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RoboStreet – July 12, 208
Trade War Timeline Favors U.S. Over China
World equity markets sold off Wednesday in a knee-jerk reaction to the headline of the U.S. announcing to place an additional $200 billion of tariffs on a variety of Chinese imports. This brings the total targeted amount to $250 billion or roughly half of all Chinese imports. The news roiled investor sentiment after a four-day rally where the focus had returned to strong U.S. employment data the upcoming earnings season.
The current tit-for-tat tariff skirmish has yet to fully mushroom into a trade war by definition, but it’s moving in that direction. The latest shot across the bow of China’s economic battleship is a 10% tariff on $200 billion worth of Chinese imports in response to Beijing’s retaliation for a previous round of U.S. duties amounting to $34 billion. The final decision on the $200 billion of newly assigned import taxes will be sometime after August 30, allowing for a good six weeks of time to negotiate.
This latest trade-based salvo is getting the immediate attention of business leaders, Congress and even some of President Trump’s political base. “The last thing America’s manufacturing workers need is an escalating trade war,” said Jay Timmons, president and CEO of the National Association of Manufacturers. “America has China’s attention, so instead of more tariffs, the U.S. and China should immediately begin working toward a fair, bilateral, enforceable, rules-based trade agreement to end China’s market-distorting activities,” Timmons said. “We can’t afford to wait any longer.”
That all makes sense when dealing with a rational adversary, but China hasn’t always fallen into that camp. The Trump administration said the $200 billion in tariffs on Chinese products are necessary because of Beijing’s failure to change what they consider a long history of unfair trade practices. And up until the headline of the newly announced $200 billion in tariffs, investors gave the market the benefit of the doubt in support of a long overdue attempt to level the global playing field on trade.
Although President Trump and Commerce Secretary William Ross are taking fresh heat from skittish supporters and newly dubbed detractors, they are operating from a position of strength. Trump and his team are, in my view, using the current leverage of a collage of variables to force China to succumb to change. The chart of the Shanghai Index above shows the Chinese stock market in a full-blown correction, down -21% since early January of this year. If the U.S. stock market was down 20% in the past six months, heads would roll.
China is stuck between a rock and a hard place. While they claim annual GDP growth of 6.5%, that growth is stoked by massive leverage both from corporations and consumers alike. In 2008, China’s total debt was about 141% of its gross domestic product. By mid-2017 that number had risen to 256%. Countries that take on such a large amount of debt in such a short period typically face a hard landing. The speed and size of China’s debt boom in the past decade has been almost without precedent. The few precedents that do exist, being Japan in the 1980’s and the U.S. in the 1920’s, are not encouraging.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
Most of this debt growth has been attributed to China’s corporate sector, and rightly so because these liabilities account for the bulk of debt outstanding. However, as of mid-2017 Chinese households had debts worth about 106% of their disposable incomes. Since 2007 Chinese disposable income has grown 12% per year on average while household debt has grown by 23% per year. Clearly, China’s transition to a consumer-driven economy from a manufacturing economy comes under severe pressure if a trade war with the U.S. escalates.
Consumer debt was never considered an issue relative to the amount of corporate and private debt issued, but now the data shows the Chinese consumer to be more leveraged than at any time in history. And it doesn’t stop there. Much of what Chinese citizens invest in are so-called trusts in what is called China’s “shadow banking” sector thatis estimated to beover $15 trillion. These are debt-like savings products which are bought by millions of ordinary Chinese consumers from debt-ridden property developers and local governments that are seeing a rapid rise in the delays or extension of repayment on maturities.
To be sure, the Chinese central bank has and will step in to provide liquidity to avert defaults and apply a crackdown on nefarious lending practices, but their financial system has been exposed and its highly vulnerable to a sudden economic downturn that the ruling Communist party and President Xi cannotafford, which is why I think the Chinese will blink first.
Money goes where it is best served and that is currently the U.S. market. Along with China’s market meltdown, European markets are for the most part down for the year as are Asian and Latin American Markets. The U.S. dollar is king, inflation is tame and the domestic economy is set to grow by over fourpercent for the second quarter. And though the prospect of a trade war provides an unknown impact on GDP growth, money flow from around the world will still be finding its way into U.S. markets.
As far as what I’m doing to manage through the uncertain market landscape, my AI platform continues to afford me and RoboInvestor subscribers a string of profits that are easily surpassing the major averages year-to-date returns. I just closed half my position in UnitedHealth Group (UNH) yesterday for a +5.8% profit generated over 42 days, while leaving the balance to benefit from when the stock eventually moves higher. But at certain levels, stocks get technically overbought and it becomes prudent to take some money off the table, which is exactly what I did.
From the Tradespoon Seasonal Chart above, it shows clearly the price of the stock in dark is trading well above its seasonal price trend. So, when I see a divergence where the price is trading at an extended premium to its historical price action, I book that gain while leaving half a position in the event the stock wants to carry higher. It’s a proven formula that works consistently over time if one has the right tools and, in my case, I created the tools based on artificial intelligence that give myself and my fellow RoboInvestors a big advantage over all other stock-picking methods.
I’m bringing two new trades this Sunday evening for all RoboInvestors to act on Monday morning that are of the highest quality names within their respective sectors. I highly encourage everyone to make the move to become a member of RoboInvestor and put the power of AI to work in your portfolio ASAP. There is no time better to enhance one’s investing acumen than the present and it’s a great way to close out the week.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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