If you’ve been listening to the news lately, you’ve probably heard the term “trade war” thrown around. It’s has become quite the buzzword. But what is going on exactly and how can it affect the markets and our investments? Good question. We should dive right in and tackle these questions.
In order to understand what’s going on, we need to take a broader picture of the world markets and events, to piece together a good explanation of why things are the way they are. Basically, if history teaches us anything, we learn that countries start currency wars with each other when they are faced with poor growth prospects and too much debt.
Currency wars reduce the cost of exports and in turn end up stealing growth from trading partners. This usually doesn’t help much because the other countries simply react by manipulating their own currencies and the back and forth of currency manipulation can continue for years on end. Clearly this doesn’t solve the overarching problem.
Once leaders of these countries realize that devaluing their currency isn’t working, then they start in with trade wars. One country imposes tariffs on imports from another country, thinking that they will reduce imports and the trade deficit and improve their growth. But again, the end result is never that. Instead, the other country starts to impose their own tariffs and just like currency wars no one is better off, global trade shrinks and everyone gets upset. The original problem of growth and debt still exists for all parties.
When the trade war started this time, the mainstream financial media denied it was happening. We’re not sure how this is possible. It can be traced back all the way to 2001 when China joined the World Trade Organization and then immediately started breaking the rules. Then in 2008, China tried to prop up exports during the global financial crisis by devaluing their currency. As recently as January 2018, Trump announced tariffs on appliances and solar panels that were mostly coming out of China.
No matter what the media says, no one can deny the impact of this trade war on the markets and our investments. There is no reason to panic, but it makes sense to internalize the facts and then come up with a good strategy going forward. Knowledge is power and with knowledge, you can act.
Right now, the U.S. trade deficit is due mostly to Mexico, Germany, China and Japan. The United States is making headway with Mexico, with a reduced trade deficit, as Mexico has agreed to buy more U.S. soybeans. The United States also has a good relationship with Japan. Germany is quickly realizing they need to make concessions, so that they aren’t hit with more punitive tariffs.
This global trade war can be reduced to the United States and China. The world’s two largest economies are having a hard time playing nicely in the sandbox together. It seems unlikely that the Chinese economy can afford to sell significantly less manufactured goods across their borders and it seems even more unlikely that the Chinese economy can allow a significant devaluation of United States sovereign debt either. The Chinese claim all this trade war stuff is part of a larger strategy that may lead to a new Cold War. Ouch.
Seems like we ought to take this trade war seriously. It’s part of a much bigger picture with more complex problems that won’t be solved overnight. The trade war will be good for U.S. Jobs, but not good for global output. Things most definitely will get worse before they get better. However, investors can prepare to ride out the storm.
One way to play this trade war to your advantage is to invest in bearish Chinese stocks that have taken a serious hit. They are a seriously under appreciated group of stocks that are poised to pop once these countries come to their senses and make some agreements. World economic and investing guru Jim Rickards of Agora Financial recently reported:
“The trade war which has broken out between the U.S. and China has damaged Chinese exports and raised costs on Chinese imports at exactly the time China was counting on a larger trade surplus to help finance its mountain of debt.
Now, trade is drying up and China is stuck with debt it can’t repay or rollover easily. This marks the end of China’s Cinderella growth story, and the beginning of a period of economic slowdown and potential social unrest.”
Either way, these countries are going to have to work out some agreements. They can’t afford not to. Until they do, we are going to see some sell-offs and a bearish environment for both U.S. stocks and Chinese stocks. Don’t panic. It will all work itself out. A couple of quick suggestions is to diversify your portfolio, buy the dips for some select U.S. and Chinese stocks that will pop when agreements are made, and potentially put some dollars into staple consumer goods stocks. Even in the midst of trade wars- food, diapers, formula and toilet paper are still being purchased, regardless of what’s going on in the rest of the world.
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