FYI | May 14 2019
By Peter Switzer, Switzer Super Report
How long can Donald keep playing his game of bluff?
[Note: This article written ahead of last night's sell-off on Wall Street – Ed]
One of my greatest regrets is that in becoming an economist I never did psychology. Each month, surveys ask me for what the RBA would do with rates, and yep, I got it right last Tuesday with my “no change” call. But working out Donald Trump has become a challenge that defies my amateur shrink insights.
Logic tells me that Donald can’t afford a trade war that creates a global recession, a stock market crash and an end to the Trump era, with next year’s US Presidential poll. Mind you, China can’t afford such a disastrous outcome but we learnt on Saturday morning that trade talks on Friday, US time, ended without agreement.
Chinese goods to the value of $US200 billion that used to have a 10% tariff are now being slugged 25%. This is trade war stuff I didn’t think was possible.
But that was based on rational analysis. As we know, Donald plays a very unique game of dare. As I write this, the only hopeful omen for me is that this unusual US President can pull a rabbit out of his hat. We need to see one soon or the sell off that was mild on Wall Street on Saturday morning our time could get very serious.
So where are we with this trade war stuff and should we take profit ahead of a big sell off? I will assess the news item by item and rate whether the revelation is positive or negative for an agreement and stocks.
- There are no plans for trade talks soon. (Negative)
- Trump and Xi Jinping are likely to meet in June at the G-20 meeting in Japan. (Positive)
- The best piece of news out of Friday’s lack of agreement was that Donald called the talks “constructive”. (Positive)
- Goods on route to the US from China would not be slugged the new 25% tariff. (Positive)
- The White House economic advisor, Larry Kudlow, said he expects a Chinese retaliation. (Negative)
- The Dow Jones Index had a 450-point turnaround before the closing bell on Friday, despite the disappointing trade talk news. (Positive)
I make it four positives plays two negatives.
I pointed out this observation on Saturday from a pretty smart analyst, Jim Paulsen, chief investment strategist at The Leuthold Group, who said: “It’s really likely that it gets resolved and if it does, you’ve got to believe we’d be back at highs very quickly…because around it, there’s a good story – a lot of green shoots, rates are staying low and better earnings.” (CNBC)
The big question is this: how long can Donald keep playing his game of bluff because a Goldman Sachs study has shown the cost of the tariffs has fallen “entirely” on US businesses and households!
The Goldman analysis concluded that: “One might have expected that Chinese exporters of tariff-affected goods would have to lower their prices somewhat to compete in the US market, sharing in the cost of the tariffs. However, analysis at the extremely detailed item level in the two new studies shows no decline in the prices (exclusive of tariffs) of imported goods from China that faced tariffs.”
The Chinese have simply maintained their prices, despite the fact that the tariffs have made them more expensive in the US.
Goldman says ramping up the tariffs could rip 0.4% off US economic growth, which would have to be felt on Wall Street sooner rather than later.
Unfortunately, US stock market futures indicate negatives are outweighing the positives, with a one percent down opening expectation.
Kudlow has admitted that “both sides will suffer” from the tariff escalation but he told Fox News Sunday “that China has invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin back to Beijing.”
And this from Bloomberg’s Todd Shields and Benjamin Bain sums up the trade tussle: “Chinese Vice Premier Liu said after talks ended in Washington that in order to reach an agreement, the U.S. must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand, and ensure that the text of the deal is ‘balanced’ to ensure the ‘dignity’ of both nations. Liu’s conditions underscore the work still to be done.”
I don’t think Donald’s breast-beating and bullying ways go down well with the Chinese, who place a lot of importance on what they call “face”, which must not be dishonoured.
So how do we play stocks going forward? We’re in the hands of Donald Trump and Wall Street’s reaction. Our market is down today but there’s no panic. However, if Wall Street gets nervous, we will cop the backlash.
I expect a small sell off until a positive story comes out of the trade talks. I also believe we’ll see a post-election bounce for stocks but I was expecting it to be a double-barrelled leg up. Unfortunately, Donald has foiled that expectation.
If we can get Donald and Xi to play ball and our next Prime Minister can allay our local economic fears, then we could see that overdue stocks leg up, which has been hurt by the Murray Inquiry, APRA’s investor crackdown, the Royal Commission, the related bank lending restrictions and then this damn election.
We’ve had a hell of a lot of headwinds and if they start abating, then economic growth should follow, boosting profit outlooks and then stock prices.
I know “hope” is not a strategy but we do live in hope that our market and our investments are given a fair go!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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