I wanted to address all the volatility we have seen in the markets lately. One of the primary drivers of it is trade tensions with China. As I often say, the only thing the market hates is uncertainty! In order to help decide if this is the “big one” in terms of a major market drop or simply a casualty of trade talks, I look back to the rest of the fundamentals of the economy.
1. We are currently at record low unemployment. This is a great sign of the health of the U.S. economy. (Source: Dept of Labor, May 2019)
2. Despite the record low unemployment, inflation (a common effect of low unemployment) has been very low. This too is a great sign for the economy.
3. Interest rates remain low and are even continuing to drop. I would expect 1-2 more rate cuts before the Fed pauses to re-evaluate the health of the economy.
Here is my take on the trade situation and its effect:
China exports to the U.S. about four times as much as it imports (U.S. Census Bureau). Therefore if we are going to be in a trade war with China, they are at a 4:1 disadvantage. Add to that the fact that, according to a June 2019 Wall Street Journal article, China’s economy is currently in a weakened state and the U.S. economy is very strong. This means that while a trade war hurts everyone, it clearly hurts China more than the U.S., in my opinion.
What are the dangers of the trade war? China, while at a disadvantage, does have some very strong potential weapons to use against us. First, they could devalue their currency, which they have done slightly, and which is the primary reason for the big decline of the last week. This offsets the impact to Chinese exporters who are subject to U.S. tariffs and hurts U.S. exporters who have to exchange funds back into U.S. dollars. A strong dollar hurts trade with a country with a weak currency. Second, they could begin to sell off U.S. Treasury bonds, of which they have bought an enormous amount over the past 20 years. This would force the value of the Treasuries down and could make people less willing to buy new ones. The problem to the U.S. is that we rely heavily on the sale of U.S. Treasuries to fund our debt, since we do not have a balanced budget.
While these are serious weapons that could hurt our economy, neither of these actions would happen without a severe response from the U.S. which could further damage an already fragile Chinese economy. As you can see, a trade war is in nobody’s best interest. The goal is simply to negotiate more favorable trade terms for the U.S., which I believe we desperately need, since I feel we have been operating at such a disadvantage for so long. In my opinion, our current unfair policies have literally built China into the economic superpower they are today, and at our expense.
I’m certainly not thrilled that we have to be in this position, but unfortunately we have ignored this problem for 30-plus years, and it has to be addressed at some point. I’m much happier it’s being done with a strong economy and not a weak one.
As always, please contact us at 609-486-5073 with any questions or concerns.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or firstname.lastname@example.org.
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