two more times this
year in an effort to counteract the economic damage
that will be done by the impasse.
The constant whiplashes in expectations can be
seen in an index that measures how often news sto-
ries mention uncertainty surrounding U.S. trade
policy. It almost tripled in June to a 25-year high,
before dropping by more than half in July after a
comparatively uneventful stretch. The drama of
August isn’t yet reflected in the index, which is cal-
culated monthly.
As troubling economic data pile up, the ques-
tion being openly debated on Wall Street is whether
lower borrowing costs will be enough to fend off a
recession. An Institute for Supply Management
index for the U.S. manufacturing businesses that
Trump’s policies were meant to support dropped
to an almost three-year low of 51.2 in July. A similar
gauge of the service industries had dropped from
60.8 in September to a three-year low of 53.7 in July.
For both indexes, readings below 50 are a sign that
economic activity is shrinking. In Europe, whose fac-
tories are caught in the crossfire between China and
the U.S., manufacturing barometers already point
toward recession. Growth in U.S. corporate profits,
which the tax cuts put on steroids last year, has all
but halted, and forecasts for the timing of a rebound
keep getting deferred.
As the trade war morphs into a potential
currency war—in which countries race to devalue
to get a competitive edge for their exports—
there are whispers about how and where the ten-
sions could escalate further. Could the U.S. thumb its
nose at China and sell F-16 fighter jets to Taiwan? Or
could Washington signal support for the anti-Beijing
protesters who’ve paralyzed Hong Kong this sum-
mer? And what could be at risk among more than
a quarter of a trillion dollars of U.S. investments in
China since 1990?
All these questions are arising in the dog days of
summer, a time of year when Wall Street’s vacation
calendars are jammed and markets seem especially
easy to rattle. Measures of stock market volatility
tend to rise on average in August, and some of the
ugliest swoons in equities over the past decade
have occurred in this month. The S&P 500 index
has shed about 6% from its last record, in late July,
leaving it below the peak it reached in January 2018
at the height of optimism surrounding Trump’s cor-
porate tax cuts. Even the most reliable big spend-
ers in the market these days—corporations◼ FINANCE Bloomberg Businessweek August 12, 2019
MANAGEMENT; BAKER, BLOOM AND DAVIS; ROBERT SHILLER; INVESTMENT COMPANY INSTITUTE; BLOOMBERG*U.S. CATEGORICAL ECONOMIC POLICY UNCERTAINTY TRADE POLICY INDEX. DATA: INSTITUTE FOR SUPPLYSigns of Strain7/2014 7/2019615651① ISM Non-manufacturing
index8/6/18 8/5/19$1.5k1.31 .1④ Gold spot price
per troy ounce7/2014 7/20196003000② U.S. trade policy
uncertainty index*8/6/18 8/5/193.4%2.51.6⑤ 10-year
Treasury yield7/2014 7/2019342924③ S&P 500 price-to-earnings
ratio, cyclically adjusted8/1/18 7/31/19$3.4t3 .12.8⑥ Assets in money
market fundsSome Investors Look for Shelter