The week you just saw was chock full of nuggets. There were so many it’s hard to know where to start.
Let’s kick things off with interest rates. I’m sure you’ve heard about the rate rise in the US. The US Federal Reserve increased the Federal Funds rate (the rate at which they lend to financial institutions) up another 0.25%.
The Fed is now targeting a rate between 1.75% and 2.00%.
Shortly after, the European Central Bank (ECB) said they would toe the line. Not only is the US economy getting stronger. The Eurozone is also improving…apparently.
Head of the ECB, Mario Draghi said he would bring an end to quantitative easing (QE) this year.
Finally the shameless strategy of money printing will come to an end. Meaning the ECB will stop buying terrible bonds from the freeloaders of the Eurozone.
Yet over in the East it was a different story. Countries like Japan and China continue to stimulate their economy with billions. Japan in particular is still hopeful for even the slightest increase in prices.
I’ll come back to what this might mean for you later. First let’s check in on the US-China trade.
Consumers lose in tough decision
It’s not a trade war, Alan Kohler wrote yesterday in The Australian:
‘…the language around trade can be misleading — for example “trade war” isn’t a war, and calling it that is confusing and unhelpful.
‘War is a conflict between two countries that can rope in allies like Australia but that’s not what happens in a “trade war” at all, nothing like that, even though President Donald Trump’s rhetoric about tariffs, as well as most people’s intuitive understanding of them, implies that tariffs are shots fired at the exporting country, aka “the enemy”.
‘Tariffs are politics, not war, or economics for that matter.’
Whatever you call it, it’s another event in the back of investors’ minds. And only recently have people woken up to the fact that these tariffs are not just words anymore.
They are going to affect the cost of production.
Take the 25% and 10% tax on steel and aluminium. It’s great for the US steel and aluminium industry. A win for the lobbyists that’s for sure.
But what about the auto, aerospace and construction industries?
Yes they might be buying US steel and aluminium now. But they’ll be paying a lot more for it. And who do you think is going to bear those costs? Not US firms if they can help it. The costs will travel down the line to the end consumer.
These tariffs haven’t just pissed off China. Countries in Europe, Canada and Mexico are looking to make that tax back.
‘Canada, Europe and Mexico will impose tariffs on a range of American products, including bourbon, motorcycles and pork,’ Kohler wrote.
Even US tech firms will feel the heat, The Wall Street Journal said:
‘The US semiconductor industry bristled at President Donald Trump’s plan to impose tariffs on about $US50 billion ($67bn) of Chinese goods, arguing they will hurt American business and make the country less competitive.
‘While the US tariffs may impair Chinese companies that use semiconductors, among others, the fallout also will extend to US businesses that participate in the complex supply chain of chip manufacturing, the Semiconductor Industry Association said.
‘That is because most chips American companies import from China are designed in the US. The manufacturing of many components in those chips often starts in the US as well, before they are shipped to China for assembly, testing and packaging.’
But can you really blame Trump for what might happen?
The people voted him in to make the tough decisions like reducing the trade deficit with China. No one expected it to be pretty. It could end up being a long drawn out process that gets worse before it gets better.
Like I said, it’s been a hectic past few days.
So what have investors done…? Absolutely nothing.
Noise or News
Over the past week, the S&P 500, the Dow Jones, the ASX 200, the DAX and the FTSE haven’t moved enough to even warrant a mention.
That’s right, as central bankers flip the table and higher costs affect firms worldwide, investors stand flat footed, not willing to jump at any macro news.
No wonder why macro hedge funds can’t make any money.
Maybe it’s because the news last week was no surprise. Investors were probably expecting the Fed and the ECB to tighten their spending spree. And there’s been no surprise about tariffs. They were set many months ago.
Whether it was a surprise or not, this is not a normal market we’re looking at. We’re not supposed to see indices climb up for long periods without much volatility. It’s also strange to see almost no reaction to interest rate decisions that affect asset prices globally.
Higher interest rates don’t just increase your mortgage repayments. It reduces demand for other assets in general. If interest rates are high enough (meaning bond yields are also high), investors prefer risk free AAA bonds.
Sure, the returns might not be stellar. But if you could make a 10% return, risk free, wouldn’t you take it? Such a return over 10 years more than triples your money.
I think this week is a great example of showing how meaningful some news really is. Far more important to your stock investments is the businesses they represent and the factors driving earnings of those businesses.
Focus on that and you’re bound to make more money over time.
Editor, Money Morning