USA vs. CHINA: EVERYTHING AROUND YOU COULD CRUMBLE!
No one saw this coming and I don’t care how many people you employ at your fund that are solely in charge of assessing risks. Last Friday was out of the blue. This conflict is out of control and now the price will be paid by those who relied on bonds and on stocks to perform well, despite this madness.
I don’t like to get ripped-off either – as the Chinese government has been doing to the U.S., according to Trump – but there’s a way of dealing with things that doesn’t cost trillions of dollars to the global economy.
China announced tariffs and shit got ugly fast. S&P 500 futures were firmly in the green late Thursday night, with many traders expecting Friday to cap off a turbulent but generally positive week. On top of that, investors were expecting the upcoming Jackson Hole Federal Reserve speech and G7 meeting to provide calm and clarity to the markets, but then mayhem erupted.
We woke up in the morning to learn of China’s escalation in the trade negotiations: tariff hikes on $75 billion of U.S. products, including a 10% hike on September 1st and an additional 5% hike to take effect on December 15th. The duties would impact more than 5,000 U.S. products, including soybeans, oil, and aircraft; moreover, a 25% duty on American-made cars would be reinstituted.
Trump retaliated in short order and it was an aggressive one: The President announced on Twitter that he would increase the 25% tariffs on $250 billion in Chinese products to 30% starting October 1st. As for the remaining $300 billion in imports on Chinese goods, they would be tariffed at 15% instead of 10% on the first of September.
The U.S. equities markets panicked: the Dow Jones dived 600 points and the NASDAQ took a 3% heat:
Courtesy: Yahoo Finance
The 10-year Treasury yield was hammered along with stocks; gold and silver made strong gains because investors wanted shelter from the storm. Whatever you want to say about gold, it has no nationality and that’s critical in de-globalization. The chief concern is that trade negotiations will exacerbate the already worrisome slowdown in global economic conditions.
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At Jackson Hole, Fed Chairman Jerome Powell openly admitted that this is the case, stating that trade policy uncertainty is playing a role in the global slowdown. For his part, Trump questioned on Twitter whether Powell or Chinese President Xi Jinping is the bigger enemy; the President also ordered American companies to immediately start looking for an alternative to China, including bringing their companies home and making their products in the U.S.
We must remember that this isn’t just a trade war but is also a currency war: Trump wants the U.S. dollar to be cheap, but to remain popular and dominant, while other nations would be glad to see the dollar lose its status as the world’s reserve currency.
Case in point: Mark Carney, the Governor of the Bank of England, suggested during his speech at Jackson Hole that the dollar ought to lose its world-reserve status in favor of a digital currency. Carney even hinted that a currency similar to Facebook’s Libra – the stablecoin that’s slated to roll out in the first half of 2020 – could replace the dollar.
Not that everybody’s expecting the Libra rollout to happen without some pushback, as regulators have already expressed their misgivings about a number of issues, including data privacy and money laundering. There’s also the question of taxation: the IRS and other tax agencies around the world are grappling with classifying cryptocurrencies and determining their taxable status.
It all comes down to the issue of trust, which the crypto community is still working hard to address. For instance, among cryptocurrency exchanges, only 5% of them are rated “AA” – the highest rating; however, the AA-rated exchanges are growing the fastest, with a 29% increase in trading volume from the highest-rated crypto trading platforms having been reported in July.
Trade war escalations are setting us up for some seismic changes, so get ready as markets will get volatile. I expect September to be one for the record books, seriously.
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