We can withstand a global turndown, Treasurer Josh Frydenberg said.
Of course, this is exactly what any politician would say.
‘It’s us that do everything good. In fact, we would have done more if it wasn’t for those guys on the other side!’
That’s what it boils down to at the end of the day. Personal character attacks. Finding inconsistences within the other side’s policies without coming up with any solid plan of your own.
This is what wins over the emotional public. Give them an emotional issue or idea to get behind and watch that voter base grow.
More important than Aussie politics, for stock market investors at least, is what’s happening between Trump and Xi.
As trade talks intensify, the mainstream paints a picture of two giants slogging it out. In reality, China is taking most of the hits. And they look to be trying last-ditch efforts to stay in the fight…
Hardly a fair fight
This was something I talked about earlier this week. China was taking too long, arguing over points they had already agreed to. So, Trump decided to snap his fingers and announce a double in tariffs on Chinese goods.
You then saw economists cry out, telling the people how dumb Trump is for increasing costs to American consumers. Former assistant professor of economics, Karl Smith wrote:
‘When it comes to trade with China, it often seems that Donald Trump is his own worst enemy. Unilaterally raising tariffs, as Trump is threatening, is akin to punishing US consumers for China’s misbehaviour.
‘Most economists view lower tariffs as a win for the US economy, even if China doesn’t reciprocate. Of course, they say, the world economy would be even stronger if tariffs were lowered across the board.’
Then you read something like the following from the Australian Financial Review:
‘Both Trump and his Chinese counterpart, Xi Jinping, believe they have more bargaining power than they did six months ago.’
It’s almost as if the mainstream thinks both Trump and Xi are on level ground. Yet as I explained yesterday, that’s simply not the case.
The US has something China wants. Two things actually. Consumer demand and American dollars. To see why, you can go read this article here. China doesn’t have a whole lot the US can’t get from somewhere else.
There are plenty of cheap manufacturers in Asia. Maybe they don’t have the volume China does. But it’s not all that hard for US businesses to purchase cheap manufactured goods from Vietnam or Thailand.
It’s why, as Trump continues to starve China of dollars, the Middle Kingdom might become more desperate. We’ve already seen them lower required reverse ratios for small lenders. This effectively lets them create more money with the current reserve assets they have.
China has also started a round of tax cuts, which might provide a short-term economic boost. But it still doesn’t solve the main problem. China needs dollars and Trump knows it.
That’s why, in my opinion, China will either cave to America’s terms, or they will have to radically change how they do things.
Even if China does agree to all terms and this whole trade war saga goes away, there’ll likely still be problems to solve.
One of those is a global structural problem we really saw the effects of in the 2008 financial meltdown…
What’s Finland and Portugal got to do with this?
Why did a country like Finland or Portugal enter recessions when US subprime went down the tubes?
Were these countries linked to US mortgages? Maybe their financial sectors bought some of the subprime crap. Yet I doubt it was so widespread it could launch both economies into negative growth.
So what was it?
Well, both are manufacturing countries. And as manufacturers, they compete along with many other countries to sell goods to those nations eating up all the trade deficits. One of those countries happens to be the US.
They eat up a lot of trade surpluses.
And with the Americans in turmoil, countries like Finland and Portugal were hit hard by lagging demand.
The problem is not just downturns, though. Things have been getting worse for manufactures as time has gone by. We’re all becoming more efficient at producing goods. Those efficiency gains, whether it’s robotics or automation, soon spread throughout the industry.
Now this might not be a problem if demand for manufactured goods was infinite. But the thing is, it’s not. Just like the amount of food you consume, there are limits to the amount of goods people will buy.
This spells trouble for the manufacturers of this world. If efficiency gains are ratcheting up by 4% each year and global demand for manufactured goods is only 2%, then there’s going to be a whole lot of losers in that industry.
Think of it this way…
Does any nation stake their fortune on farming today? Almost no one does. And that’s because farming productivity has been widely dispersed through the industry. And because everyone is competitively similar, profits margins get cut to the bone.
I expect the same will happen to manufacturing. It’s already a dying industry. But profits might dip even further as efficiency improves and those gains are widely spread among nations.
What this means for you
As an investor, this is probably something you want to keep in mind. With so many manufacturers out there, most of Asia and a whole lot of Europe, global growth might be terrible for some time to come.
Maybe we’ll see a huge restructure to one of these nations. Maybe it will be China who takes the lead, transitioning from manufacturing to services.
Such a transition might only happen in drastic times. And while that might spook financial markets, it will be one of the best times to put your savings to work.
Who knows, maybe Trump’s tariffs will push China to do it.
Think we could sustain that kind of downturn, Frydenberg?
Editor, Money Morning
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