It’s D-day for the US and China. But a new countdown has begun…
After seeing Trump’s ultimatum tactic on China, Iran is thinking of doing something similar.
You might remember about a year ago, Trump walked away from the landmark nuclear deal. He also imposed economic, trade, scientific and military bans on Iran.
The currency collapsed. Consumer goods are in short supply. Iran, while rich in oil, now spirals down because of Trump’s decisions.
So, they’re giving their European trading partners 60 days. 60 days to send an economic lifeline. If that doesn’t happen, then Iran kicks up their uranium activities.
Seemed like a good move at the time…
What happens from here?
‘In a letter to other signatories, Iran’s Supreme National Security Council said it was no longer committed to restrictions on the storage of enriched uranium and heavy water stocks, and could stop observing limits on uranium enrichment at a later stage.
‘The level of nuclear enrichment Iran is allowed to pursue is at the heart of the nuclear agreement, because material enriched at a sufficiently high concentration could be used to produce a bomb.’
A good move for Trump, but likely won’t help Iran.
The only bargaining chip they have is oil, and various radicalised Middle Eastern nations under their influence. Trump also has oil…and dollars…and far more political influence.
It’s why Europe is so nervous about getting involved. If push comes to shove, they will probably side with the US, not Iran.
But with all his influence and power, Trump still couldn’t get China to bow to his wishes…yet.
At about 2:00pm today it will be 12:00am in Washington, DC. That’s the time tariffs increase if a deal has not been made. As far as I can see, there is no sign of a deal. So, will we see higher tariffs in the next few hours?
I’m betting we will. But other than that, what could happen from here? Other than extremely volatile markets of course…
Maybe talks continue with higher tariffs in the background. Bloomberg writes:
‘U.S. Trade Representative Robert Lighthizer said tariffs on $200 billion in Chinese imports will increase to 25 percent from 10 percent at 12:01 a.m. on Friday. He also indicated the U.S. wants to keep talking.
‘The Chinese are preparing their own retaliatory duties on U.S. imports should Trump carry out his threat, according to people familiar on the matter. But they, too, are staying at the table.
‘It’s an awkward equilibrium, but it may just hold. Neither country wants a long, bruising trade war that undermines growth. The incentive to reach a deal grows stronger by the day for Trump, who’s seeking re-election in November 2020.’
Or maybe trade talks collapse entirely? Again, from Bloomberg:
‘The stakes are arguably higher than ever as both countries prepare to slap more tariffs on each other.
‘In an all-out trade-war scenario, annual gross-domestic product may shrink by as much as 0.6 percent in the U.S. and by 1.5 percent in China, according to the International Monetary Fund.
‘“My most likely scenario is that there’s no final resolution, not for some time,” said Chris Rupkey, chief financial economist at MUFG Union Bank NA. “They’re talking about changing the way another country is doing business. It’s like another country telling the U.S. to stop being capitalist.”’
But I would think continuing talks is more likely. After all, Trump did recently receive a ‘beautiful letter’ from Xi. The Australian Financial Review explains:
‘US President Donald Trump said he received a “beautiful letter” from Chinese President Xi Jinping just hours before trade talks resume under the looming shadow of a tariff deadline mere hours away.
‘As Wall Street fell, Mr Trump quoted Mr Xi as saying: “Let’s work together. Let’s see if we can get something done.”
‘Negotiators are set to resume talks over dinner Thursday in Washington after almost a week of tumult over whether a trade deal is still possible.’
Whether a deal actually goes through today is anyone’s guess though. But I’m fairly certain of one thing. If a deal is reached sometime in the future, I don’t think it will be to China’s benefit. The US holds the power.
Xi’s letter begging to put an end to tariffs is yet more evidence to back up that claim. As I explained on Wednesday, China is in sore need of dollars. Here’s a snippet of what I wrote…
‘China needs US dollars!
‘They need dollars because they act as a reserve asset for Chinese banks. With more dollars in the kitty, they can create more loans, which will hopefully spur on demand and production leading to growth.
‘This is why Trump is fighting this tech war with dollars. He knows China needs them. And right now, they’re running low on foreign currency reserves.’
In my mind, the longer this drags on, the stronger Trump’s bargaining power becomes. It’s why China’s central bank is also rapidly trying to trade their US dollars for gold.
They are trying to de-dollarise their reserve assets. But it might be little too late.
Take a look at China’s pool of foreign reserves (first chart) and current account (second chart), which tops up their foreign reserve balance…
Source: Trading Economics
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With fewer reserves, China will find it harder to grow their economy. They’ll find it harder to recapitalise banks, like they’ve had to do before.
The longer Trump waits, the fewer dollars flow to China. Sooner or later, China will be back, with their tail between their legs begging for a deal.
While I’m generally against tariffs, it’s still fun to see it all play out.
How to profit from an extended war
So, let’s say this whole thing drags on…
Tariffs increase even further and its bye-bye to any kind of amicable deal. Well, the first thing you should be thinking of is the stocks in your portfolio.
Until now, markets haven’t really moved all that much.
‘A trade deal had been priced into markets, and now we are living through the fallout of altered expectations, so it wouldn’t be surprising to see continued volatility,’ said Kristina Hooper of Invesco. ‘We’re going to see both sides playing a game of chicken,’ she added.
But now, surely it’s time for investors to wake up.
It’s time to move out of the expensive highflyers and look at the thing that used to matter…valuations.
One sector you might want to look at is gold. Forget physical gold. I’m talking about looking at gold miners and producers. Although gold prices have been falling due to ever rising stocks, geo-political conflicts like these tend to have a wonderful effect on the yellow metal.
Optimistic as ever,
Editor, Money Morning
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