Readers who remember the Ron Howard film, “A Beautiful Mind,” may recall the ideas developed by mathematician John Nash regarding game theory. The basic concept is that decisions made by a group affect individuals and one individual acting in his or her best interest can harm the group and themselves.
There are two examples in global politics and markets these days that demonstrate how that theory can play out.
The first is trade relations. There has been a sharp escalation of tensions this week between the U.S. and much of the rest of the world – particularly China. The U.S. has moved forward with planned tariffs that it announced as retaliation for intellectual property theft. China responded with tariffs of their own and now President Trump has upped the ante by directing U.S. Trade Representative Robert Lighthizer to identify an additional $200 billion of Chinese imports that may be subject to tariffs. China has promised to respond to those tariffs as well in some form.
On their own, these tariffs make up a small portion of U.S. and global GDP. But the fear is that this tit for tat will keep building, with each country responding to the other's actions, as each side seems focused on retaliation rather than on de-escalating.
The other example is the Organization of the Petroleum Exporting Countries (OPEC), which is meeting at the end of this week in Vienna to discuss production quotas. That is an even better example of game theory, as each OPEC country has an interest in limiting the supply of oil on the open market in order to keep prices high. But those high prices create an incentive to cheat and produce more oil for the world market with those high prices. If enough countries do that then prices fall as the result of that increased supply.
The OPEC meeting has interesting dynamics this time. First, the re-imposition of sanctions on Iran by President Trump has changed the supply dynamics, since some Iranian oil has been taken off the market. Secondly, the recent rise in oil prices in general has restarted production of shale oil in the U.S., though that production must ramp up before shale oil will be sold on the open market.
Meanwhile, Saudi Arabia and Russia want to increase oil production, the latter primarily due to a need for more U.S. dollar reserves. Other OPEC members like Venezuela, Iraq and Libya prefer keeping production quotas in place because these countries have supply chain issues that prevent them from ramping up their production.
My View: John Nash earned his doctorate from Princeton in 1950 with a dissertation titled “Non-Cooperative Games.” It earned Dr. Nash a Nobel Prize in Economics in 1994 and it clearly stands true today. I expect the Trade frictions to get worse before they get better and I expect OPEC to increase their production quotas somewhat.
For more City National commentary, subscribe to our newsletters.
If we can help you with any Foreign Exchange needs, please email email@example.com or call (800) 447 4133.
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|