How Two Economic Powerhouses Could Ruin Us All

The threat of a global trade war has been looming over 2018 like a dark cloud.

Here at Money Weekend, we’ve written extensively on the impact a trade war breakout between the US and China could mean for Australia.

And it’s not pretty…

The back and forth between the two economic powerhouses began earlier this year. We all know the story, the US put down a 25% and 10% tariff on steel and aluminium, respectively. And it’s grown from there.

It caused market turbulence in the beginning, but it quickly steadied and the market hasn’t been affected by the trade threats and tariffs laid down since.

But that might be all about to change.

On Tuesday (Monday US time), it was announced that US President Donald Trump and the government’s trade officials had announced their plan to impose 10% tariffs on US$200 billion Chinese imports — which could grow to 25% by the New Year.

What a trade war means for Australia?

These tariffs could have a significant impact not just on China and the US, but globally and more specifically here at home in Australia.

And with the Australian economy already on a knife’s edge with it heavily reliant on house prices, which have tumbled this year, more threat to the economy could see Australia’s bull bubble burst.

KPMG, an auditor and professional services company, believe that over the next decade, $36 billion could be taken from the Australian economy.

Last month KPMG released a report on the effects a trade war could have on the Australian economy.

We told readers about what could potentially happen if scenario one was put in place, and that’s what’s just happened.

With the 10% tariffs announced this week by the US on Chinese imports, Australia could lose $36 billion over 10 years. Now, ‘Scenario One’ was conductive to a 15% tariff. The tariff currently sits below that.

But, in three and a half months, Australia could find itself in ‘Scenario Two’, which is a lot direr.

As we reported a few weeks ago, scenario two could see Australia lose $58 billion from its economy.

It also looks likely that China will hit back at the US with new tariffs of their own.

The constant back and forth from both nations could see other nations then impose their own tariffs, leading to an all-out global trade war.

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How the markets have reacted

In just hours following the announcement made by Trump, US futures and Asian stocks fell on the market.

While KPMG have released what they believe could happen should the trade conflict escalate, MPs admit they aren’t too sure what Australians could expect, but they agree it won’t be pleasant.

Labor frontbencher Brendan O’Connor told Sky News:

There will be ramifications — the extent and nature of which we don’t know yet — but there’ll be some impact on Australia’.

Trade Minister Simon Birmingham agreed with O’Connor that Australia would be impacted. He expanded further, telling ABC radio:

The retaliation is going to ripple through this region, without a shadow of a doubt.

We’ve continued consistently to urge parties not to pursue distorting subsidies and not to pursue unilateral tariff actions

Tariffs ultimately result in consumers paying more and disruptive trade practices ultimately hurt economies rather than help them

That’s why we continue to urge everybody … to think carefully about the consequences of doing so, to recognise that hurts their economies, it has possible negative impacts on other economies.

It means consumers end up paying more, taxpayers end up subsiding more. They’re not good things.’

But ultimately, Australia started feeling the effects of the tariffs immediately.

It was the resources sector that drove down share prices on the S&P/ASX 200. But it wasn’t only Australia that saw markets down, England and New Zealand also saw stocks fall.

Unsurprisingly, China returned serve to the US and also raised their tariffs, hitting the nation with $60 billion on US imports.

If you’re concerned about the long-term impact a declining economy may have on your wealth, then you can check out what controversial economist and Editor of The Boom & Bust Letter, Harry Dent recommends Australians do to protect themselves from any future financial crisis. Go here to find out the details.

This week in Money Morning

In Monday’s Money Morning, Harje looks to the future of financial markets. Unlike the thousands of doomsayers who predicted the end of the Earth, we know financial apocalypses do happen (like in 2008, but no one saw that one coming).  JPMorgan’s models and all models in fact, are only as good as the assumptions they’re built on. If just one assumption is off, then the whole model will struggle to be accurate. The point Harje tries to make is that it’s incredibly difficult trying to predict what the market will do. You’re essentially making a bet on human behaviour. To find out more, go here.

In Tuesday’s Money Morning, Harje discusses how Seek has had stagnant profit growth over the last two years, but that may not mean the business is damned and won’t recover with new offshore strategies. On a five year basis, however, Seek trades for less than 30-times average earnings. To find out more about Harje’s views and analysis about Seek, go here.

On Wednesday, Harje discussed the rise of Smart Cities and how 5G technology is absolutely necessary to transmit data faster between users, as populations grow and more and more people come online. Places like Hong Kong are following suit (from Singapore). Their plans to create a Smart City include: a connected transport system, ubiquitous use of digital payments, clean green connected energy and, innovation incubators for youths and entrepreneurs. But unless we get 5G, it’s hard to imagine a future of driverless cars, remote surgery or the Internet of Things. Partly it’s because we cannot transmit data fast enough. Its why there’s so much hype around 5G. It’s not just the answer to more data and faster connection speeds. It could bring on true Smart Cities, where everything is connected. To find out more, click here.

In Thursday’s Money Morning, Harje looks at hedge funds and questions whether they are actually necessary. However, Harje claims that they can be useful in certain situations such as shorting stocks…and while some are guilty of misconduct there are a few good hedge funds out there. What value do they offer? Well, the good ones put more money in your back pocket. But these ‘good ones’ are becoming few and far between. As Harje explains, they can aggressively short stocks, even though this can be risky trading. The market can always rise higher. But because of very little regulation, hedge funds can pursue this strategy aggressively. The problem with the hedge fund industry isn’t the greedy managers. People will always be greedy. The problem is those people pouring money into the industry, entities like sovereign wealth funds and alike. To find out more, go here.

In Friday’s Money Morning, Harje discusses how the US-China trade spat is getting worse, how tariffs are bad for everyone, and the media focusing on the drama creates more uncertainty…but then Harje explains why you shouldn’t panic, and should ignore the doomsayers. Harje believes another financial meltdown is likely on the way in the next few years, but we can’t know when exactly, and you won’t benefit by burying your head in the sand and ignoring your opportunities in the meantime. And as Harje explains, there are some great potential gains to be made. Go here to find out more.

Kind regards,

Alana Sumic,
Editor, Money Weekend

PS: Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now.

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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