Lessons From Trump's Yuan U-Turn

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"On day one of a Trump administration, the US Treasury Department will designate China a currency manipulator."

- "Ending China's Currency Manipulation," Donald J. Trump, The Wall Street Journal, November 10, 2015.

Those words, among others then-Candidate Trump uttered regarding trade, haunted many investors, economists and pundits following his victory in the US presidential election a little less than a year later. Fears ironically reiterated in an otherwise rosy report World Trade Organization head Roberto Azevêdo delivered Wednesday morning, when he warned an expected 2017 goods trade acceleration could be squelched by protectionism-a thinly veiled shot at Trump. We say "ironically" because later Wednesday Trump told The Wall Street Journal the Treasury's semi-annual currency report, to be released soon, won't dub China a manipulator. To those keeping score, eighty-three days in, broad tariffs on China-which the currency manipulation moniker would justify-aren't close. While clearly there is an article to be written on the positive impact of Trump not following through on protectionist promises-we wrote one version a couple weeks ago-our interest today is different. Too many investors were too quick to act on protectionist fears and speculation about which policies he was "serious" about. This highlights a process error: forecasting and speculating on things that can't be foretold.

First, to be clear, Trump's U-turn shouldn't shock. The administration's gradual backtracking on this issue has been clear for weeks. We also aren't criticizing him for this. Whatever the justification-he said it is a quid-pro-quo for more forceful Chinese aid on North Korea-protectionism is a real risk to stocks, a potentially material negative. Claiming China artificially depressed the yuan to boost exports was also just very 2006, as Chinese currency interventions in recent years have supported the yuan.

Countless pixels have been spilled speculating about which policies and promises this president intended to act on in office. Those who (again, correctly) see international trade as a plus feared protectionists' appointments to trade offices meant the threat was real. Exiting the Trans-Pacific Partnership-an unratified deal that faced many challenges within and without America-increased fear further. Many investors sold or sat out of markets for fear Trump meant business on this signature anti-business pledge.

The reality, though, is none of these actions negatively changed the trade landscape. They were talk. Merely talk. Acting on talk presumed Trump's rhetoric targeting NAFTA and Chinese manipulation was more credible than Barack Obama's 2008 talk on the same. Or Mitt Romney's in 2012.

This is a repeat error in investment analysis, from professionals and individual investors alike. Too often, folks make huge assumptions about politicians and policymakers' intent based on talk, forecasting what is literally not foreseeable. With each major central bank meeting globally, analysts and economists forecast what a cabal of folks who don't share their private discussions will do, or even which data they are weighing. They handicap court cases' outcomes. There is a cottage industry in this business dedicated to forecasting geopolitical developments-down to troop movements-despite analysts' having no real insight into planning or planners' minds. (Exhibit A: North Korea right now.) Investors frequently ponder what policymakers' "actual" motives are, presuming the stated ones aren't real and someone should know. The numerous analysts engaged in forecasting the Trump Administration's policy positions are proving the fecklessness of this practice right now.

Put this way, it should be apparent these things aren't knowable without being inside the rooms where debate is held-or inside the mind of the politician or policymaker in question. Taking these forecasts literally and acting isn't wise. But this doesn't mean such outlooks bring you no value. They just do it in a perverse way many investors don't consider.

We often write on these pages that investing is only partly about knowing "what" happens-what the data show, what political or legislative actions take place, what monetary policy moves are made. It is equally, if not more, about what folks think about those developments. By dissecting the undissectable, these folks' opinions and forecasts help set the stage for expectations. How reality relates to that is what matters most of all. So if your intent is to educate yourself about how to invest, to research, to invest on your own, to manage assets, don't read the news exclusively to "get informed" about developments. Think about what message the opinions and forecasts share with you. Markets will price all of it in. If the investment community thinks Trump is serious about protectionism-whether or not they have a basis for this-him not following through on it is a positive surprise.

Sadly, too many investors take these forecasts of the unforecastable as gospel-and act. This is a theory, and is of course possibly wrong, but it seems this error stems from the mistaken belief successful investing is about being "faster," which Wall Street and the financial press celebrate constantly. If fast is key, after all, forecasting all this stuff is even better. Don't buy it. There are lightning fast ways to lose oodles of money. Patience is undervalued in investing, but it is crucial if you're going to assess how data relate to sentiment.

As for Trump and China, maybe he changes tune eventually. Maybe not. But acting on talk and forecasts that would require unattainable inner knowledge is just guessing. We'd humbly suggest your portfolio deserves better stewardship than that.