Should Investors Be Concerned About a Trade War?

Again, US-China trade tensions are all over the headlines.

Thanks to recent talks, the trade spat ‘just got a lot bigger,CNN writes.

Rather than just soybeans and steel, tariffs will escalate to more than US$360 billion worth of goods.

Now as you’re probably aware, tariffs are no good for anyone.

They prop up uncompetitive industries. They force the consumers to pay more. The only one benefiting is Trump.

He promised to cut the trade deficit during his campaign. And that’s exactly what he’s trying to do.

The Hill writes:

It is hard to understand the public meltdown over Donald Trump’s promised tariffs on nations that cheat on trade agreements. This is exactly what he promised during the campaign.

So I guess we can’t accuse the guy for not trying.

But surely US$360 billion in tax has repercussions?

Investors don’t seem to thinks so…

Thousands of Aussie jobs could go

I’ll let CNN fill in some more of the details:

The US tariffs start at a rate of 10%, before rising to 25% at the end of the year. They come into effect on September 24, and will apply to thousands of Chinese products, ranging from food seasonings and baseball gloves to network routers and industrial machinery parts.

China’s new tariffs will be levied at rates of 5% or 10%, depending on the product, from the same date, the Chinese government said.

More than 5,000 US goods will be affected, including meat, nuts, alcoholic drinks, chemicals, clothes, machinery, furniture and auto parts.

And if you’re thinking about how these tariffs could affect you, you’d be right to do so.

One scenario is that more nations will join in on protective trade policy party.

And if this happens, many Aussies could find themselves unemployed. Here’s what KPMG’s chief economist, Brendan Rynne, had to say:

 ‘…a trade war of the scale we’ve just entered into knocks 0.3 per cent off our gross domestic product in five years’ time. If China and the US impose higher tariffs of 25 per cent, this rises to 0.5 per cent. If other countries join the trade war to protect their domestic industries from the dumping of cheap Chinese and American goods, Australia loses 2.4 per cent of GDP. Thousands of jobs are lost, and real incomes take a hit.

It all sounds terrible doesn’t it? And these tariffs kick in in only a few days.

So why are investors (at large) uninterested?

Are investors ignoring the risks of a trade war?

Both the S&P 500 and the ASX 200 dropped on Tuesday. And just days later, they’ve both bounced back.

Have investors seen the news and already made up their minds that it’s no big deal?

Maybe.

But there’s a small group sounding the alarms. It’s not just the trade war, but manipulative central bankers that could bring on a coming collapse.

Take a look at the graph below.

It shows the yield of US 10-year treasury bonds.

MoneyMorning 21-09-18

Source: CNBC
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Just recently, the 10-year bond yield climbed up past 3%.

This means you can earn a 3% return in US bonds. While this doesn’t sound significant, it’s another sign that stocks could be on the way down.

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Why?

Because to invest in stocks, which bears risk, investors demand a premium…usually that premium is added onto bond yields.

Why would you buy a stock that has an expected return of 3% when you can buy a 3% in bonds?

So…when bond yields rise, that risk premium decreases, making stocks more risky and expensive, relative to bonds.

Back in February this year, many investors believed that once bond yields reached 3%, investors would rethink multiples.

Meaning rather than paying 20-times earnings for a stock, they might now only pay 15-times.

Yet again, investors seem to be ignoring the signs.

Instead, some are piling into ETFs, speculating on currency prices. According to Bloomberg, hundreds of millions have piled into an ETF-tracking emerging market for local currency bonds.

MoneyMorning 21-09-18

Source: Bloomberg
[Click to open new window]

And I suggest you do the same.

Not speculate on currency that is…but ignore the doomsayers.

I’m confident in my belief that we’ll see another financial meltdown in the next few years, but I couldn’t say when. I’m also confident you wouldn’t be able to potentially make MASSIVE returns with your head buried in the sand.

And I’m not talking gains of 100% or more. I’m talking Peter Thiel returns.

Recently, the billionaire founder of PayPal saw a multi-million dollar windfall from one cannabis investment.

How he invested in this cannabis stock (through private equity) isn’t that important. Far more important is his willingness to take bets.

It’s why I suggest you tune out the doomsayers and focus on taking advantage of the opportunities that present themselves in the market.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Aussie finance expert reveals four Aussie stocks he believes could be top performers in 2018. Get your free report now.


Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and Gold & Commodities Stock Trader, and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


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