Thanks for listening. I'm currently out on vacation, but I wanted to make sure you didn't miss my earlier episode regarding US-China trade policy and how the concept of the prisoner's dilemma applies to it.

The analysis I provided holds every bit is true today as it did then.

Welcome to thoughts on the market. I'm Michael Zezes, head of public policy and

municipal strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the

intersection between U.S. public policy and financial markets.

We're recording this on Tuesday, May 28th at 11 a.m. Eastern.

If you ever study game theory, you might remember something called the Prisoner's

dilemma. Applied to the US and China on trade, it means that compromising leaves

both sides better off. But it also means both sides perceive greater benefits for escalating than to risk making an agreement on the others terms.

That's what seems to be happening right now is the US and China since May 5th have outlined key remaining differences on issues of intellectual property, enforcement,

and how quickly existing tariffs can be removed.

The benefits of cooperation only become easier to realize once the downsides become apparent

either through weaker economic data or

falling markets and that's what should happen over time especially if the next round of

tariffs comes into play next month those tariffs on the remaining 300 billion or so of U.S. imports from China largely fall on finished

consumer goods. So the impact of prices, consumer behavior, and the broader economy should

be more apparent than in previous rounds. So that drives a key rule of thumb for investors.

You should act as if the next escalation

will happen until markets price it in.

That's because the incentives are for both sides

to escalate until clear market or economic weakness pushes them to

re-engage. That drives further downside for US and China equities and favors a

...