FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 27, 2019

IN THIS ISSUE:

1. China Announced New Tariffs Friday, Trump Responded Bigly

2. Stocks: Three Worst Trading Days of Year Happened in August

3. Fed Chairman Powell Disappointed the Doves in Jackson Hole

Overview

There are weeks, occasionally, when it is somewhat difficult to find a really interesting topic to write about. This is not one of them! There were several interesting, and in some cases troubling, things which happened over the last week, making it easy to pick which topics to write about in this letter.

We’ll begin with the 800-pound gorilla in the room. Early Friday morning, China announced a new round of tariffs on $75 billion in US goods. President Trump quickly replied that he would respond before the end of the day. On Friday evening, Trump announced massive new tariffs on goods from China and demanded that US companies move their operations out of China. I’ll explain it all below, but none of it is good news – quite the opposite!

Stocks plunged on Friday, over 600 points in the Dow. That followed the 800-point daily loss on August 14 and the 767 point drop on August 5. Those were the largest one-day losses this year in the Dow. The S&P 500 and the Nasdaq were also down as much or more. I’ll talk more about that as we go along today.

Finally, in his speech in Jackson Hole last Friday, Fed Chairman Jerome Powell did not suggest that the central bank is prepared to cut interest rates further just ahead. Instead, he stuck with the same language he used at his last press conference on July 31, saying the Fed would “act as appropriate” to keep the economy growing. Those hoping for more rate cuts just ahead were quite disappointed, as I suggested in my Blog last Thursday.

China Announced New Tariffs Friday, Trump Responded Bigly

Early Friday morning, China announced it was increasing tariffs on another $75 billion of US goods we sell them. They also announced that China will reinstate the 25% tariff on US autos on December 15. The announcement came as a surprise.

Not long after China’s announcement, President Trump tweeted that he would retaliate before the end of the day. Late in the day, before he left for the G-7 summit in France, Mr. Trump announced the US would be increasing tariffs on $550 billion of goods we buy from China.

You may recall that we already have a 25% tariff on $250 billion in Chinese goods we import, and Mr. Trump tweeted that this tariff would be raised to 30% starting on October 1. He also announced that the 10% tariff on an additional $300 billion in Chinese imports, which was set to go into effect on September 1 and December 15, would be increased to 15%.

This means we will be taxing virtually everything China sells us and vice-versa. These moves deepen the trade war that many fear could tip the US and global economies into recession. 

Even more surprising, President Trump also tweeted Friday: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

However, it wasn't clear how he planned to force US companies to cut ties with China, given   that many rely on Chinese manufacturing which is far more economical than is possible in the US. Mr. Trump referred to the Emergency Economic Powers Act of 1977 as his authority to do so.

That law gives the president authority to regulate commerce after an "unusual and extraordinary threat" is declared. Yet no one is sure if the trade war with China qualifies as such. Most experts believe it does not.

As noted above, the Dow Jones Industrial Average closed down over 600 points on Friday, even before President Trump announced the new tariffs later that day. The S&P 500 and Nasdaq indexes closed even lower.

Businesses also expressed concerns and criticized the White House. David French of the National Retail Federation warned: "It's impossible for businesses to plan for the future in this type of environment. The administration's approach clearly isn't working, and the answer isn't more taxes on American businesses and consumers."

The American Apparel & Footwear Association, complained that the White House's approach amounts to a "1930s trade strategy that will be a disaster for American consumers, American businesses and the American economy."

The head of the American Farm Bureau said in a statement that China's increased tariffs on US imports signal "more trouble for American agriculture," while expressing concern that any retaliation "adds to the difficulties farm and ranch families are facing." China has already told its importers to stop buying US grain, soybeans and other ag products.

As I have argued often in recent weeks, most economists agree that sharply higher tariffs on Chinese goods could raise prices for consumers on everything from phones and video consoles to apparel and shoes – unless China continues to devalue its currency, which is doubtful.

Meanwhile, the latest escalation in trade tensions comes amid signs that the US economy is slowing down, including declining corporate profits and the recent dip in job creation – not to mention the damage done to the stock markets.

The US Chamber of Commerce agrees that Mr. Trump’s tariffs threaten the continuation of the economic expansion and increase the odds of a recession before long. It recently released a graphic showing that tariffs negatively affect all 50 states, some more than others. Take a look:

Finally, a possible piece of good news: President Trump announced on Monday at the G-7 summit that China reached out to him and expressed interest in returning to the bargaining table on trade relations between the two countries. We’ll have to see what happens.

Stocks: Three Worst Trading Days of Year Happened in August

We have recently witnessed the three worst trading days for US stocks this year, all of them in August. The latest, which we saw last Friday, was sparked by President Trump threatening more trade tariffs on China. Gee, thanks, Mr. President! Let’s take a quick look at the two worst days of this year.

On August 14, the Dow Jones Industrial Average plunged over 800 points (-2.9%), marking the worst trading day of the year and the fourth worst one-day point drop on record. That was the day the yield curve between 2-year and 10-year Treasuries inverted, and recession fears skyrocketed.

The second worst day of the year came on August 5 when the Dow shed almost as much, 767 points (-2.8%). That was the Monday after China significantly devalued its currency over the preceding weekend.

The third worst day of the year came last Friday, August 23. Early that day, China announced it was retaliating with new tariffs on $75 billion of US products, which didn’t impact the stock market significantly, at least initially.

But shortly thereafter, President Trump tweeted that he would be “responding to China’s [new] tariffs this afternoon.” Stocks immediately fell off a cliff, plunging several hundred points in only a few minutes. By the close last Friday, the Dow was down over 600 points (-2.4%).

So, the three worst trading days of the year for stocks all happened in August. The Dow and the S&P 500 were both down just over 6% from their record highs earlier this year at the end of last week.

Fed Chairman Powell Disappointed the Doves in Jackson Hole

Speaking at the Fed’s annual symposium in Jackson Hole, WY last Friday, Fed Chairman Jay Powell disappointed those hoping (and in some cases, betting) he would hint that the Fed will be cutting interest rates further between now and the end of the year.

However, as I suggested in my Blog last Thursday, Mr. Powell decided to stick with the same language he used in his last press conference on July 31, that the Fed would “act as appropriate to sustain the [economic] expansion.” No hint of a rate change one way or the other.

Stocks moved lower after Mr. Powell’s remarks but not dramatically. However, not long after Powell’s speech, President Trump dropped his tariffs bombshell on China. Stocks plunged dramatically lower after Trump’s tweet and finished the day with the Dow down over 600 points, as discussed above.

In his speech, Chairman Powel expressed serious concerns about the US-China trade war and conceded that the Fed has “no rulebook” to deal with trade wars.

In what was the most stunning and unprofessional response to Chairman Powell’s speech in Jackson Hole, President Trump tweeted: “As usual, the Fed did NOTHING. We have a strong dollar and a very weak Fed… My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” You can read this quote in context in the related article in the links below.

I think we can all agree that comparing Mr. Powell to China’s President Xi Jinping is a low blow! Aside from looking very childish and crude, Trump undoubtedly angered President Xi, with whom the president has bragged about how chummy their personal relationship has been.

I find this a complete embarrassment! I think I better stop now.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

US-China Trade War Escalates, Threatens Global Economy

Powell Highlights Fed’s Limits – Trump Labels Him an “Enemy”

Stephen Moore: Democrats Rooting For Recession

Gary's Between the Lines Blog: Fed's Annual Jackson Hole Symposium Starts Tomorrow

 

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