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Trade Wars - Not Good, And Not Easy To Win

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  • Trade Wars - Not Good, And Not Easy To Win

    I thought I would start up a new thread on this topic since it is becoming a major issue and can be a place where we can discuss specifically Trump's Trade Wars and and how it will impact both the global economy and NZ Inc.

    I also believe that as this situation evolves we can use this information to our best advantage, as well as, if there is a major market crash because of it, to find a bottom in the market and make the most of the timing. It will also be a good piece of historical reference once all is done and dusted.

    So, to recap so far:
    Starting in April 2018, the U.S. imposed tariffs on steel and aluminum imports from China, as well as Canada and countries in the European Union. On July 6, the U.S. imposed 25% tariffs on $34 billion worth of Chinese goods[4] as part of President Donald Trump's tariffs policy, which then led China to respond with similarly sized tariffs on U.S. products. Four days later, following Trump's orders, the Office of the U.S. Trade Representative (USTR) published a list of $200 billion in Chinese products to be subject to a newly proposed – but not yet implemented – 10% tariff.[4] China quickly responded to the announcement by blasting the proposed tariffs as "irrational" and "completely unacceptable". The Trump administration said the tariffs were necessary to protect national security and the intellectual property of U.S. businesses, and to help reduce the U.S. trade deficit with China.

    The U.S. administration is relying partly on Section 301 of the Trade Act of 1974 to prevent what it claims are unfair trade practices and theft of intellectual property. This gives the president the authority to unilaterally impose fines or other penalties on a trading partner if it is deemed to be unfairly harming U.S. business interests.


    That last bit is the most important, since we all know that Trump relies on unilateral decision making to get his wishes in regards to governmental decrees. It is also important to know that the Chinese consider "losing face" a huge cultural issue here, and when we throw in Trump's narcissism we almost have an immoveable object meeting an unstoppable force.

    The hybrid-Communist regime in China cannot afford to back down and throw it's centrally-developed social and economic plans under the bus, especially to a foreign power, which would risk destabilisation and possible regime change in Beijing. Problem is, if the Chinese markets are anything to by, then the Chinese economy is already in deep trouble (read: bear markets galore) and risk crimping the still developing middle class, who are starting to gain power in the country.

    Looking forward, the recently closed session on further US tariffs and lower-level trade talks between the 2 countries has done little to stop Trump from again lambasting China and putting the spectre of a further $200B of tariffs to work int he short term:
    “Nobody has ever done what I’ve done,” Mr. Trump said on Friday. “The $200 billion we’re talking about could take place very soon, depending what happens with them. To a certain extent, it’s going to be up to China.”

    “Now we’ve added another $200 billion,” he continued. “And I hate to say that, but behind that, there’s another $267 billion ready to go on short notice if I want. That totally changes the equation.”


    Source: https://www.nytimes.com/2018/09/07/b...r-tariffs.html

    In order to counteract this, China only has $60B of tariffs lined up, but is looking at specifically targeting US companies within China in order to make up the shortfall. This risks destabilising global trade and slashing US profits for listed companies, a direct threat to recent US market gains. There is also the fact that China could devalue the yuan drastically in order to blunt the effect of US tariffs (this sudden devaluation action led to the 2015 correction and months of uncertainty in US markets amid contagion fears).

    There is also the fact that China owns $1 Trillion in US Treasuries, although selling these into the market would be considered the "nuclear option" and would hurt both parties, almost equally. (Source: https://www.bloomberg.com/news/artic...llion-in-april).

    Now, with NZ Inc I see some looming problems here, and anyone thinking we are going to get off scot-free is totally ignoring the enormity of the evolving situation and not taking into account our reliance on China. China is by far our largest trading partner, and any slow down there will directly impact NZ markets for goods and services.
    New Zealand's two-way trade with China increased more than three-fold in the past decade, Stats NZ said today. It climbed from $8.6 billion in 2007 to $26.1 billion in the December 2017 calendar year.


    This infographic also shows the rise of China in our trade links:

    Click image for larger version  Name:	mei-jul-17-2.jpg Views:	1 Size:	88.4 KB ID:	9075




    Further slow downs in Chinese credit markets, as well as the tightening of off-shore capital flow, will most definitely affect house prices in New Zealand. As we have experienced such a boom over the past few years by price insensitive foreign buyers, the further drying up of credit (see also: Australian Royal Commission into Banking currently ongoing) will mean an entire pool of buyers at the higher end of the market, seeking a safe haven for large amounts of capital, may disappear over night (see also: Foreign Buyers Ban).

    All in all, we can expect further escalation of the Trade War in coming weeks, which will inject uncertainty into markets. Pray for the best, but prepare for the worst.

    Finally, I couldn't escape throwing in a chart on the issue. Below is the DJIA daily index, showing the first utterances by Trump of tariffs and the effect it had on the market, as well as the current fears around US Fed rate hikes. As that was only a mere $50B to begein with, I wonder what the next $400B+ will do to the markets? Lots of uncertainty ahead!

    Click image for larger version  Name:	big.jpg Views:	1 Size:	111.9 KB ID:	9076
    Last edited by Moosie; 08-09-18, 08:54 AM.

  • #2
    Ugly chart of the day - Shanghai Composite Index (SHCOMP) ready to test the bubble burst lows of 2015. Catalyst for this move even lower will be the extra $200B in tariffs Trump has lined up for them this coming week.

    I am seeing commodities most used by China starting to really fall off the wagon (Lithium, Copper, Iron Ore etc.) and I suspect this is the first signal we are getting that the growth that the Chinese propaganda ministry puts out showing consistent, steady growth in the 6% range for years on end is nowhere near what it truly is, and that it is in fact getting much worse as tariffs start to bite.

    IMHO, be prepared for another China Syndrome panic on the way over the next few weeks, feeding into the Oz and then NZ markets!

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    Last edited by Moosie; 11-09-18, 02:07 PM.

    Comment


    • #3
      Jeez, only took half a day and the Chinese proved my theory correct!

      CHINA-U.S. TENSIONS: China is putting off accepting license applications from American companies in financial services and other industries until Washington makes progress toward a settlement, an official of a business group said Tuesday. The disclosure is the first public confirmation of U.S. companies' fears that their operations in China or access to its markets might be disrupted by the battle over Beijing's technology policy. The license delay applies to industries Beijing has promised to open to foreign competitors, according to Jacob Parker, vice president for China operations of the U.S.-China Business Council. The group represents some 200 American companies that do business with China. China is running out of American imports for penalties in response to President Donald Trump's tariff hikes, which has prompted worries that Chinese regulators might target operations of U.S. companies. The U.S. is poised to slap tariffs on $200 billion in Chinese goods and Trump has said he is considering tariffs on $267 billion more, or essentially every good that's imported from China.

      ANALYST'S TAKE: "China's ability to respond is limited in tariffs, the government is using what they call 'qualitative measures,'" said Robert Carnell, head of research and chief economist at ING Bank. "You can't put a number on that, but it's not an idle threat. They could really make it hard for U.S. companies to operate in China."

      Comment


      • #4
        Crudely put, the US position on Iran is " You can do business with the USA or you can do business with Iran, but you can't do business with both".

        What does a small trading nation at the bottom of the Pacific is confronted with a Chinese position of "You can do business with the USA or you can do business with China, but you can't do business with both".

        Which way does the Kiwi jump. . .

        Comment


        • #5
          Another $200B in tariffs so close I can smell it now...

          https://www.reuters.com/article/us-u...-idUSKCN1LV0OB

          Comment


          • #6
            It's on - another $200B tacked on today.

            https://www.radionz.co.nz/news/world...riffs-on-china

            Watch the CSI 300 plummet today. 3,000 should fail spectacularly, setting up for the 2,700 low from the 2015 bubble burst.

            Things are getting interesting!

            Comment


            • #7
              Thought I'd revive this thread and note today's announcement that Huawei has effectively been blacklisted by the major US tech companies and is being seen as the main bargaining chip in this tit-for-tat war.

              https://au.investing.com/news/stock-...pplies-1457598

              A week on and still absolutely 0 sight of any sort of resolution. Those ships with with "only" 10% tariffs are sailing closer, as is the time for full implementation of that 25% tariff on Chinese imports to 'Merika...

              Comment


              • #8
                90 day "grace" period for Huawei one day, deepening blacklist the next.

                https://uk.investing.com/news/stock-...cklist-1516503

                Comment


                • #9
                  Well, the infamous H&S pattern is showing up on the DJIA chart. We have obvious support around the SMA100/200 confluence, which the index managed to close above today (just). Not far below that we have the neckline of our pattern which, should it be breached, brings up other lower support levels very quickly.

                  Wall Street'ers already calling it a "Technological Cold War". Those massive boats that left Chinese ports pre-25% tariff raise have a mere 1 week left before they reach port for the 2 dicktators to reach an agreement and not be slapped with massive taxes on their products. I am personally not holding my breath on that one!

                  Eurozone also posting some bad news in regards to industry climate and growth rates. Brexit is also no back on the table as Theresa May looks to get ousted.

                  Reality really starting to sink-in. Hope everyone has positioned themselves accordingly...

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                  • #10
                    I've positioned myself in a large bath tub full of A2 milk after all babies still need milk no matter what the Trumpet does or says. PS-Come to think of it he is basically a big baby anyway.

                    Comment


                    • #11
                      Originally posted by Couta View Post
                      Come to think of it he is basically a big baby anyway.
                      Wow, something we can actually agree on!

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                      • #12
                        Considering the fact that tariffs are now higher than previous levels and there is still more to be tacked on should Baby Trump not get his way, the recent Triple Top on the DJIA looks ominous. As I stated above, should the H&S neckline snap, we can see where this may end up (around the 21,000 level). Momentum is lacklustre at these heights at best, with some major divergence now presenting itself. Those new 25% tariffs get slapped on goods arriving this week as well.

                        Tick tock...

                        Weekly chart - DJIA

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                        • #13
                          Authored by Michael Zezas, Chief Public Policy strategist at Morgan Stanley

                          Investors are obsessed, trying to figure out what happens next in the US/China trade dispute. Will the US call China? What do the negotiators really think? Does this last three weeks or three months? Our answer: you could be starting with the wrong questions.

                          First, let’s look back. It all seemed to be going so well. After market sell-offs sent signals to the US and China about the costs of trade tensions, they sat down at the G20 in November, called a truce, and appeared close enough to a deal to start planning for a signing ceremony. Then came the week of May 5. The US claimed China had moved the goalposts on key issues and announced another tariff increase, with preparations to levy tariffs on another ~US$300 billion of imports. China responded with counter-tariffs and heated rhetoric. Escalation was back, but the market response was relatively muted. After a 3-4% down move in the S&P from all-time highs and about a 7% down move in the Shanghai Composite, both indices remain well above pre-G20 levels. This suggests the recognition of heightened uncertainty, but no clear idea of what comes next.

                          It appears that investors are trying to gauge trade risks by focusing on near-term catalysts. We’re often asked what key players are saying, what might happen at the next G20, where that meeting fits in the timelines for tariff events, and what unconventional action each side might take. But these questions can be counterproductive. Answers require us to intuit the intentions of key players around specific details, while we can only parse their broad intentions from public statements and reporting. Furthermore, this approach risks overemphasizing isolated bits of evidence.

                          Rather than guess at the next headline or meeting, define the dynamic at play.

                          Game theory takes us back to what shaped our call in 2018. Both sides will continue to escalate until clear market or economic weakness pushes them to reengage. Hence, investors should act as if the next escalation will happen until markets price it in. The situation resembles a repeated Prisoner’s Dilemma game. Both sides start by escalating, perceiving better payoffs for doing so. They can cooperate later on if they realize that the rewards for payoffs from cooperation are greater than from further escalation. Consider:
                          • This isn’t posturing, meaningful disagreements exist: Early speculation the week of May 5 was that the game hadn’t changed, rather both sides were framing their compromises for domestic audiences. But the US soon highlighted new areas of disagreements, confirmed by the Chinese side, around IP protections and how quickly to remove existing tariffs.
                          • These conflicts reset the payoffs, suggesting that escalation is preferable at this point to meeting the other’s demands: For one side, and possibly both, the payoff for cooperation had diminished as it became clear that their counterpart wasn’t agreeing to key conditions.
                          • Market and/or economic weakness could change the game: In 4Q18, we believe that the US administration’s market sensitivity and China’s short-term economic exposure played a key role in bringing them to the table amid weakness in global markets and softer data in China. The payoffs for cooperation became clearer and preferable to escalation. A repeat of these pressures could mend this new rift.

                          We expect this dynamic to pressure risk assets and US bond yields lower. If risk markets don’t drive cooperation soon, escalation will likely cause enough economic erosion to move the markets before long. Consider the impacts of further escalation laid out by our economists in their midyear outlook. A three-to-four month extension of current tariffs could dampen growth in China and the US by 20bp and 30bp, respectively, barely avoiding recession. A longer period of tension, including fresh tariffs on ~US$300 billion of remaining China exports to the US, puts 100bp of global growth at risk and pushes the Fed into repeated cuts. Neither of these outcomes is in the price, in our view, and recent conversations with investors suggest that they under-appreciate the downside impact of such scenarios.

                          Where could we be wrong? Perhaps the US and China will follow the path lauded by game theorists and marriage counselors alike – communication! Given domestic politics and negotiating stances, we think that it will take weak markets or fundamentals to pry open a channel. Still, any news of fresh, substantive dialogue between the countries should be seen as a positive.

                          Comment


                          • #14
                            Originally posted by Moosie View Post
                            Authored by Michael Zezas, Chief Public Policy strategist at Morgan Stanley

                            Investors are obsessed, trying to figure out what happens next in the US/China trade dispute. Will the US call China? What do the negotiators really think? Does this last three weeks or three months? Our answer: you could be starting with the wrong questions.

                            First, let’s look back. It all seemed to be going so well. After market sell-offs sent signals to the US and China about the costs of trade tensions, they sat down at the G20 in November, called a truce, and appeared close enough to a deal to start planning for a signing ceremony. Then came the week of May 5. The US claimed China had moved the goalposts on key issues and announced another tariff increase, with preparations to levy tariffs on another ~US$300 billion of imports. China responded with counter-tariffs and heated rhetoric. Escalation was back, but the market response was relatively muted. After a 3-4% down move in the S&P from all-time highs and about a 7% down move in the Shanghai Composite, both indices remain well above pre-G20 levels. This suggests the recognition of heightened uncertainty, but no clear idea of what comes next.

                            It appears that investors are trying to gauge trade risks by focusing on near-term catalysts. We’re often asked what key players are saying, what might happen at the next G20, where that meeting fits in the timelines for tariff events, and what unconventional action each side might take. But these questions can be counterproductive. Answers require us to intuit the intentions of key players around specific details, while we can only parse their broad intentions from public statements and reporting. Furthermore, this approach risks overemphasizing isolated bits of evidence.

                            Rather than guess at the next headline or meeting, define the dynamic at play.

                            Game theory takes us back to what shaped our call in 2018. Both sides will continue to escalate until clear market or economic weakness pushes them to reengage. Hence, investors should act as if the next escalation will happen until markets price it in. The situation resembles a repeated Prisoner’s Dilemma game. Both sides start by escalating, perceiving better payoffs for doing so. They can cooperate later on if they realize that the rewards for payoffs from cooperation are greater than from further escalation. Consider:
                            • This isn’t posturing, meaningful disagreements exist: Early speculation the week of May 5 was that the game hadn’t changed, rather both sides were framing their compromises for domestic audiences. But the US soon highlighted new areas of disagreements, confirmed by the Chinese side, around IP protections and how quickly to remove existing tariffs.
                            • These conflicts reset the payoffs, suggesting that escalation is preferable at this point to meeting the other’s demands: For one side, and possibly both, the payoff for cooperation had diminished as it became clear that their counterpart wasn’t agreeing to key conditions.
                            • Market and/or economic weakness could change the game: In 4Q18, we believe that the US administration’s market sensitivity and China’s short-term economic exposure played a key role in bringing them to the table amid weakness in global markets and softer data in China. The payoffs for cooperation became clearer and preferable to escalation. A repeat of these pressures could mend this new rift.

                            We expect this dynamic to pressure risk assets and US bond yields lower. If risk markets don’t drive cooperation soon, escalation will likely cause enough economic erosion to move the markets before long. Consider the impacts of further escalation laid out by our economists in their midyear outlook. A three-to-four month extension of current tariffs could dampen growth in China and the US by 20bp and 30bp, respectively, barely avoiding recession. A longer period of tension, including fresh tariffs on ~US$300 billion of remaining China exports to the US, puts 100bp of global growth at risk and pushes the Fed into repeated cuts. Neither of these outcomes is in the price, in our view, and recent conversations with investors suggest that they under-appreciate the downside impact of such scenarios.

                            Where could we be wrong? Perhaps the US and China will follow the path lauded by game theorists and marriage counselors alike – communication! Given domestic politics and negotiating stances, we think that it will take weak markets or fundamentals to pry open a channel. Still, any news of fresh, substantive dialogue between the countries should be seen as a positive.
                            Click image for larger version

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                            • #15
                              Here we go folks. China making its first big strike back. Rare Earths (RE) a key ingredient in technology consumables. Been murmurs of this for a week or so now, so no surprises to those paying attention:

                              China's Communist Party newspaper warned on Wednesday that Beijing was ready to use its influence over the supply of rare earths to strike back against the United States in an increasingly bitter trade dispute.

                              Euro stocks getting hammered, US futures down below SMAs and gold getting bid. It's on, again...

                              Comment

                              HLG

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