What Will Trump Pick: Plunging Stocks Or Trade War? We Now Know The Answer

One of the long-running debates on Wall Street has been when faced with two choices, a plunging stock market or a full-blown, (perhaps) popularity boosting trade war with China, which one would Trump choose. After all, for much of the first year of his administration, Trump took delight in pointing out the daily surge in the S&P, which he was all too quick to take credit for, which prompted many to ask what happens when stocks plunge, and will Trump wash his hands from the red tape.

This morning we finally got the answer, thanks to CNBC's Eamon Javers who moments ago tweeted that a "White House official said the the WH recognizes that Trump’s actions are hitting the stock market, but this is “a longer term thing,” and the president has to follow through on a key campaign promise. The White House feels that China simply has to be held to account."

Which means that Marko Kolanovic was wrong once again. Recall that in mid-March the JPM quant said that there is no way Trump would launch a "significant trade war" as that would risk "destabilizing markets" and Trump would "open a path" to his own impeachment:

A significant trade war started by this administration would destabilize global equity markets. Should this happen ahead of the November election, it would impair the administration’s ‘market scorecard’ and likely lead to an election loss. Lost elections open a path to impeachment, and other complications. The game is also non-zero sum, as one can both use tough rhetoric and at the same time do little disruptive action (e.g., players as we defined them can ‘have their cake and eat it’). Setting up a diagram (similar to the well-known ‘prisoners’ dilemma’) points clearly that there will be strong rhetoric, but weak or no action that would destabilize equities.

Clearly, that's not what Trump had in mind, and now it's time for algos - and reputable Wall Street analysts - to start pricing to what he did.

And speaking of China's retaliation, Javers tweets that he "asked a White House official last night if the US was prepared for further Chinese retaliation for American trade action and if we should then expect further reaction by the US. The official said “all of it is under discussion.”

Meanwhile, the real question is whether Trump and Navarro now unveil a new, third round of tariffs against China. If and when they do, all bets will be off.

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Javers also touched on something else: what happens to the biggest risk factor of, well, yesterday, namely that other ongoing feud between Trump and Bezos. Here is Javers: "A White House official tells me it is “almost certain” there are no specific policy actions coming from the White House against Amazon. But the president is “not a fan of Jeff Bezos.”"

Then again, it is Trump, and he may unexpectedly tweet about Bezos and/or Amazon at any moment, unleashing even more "risk off" especially in the aftermath of his dinner last night with the co-CEO of Oracle who is now almost assured of winning the Pentagon contract that was meant to go to Amazon.