The question about the impact of trade wars is really two questions, and I suppose they get conflated a lot these days. First, there’s the near-term market impact; second is the longer-term price/growth impact.

The near-term market impact is interesting. When the market is in a bad mood (forgive the anthropomorphization), then trade frictions are simply an excuse to sell – both stocks and bonds, but mostly stocks. When the market is feeling cheerful, and especially around earnings season, trade wars get interpreted as having very narrow effects on certain companies and consequently there is no large market impact. That is what seems to have happened over the last few weeks – although trade conflicts are escalating and having very concentrated effects in some cases (including on markets, such as in commodities, where they really oughtn’t), it hasn’t dampened the mood of the overall market.

In fact, the risk in these circumstances is that a “happy” market will take any sign of a reduction in these tensions as broadly bullish. So you get concentrated selloffs in single names that don’t affect the market as a whole, and when there’s any sign of thawing you see a sharp market rally. We saw a bit of that in the last day or so as Mexico’s President-elect and US President Trump both expressed optimism about a ‘quick’ NAFTA deal. Honestly, the broad market risk to trade in the near-term is probably upwards, since any increase in tensions will have a minor and concentrated effect while any thawing (especially with China) at all will cause a rally.

But beware in case the mood changes!

As an inflation guy, I’m far more interested in the longer-term impact. And there, the impact is unambiguous and bad. I’ve written about this in the past, in detail (see this article, which is probably my best on the subject and first appeared in our private quarterly), but the salient point is that you don’t need a trade war to get worse inflation outcomes than we have seen in the last 20 years. You only need for progress on advancing global trade to stop. And it seems as though it has.

Not all of the forces pressing on inflation right now are bullish, although most are. Apartment rents have slowed their ascent, and the delayed effect of the dollar’s rally will have a dampening effect next year (arrayed against that, however, are the specific effects of tariffs on particular goods) although globally, FX movements are roughly zero-sum in terms of global inflation. Money growth has slowed, to levels that would tend to contain inflation if velocity were also to remain stable at all-time lows. But velocity recently started to uptick (we will find out on Friday if this uptick continued in Q2) and as interest rates gradually increase around the globe money velocity should also quicken. The chart below (source: Enduring Investments) shows our proprietary model for money velocity.

At this point, trade is pushing inflation higher in two ways. The first is that arresting the multi-decade trend towards more-open markets and more-numerous trade agreements fundamentally changes the inflation/growth tradeoff that central banks globally will face. Rather than having a following wind that made monetary policy relatively simple (although policymakers still found a way to louse it up, potentially beyond repair, largely as a result of believing their own fables about the powerful role that central banks played in saving the world first from inflation, and then from deflation), there will be a headwind that will make monetary much more difficult – more like the 1960s and 1970s than the 1980s, 1990s, and 2000s. The second way that trade conflict is pushing inflation higher is mechanical, by causing higher prices of recorded goods as a direct result of tariff implementation.

But this second way, while it gets all the ink and causes near-term knee-jerk effects in markets, is much less important in the long run.