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Global Trade War Looming: Will Cooler Heads Prevail? |
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FORECASTS & TRENDS E-LETTER 1. Trump Seems to Want a Trade War With China 2. Trump Says We Can Win a Trade War… But Consumers Lose 3. Could Trade War Put the Brakes on Strong US Economy? 4. Seriously Consider Broadmark’s Real Estate Lending Funds Overview President Donald Trump has repeatedly threatened a trade war with China, the European Union and even our NAFTA neighbors, Canada and Mexico, in recent months. In his latest salvo, he threatened to impose a 20% tariff on European car imports. That’s not likely to happen, but stocks recently sold off badly nonetheless. The truth is, there are no winners in a trade war. Protectionist policies generally benefit no one. It is not clear to me that President Trump fully understands this. He has some smart people around him, so hopefully, cooler heads will prevail. That remains to be seen. Let’s explore some trade war issues today since they are having a decided effect on the markets. And let’s look at the likely effects on the US economy if the president decides to go ahead with some of the more onerous tariffs I’ll discuss below. Trump Seems to Want A Trade War With China Back in the spring, President Trump repeatedly threatened to slap duties on $50 billion in Chinese imports, with the first wave of tariffs to cover $34 billion of goods and take effect July 6 (this Friday). The president threatened to raise the total even higher if China retaliated, which it swiftly pledged to do. The Communist Party-run government quickly countered with a list of US goods slated for tariffs, including cars, various farm products, etc. that could cause targeted political damage in rural states that Trump won in 2016. Trump also has signaled over and over that he wants to reduce America’s nearly $400-billion trade deficit in goods with China. Never mind that as the largest economy on the planet by far, we are going to import more goods from abroad than any other country. Here are the top five countries ranked by trillions in Gross Domestic Product: United States $19.75T Much depends on how far Trump is willing to go to reach his goals. He has recently threatened to put tariffs on an additional $100-$200 billion in Chinese goods in addition to the $50 billion noted above. He has administration officials working on a list of Chinese products that would cover that amount, so the trade war could escalate on fairly short notice. The question is, does President Trump really want a trade war with China, or is he just negotiating? The problem is, we don’t really know. Less than a month ago, it seemed like the latter. Now it seems more like the former. Following talks recently between the two powers in Washington, Treasury Secretary Steven Mnuchin said the administration was “putting the trade war on hold” and wouldn’t impose tariffs. Hope grew that the US would accept a modest increase in purchases by China of American products. But within days, the president backed away from that framework for the talks. China, for its part, is trying to transform itself from an export-driven economy to a consumer spending-driven system that is more sustainable. A trade war could disrupt Beijing’s careful management of the economy, which has been slowing down over the last few months. A trade war is the last thing China wants at this point, but its President Xi Jinping believes he cannot afford to appear weak in the eyes of President Trump. So, he talks tough in terms of retaliating against any tariffs the US might impose. He may have to. The best-case scenario for the US would be for China to back down on its strident technology issues as they pertain to US companies doing business in China and open its markets to more American goods and services. Unfortunately, that does not look to be the most likely scenario, at least for now. Trump Says We Can Win a Trade War… But Consumers Lose Picking a fight with a trading partner seems like a bad idea, but it’s not necessarily irrational. Probing a partner’s weaknesses can be an effective way to get a better trade deal, according to game theory and the strategy of negotiating. Yet President Trump seems increasingly intent on doing more than just negotiating. Earlier this year, he tweeted that trade wars are actually “good and easy to win.” In addition, he repeatedly pledges to reduce the US trade deficit, which results from the country importing hundreds of billions of dollars more than it exports each year. By the end of 2017, the overall US trade deficit had ballooned to $568 billion from $505 billion in 2016.
Yet as the largest and richest country in the world, it makes sense that we would import more than we export. Quite simply, we can afford to. Yet Mr. Trump says the trade deficit is a bad thing, especially with China, and a trade war is a good thing. Some political observers argue that Trump knows in his heart of hearts that a trade war is a bad thing, that it will ultimately result in lost American jobs and higher prices for US consumers. Take his tariffs on steel and aluminum, for example; yes, they may benefit the relatively few American companies that actually make steel and aluminum; but they will increase prices for all goods that contain those metals. Many more people are employed in industries such as auto manufacturing, that buy steel and aluminum to make products, than in steel and aluminum-making themselves. Higher prices for those products could reduce demand and lead to job losses. Some of those same political observers suggest that Trump knows this but feels the US economy is more than strong enough to absorb the effect of job losses and higher consumer prices. They believe the Trump administration is deliberately using the tariffs, which act as the rough equivalent of a domestic tax increase, as a way to keep the economy from overheating. Frankly, I find that a bit of a stretch but I suppose anything is possible at this point. Along that same line, some politicos believe that the recent deterioration in US trade relations with historical allies in Europe, Canada and Mexico is somehow a geostrategic concession to China, which the Chinese government is exploiting. That, too, may be a bit of a stretch. In any event, all signs point to a continued escalation of tariff battles and limited progress on key negotiations such as NAFTA. With the US, the EU and China combining for apprx. 60% of the global economy, the ongoing trade tensions will continue to create significant market volatility, dampen investment and threaten global growth prospects. Nothing good comes from this! Could Trade War Put the Brakes on Strong US Economy? The escalating trade battle between the U.S. and the rest of the world is raising the risk of a slowdown in an otherwise vibrant American economy. While the tariffs already in place and those set to be implemented just ahead will barely dent US growth, economists say the combination of additional measures being considered could take a perceptible bite out of gross domestic product if they are implemented.
Federal Reserve Chairman Jerome Powell said on June 20 that officials are beginning to hear that companies are postponing investment and hiring due to uncertainty about what comes next. The increasing tariff strife poses particular problems for the central bank because it’s likely to both raise inflation and depress growth. Nevertheless, most economists still expect 2Q GDP growth to come in at 4% or better, the strongest in almost four years and twice as fast as the 2.0% annual rate in the 1Q – that despite the steel and aluminum tariffs already imposed. Yet if the Trump administration goes ahead with its more onerous tariffs just ahead, that could start to significantly chip away at the positive benefits of the tax cuts. That would not be good. President Trump has some very smart people working for him. Larry Kudlow, for one, knows very well that a trade war is bad for everyone including the United States. Let’s hope Kudlow and other smart people working for Mr. Trump can keep him from implementing the more onerous tariffs discussed above. In other words, may cooler heads prevail! Seriously Consider Broadmark’s Real Estate Lending Funds Broadmark Capital has two real estate lending funds that we highly recommend for accredited investors: the Pyatt/Broadmark Real Estate Lending Fund I and the Broadmark Real Estate Lending Fund II. Both Funds make short-term loans (usually less than one year) to homebuilders and real estate developers. Broadmark insists on a maximum 65% Loan-to-Value ratio, meaning that if the real estate securing the loan is valued at $1,000,000, they would only loan up to $650,000. This makes these loans more secure in case they had to take possession of the property. Their goal is to provide a high-yield debt investment while minimizing the risks of principal loss and maintaining near-term liquidity. Their track record is very impressive with an average annual return of about 10% (net of fees and expenses). The original Pyatt/Broadmark Real Estate Lending Fund I makes loans in three states -- Washington, Oregon and Idaho – and its 7½ year record has been very consistent with very low drawdowns. You really should take a look at the actual returns net of fees and expenses: Download the Pyatt/Broadmark Real Estate Lending Fund I Fact Sheet The Broadmark Real Estate Lending Fund II makes loans in Colorado, Utah and Texas and has a consistent track record of nearly 4 years. You can see the actual, net returns for this Fund here: Download the Broadmark Real Estate Lending Fund II Fact Sheet You should seriously consider Pyatt/Broadmark Real Estate Lending Fund I and Broadmark Real Estate Lending Fund II for your portfolio if you are an accredited investor. In fact, I believe these two unique Funds, which are uncorrelated to stocks and bonds, should be core holdings for most accredited investors. As always, keep in mind that past results are not necessarily indicative of future results. There is a risk of loss. Be sure to read Important Disclosures and the Confidential Offering Memorandum for more details. Finally, we also have similar real estate funds that are available to non-accredited investors. There are three successful funds you can look at here. Call us at 800-348-3601 if you would like to learn more about any of these funds. You can also e-mail us for more information at info@halbertwealth.com. ** HAPPY INDEPENDENCE DAY Everyone! Be thankful for our freedoms!! All the best,
Gary D. Halbert SPECIAL ARTICLES Trade war means higher prices, layoffs
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Throw in President Donald Trump’s threat to slap a 10% tariff on an additional $200 billion of Chinese imports and a 20% levy on car shipments from the European Union and the economic impact grows significantly higher. The fallout could even be greater if heightened tensions begin to infect consumer, business and investor confidence.
