I’ve got an abundance of silk you need. And you’ve got an abundance of salt that I need.
The logical thing to do is exchange the goods so we both benefit.
Historians believe early 3000 BC traders from Mesopotamia and Pakistan were some of the first long distance traders.
Most of the goods traded were luxury items, things you couldn’t get anywhere else. But what was a rare luxury to some was an abundant commodity to others. Through trade, prices of all goods would drop, increasing the living standards for everyone.
You could argue that international trade has been a major factor in lifting our global economy out of the mud, and into what you see today.
Thanks to trade, you can afford almost anything you want. A computer assembled in Japan, a car made in China, and cheap medicine from Europe.
Not only does trade make nations richer, it increases the quality of life for people like you and me.
That’s why all countries should trade and focus on removing any barriers.
Economist David Ricardo explains:
‘Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole.
‘By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.
‘It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.’
But Trump and Xi see things a little differently.
This tit for tat situation is escalating
You’ve probably heard him say it before. Donald Trump doesn’t like that China is ‘taking advantage’ of America. It’s why he’s now trying to level the playing field.
To make things fair, Trump is taxing a whole lot of imported Chinese goods. This will in effect drive up the price of Chinese goods for American importers, encouraging them to shop elsewhere.
First, Trump went after Chinese steel and aluminium.
China’s president, Xi Jinping, of course came back with his counter. Xi put a $65 billion tax on US soybeans, small aircrafts and autos.
Hours after China’s retaliation, Trump thought of ways to tax Chinese goods by up to $100 billion, or from $50–150 billion.
‘Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers,’ Trump told the American people. He also stated:
‘In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs. I have also instructed the Secretary of Agriculture, with the support of other members of my Cabinet, to use his broad authority to implement a plan to protect our farmers and agricultural interests.’
An escalating trade war isn’t what’s most surprising, but what it could mean for the economy at large.
Jamie Dimon, CEO of JPMorgan, wrote a 46-page letter to his shareholders this year.
In which, he devoted a section to his view on the economy. He says the US economy seems healthy today and he’s bullish for the ‘next year or so.’
He sees lower unemployment, higher capital spending, wage growth, low housing supply and relatively strong consumer and corporate credit aiding growth.
But this trade war could throw a spanner into the works. Combine this with higher interest rates around the corner, uncertainty is at an all-time high.
It wouldn’t surprise me, and Dimon either, if stocks were to continue their decline in a much volatile manner. And of course this would be an amazing outcome for investors with capital to invest.
Let me explain why.
Compound your way to freedom
Buying stocks when they’re cheap and selling them when they’re expensive is what everyone wants to do. In reality it doesn’t always work out that way.
As the market rallies, investors fear missing out and jump in with the herd. When markets collapse and buyers are nowhere to be seen, investors jump out before things get worse.
Not only it is important to buy when stocks are cheap, you need to buy the right stocks. Which ones are those?
Typically, these stocks are called compounders. They’re companies that can earn extremely high returns on any cash invested into the business.
To give you an example, I’ll use Nick Scali Limited [ASX:NCK]. The company designs and sells furniture which is manufactured in Asia.
The company focuses on a market willing to pay more for designer furniture. The easiest way for the company to expand is to open more stores. And that’s what they’ve done over the last few years.
As of 31 December 2017, Nick Scali had 57 stores. Such growth has allowed the company to generate extremely high returns on capital (equity plus debt). For each dollar of capital, the business can generate around 47 cents.
Such economics has helped the group grow earnings by more than 23% annually over the past five years.
With that said, companies like Nick Scali are not worth an unlimited price. But if our market declines further, these are the companies you should be looking to buy for cheap.
Editor, Money Morning