Are Market Fears Over China Overblown? Paul Mampilly Shares His Thoughts

Are Market Fears Over China Overblown? Paul Mampilly Shares His Thoughts

China, Trade War

Paul Mampilly has been working in and around Wall Street since the early 1990s. Throughout his long career, he has sat on both sides of the trading desk, working as a skilled analyst and trader on behalf of some of the largest financial institutions as well as managing his own personal portfolio.

Mampilly has racked up an impressive track record that reflects his ability to cut through all the market noise and extract a signal sufficiently strong to consistently make outsized gains versus the market. He has been recognized as one of the top fund managers on Wall Street as well as a highly skilled macroeconomic analyst.

Today, Paul Mampilly is featured on podcasts, operates an advisory service, trades on his own account and is a prominent author at Banyan Hill Publishing, a company that specializes in deep market insights from some of the world’s top industry-specific experts.

Paul Mampilly Says Trade War Fears Are Misplaced

Since President Donald Trump declared that he would no longer tolerate the United States getting the raw end of trade deals with its international trading partners, much noise has been made about the severe consequences that are likely to follow from attaching tariffs to America’s number-one trading partner.

But Paul Mampilly cautions people against listening to the most hysterical partisan voices regarding a U.S.-China trade war, voices that often have clear political agendas of their own that have nothing to do with a genuine interest in the U.S. economy or seeing the country succeed.

Paul Mampilly says that there are a few compelling pieces of evidence that all point to the trade war as being little more than a minor drag on the economy. Mampilly points to the country’s GDP growth of 3.2 percent in 2018. This, he says, is a very important metric because it came amid a severe market downturn at the end of the year, making such strong economy-wide growth even more compelling. It also seems to be a clear product of long-term rises in productivity, a key factor that Mampilly says is a highly fortuitous development for the economy. The strong growth in productivity suggests that the solid GDP growth that took place throughout 2018 is reflective of a genuinely strengthening economy at the ground level.

Inflation Fears Are Misplaced

Paul Mampilly also points out another key fact: Throughout 2018, a year in which tens of billions of Chinese products were placed under high tariffs, inflation remained at right around the Federal Reserve’s target rate of 2 percent. This is strong counter evidence to the narrative that any tariffs on Chinese-imported goods will immediately be passed through to consumers, causing a stark increase in living expenses.

In fact, Mampilly believes that almost all the arguments regarding inflation caused by the full Trump trade-war program, which includes tariffs of up to 25 percent on essentially more than $580 billions of Chinese goods that the U.S. imports each year, will be proven false.

There Will Be Some Losers

Mampilly says that there are some individual companies that will feel the heat from these tariffs as well as an anticipated vigorous Chinese response. But these are mostly firms with global footprints, like Walmart, Boeing, Tesla and Apple. While the tariffs may result in consumer-facing price increases for these companies due to their supply chain being affected, Mampilly argues that general living-cost increases for average consumers highly unlikely to follow.

Mampilly says that one industry that may be adversely affected by an escalating trade war is the U.S. automotive industry. This is primarily due to the complex supply chains that currently have many automakers directly sourcing critical parts and materials from Chinese manufacturers; the auto sector makes heavy use of Chinese electronics as well as that country’s steel.

But Mampilly points out a truth that may make U.S. automakers a bit uncomfortable: With the constantly improving automotive technology over the last decade alongside historically low interest rates and programs like the Obama Administration’s Cash for Clunkers, the used-car market has seen sharp reductions in volume of sales over the last decade. But Mampilly points out that consumers’ preference for new cars will evaporate like an ephemeral lake the second that they start getting priced out due to automakers’ increased production costs.

Mampilly says that while the used car market could explode, sending U.S. automakers into crisis-level sales declines, this is unlikely to affect consumers’ living costs because they will just drive their cars a little longer or pay significantly less in the used market.

The bottom line is that U.S. consumers will have strong backup options for almost every class of product that will experience upward pricing pressure due to tariffs on Chinese imports. And only the tiniest fraction of U.S. companies will deal with any significant trade-war headwinds for the simple fact that few companies have a global supply chain or manufacturing footprint. The firms that do will generally have the strength to ride out the storm.

For companies that rely directly on Chinese markets for their bread and butter, Mampilly says that some may feel real heat. But in the grand scheme of things, the $126 billion in goods that the United States exports to China is a tiny drop in the very large bucket of U.S. GDP. Even if all this trade ceased tomorrow, Mampilly says, few Americans would realize anything had changed.

Lack of Global Footprint Allows Disruptive Companies to Dodge Bullets

In the same recent podcast in which Mampilly shared the above insights, he also used the trade war as a chance to illustrate a key advantage that disruptive startups and recently founded new-economy businesses have.

Mampilly noted that Apple, Walmart, General Motors and Boeing could all find themselves affected by the trade war with China due to two-way exposure. Mampilly explains that two-way exposure — the state of both sourcing raw materials and key components within the supply chain from China as well as directly relying on the Chinese market for significant portions of global sales — is common to many old-economy dinosaur firms. Mampilly says that these companies often had no choice but to establish global supply chains due to cost savings. If those companies would not have globalized both their sales and supply chains, their competitors would have. And these companies who refused to exploit the advantages of globalization would have been run out of business or bought out.

Mampilly says that this illustrates a great lesson for entrepreneurs; Startups can stay lean, hungry and nimble in ways that are structurally impossible for acromegalic legacy firms. As a concrete example, Mampilly points to the radically different ways in which Walmart and Amazon are reacting to the trade war. While Walmart is struggling to meet its quarterly targets amid entrenched two-way exposure to both Chinese-sourced goods and tariffs imposed upon Walmart’s sales within China itself, Amazon has just launched Amazon Flex.

Amazon Flex is an entrepreneurial initiative that Amazon hopes will allow thousands of its current employees to start their own businesses, making up to $300,000 per year. At the same time, it may eventually reduce Amazon’s reliance on the U.S. Postal Service, UPS and FedEx to almost nothing. So, at a time when Walmart is considering price increases and layoffs, global retail disruptor Amazon is aggressively expanding while helping tens of thousands of entrepreneurs to launch their own companies and making Amazon far stronger in the process.

Mampilly says that this is one illustration of why the bears and market naysayers can be correct in the short term but are almost always proven wrong in the long term. Every time a company grows too massive and sclerotic to effectively adapt, its demise doesn’t signal the end of a market but, instead, the creation of thousands of new opportunities within that market.

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