U.S. China Trade War Underway Signals Inflation and Stocks Bear Market
Stock-Markets / Financial Markets 2009 Nov 12, 2009 - 01:56 AMBy: Tony_Sagami
What would you do before you go visit someone whose help you desperately need? Would you give him a one-fingered salute with your middle finger?
Well, President Obama is about to make his first visit to China, and that is exactly what he has done to the Chinese leaders.
I say that because the administration slammed another tariff on Chinese steel pipes last Friday. How big of a tariff? Duties of up to 99% … ouch!
That is the largest trade sanction the United States has made against China. From a diplomatic standpoint, it’s a very bad move.
This isn’t, by the way, the first tariff the United States has placed on Chinese products recently. Since September, Chinese tires have been taxed for an extra 35% duty.
Click here to see my UWD column in September about tariffs on Chinese products.
So far, the Chinese responded with cutting remarks, but are almost sure to follow up with even more retaliatory duties and tariffs.
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| Commerce Ministry official Yao Jian says China will take measures in retaliation of U.S. tariffs on Chinese products. |
Clearly, the Chinese Commerce Ministry is not happy. It criticized the tariffs on Chinese pipes as “protectionist” and said they violate World Trade Organization rules and are a blatant breach of the agreements by Group of 20 major economies to avoid protectionism.
“China resolutely opposes use of such protectionist practices, and will take measures to protect the interests of domestic industry,” said Ministry official Yao Jian.
Additionally, China announced a new anti-dumping investigation of U.S. auto imports. Chinese automakers have complained that Obama’s multi-trillion dollar bailouts of General Motors and Daimler Chrysler were subsidies that gave American car makers an unfair advantage.
Tariffs on U.S. autos are probably right around the corner. Since China is one of the few markets where auto sales are strong, a retaliatory tariff on American cars would just crush the little life left in American automakers.
That’s not all; the Chinese steel industry is claiming that American steel companies are selling stainless steel at artificially low prices and have “caused injury to the Chinese market.”
Can you say, “Trade war?”
What I don’t get is that our President will tolerate some of the worst totalitarian thugs and America haters in the world, such as Venezuela’s Hugo Chavez and Moammar Kadafi of Libya, yet kick political sand in the face of a country that loans our country $20-plus billion a month.
That’s the typical size of our monthly trade deficit with China. Not to mention the $700 billion of U.S. government debt that China holds. If China decides that it no longer wants to loan us billions of dollars each month, the U.S. dollar is going to get crushed.
Well … the dollar has already gotten clobbered, but it is about to get a lot worse when the Chinese lose their appetite for U.S.-dollar-denominated debt.
What’s this mean for your investments?
At some point, our combative trade policy and ballooning national debt will (1) send interest rates higher as the Chinese become more reluctant to lend us money and (2) also drive the Chinese to diversify their reserves and assets away from the U.S. dollar.
That’s bad news for all dollar-denominated investments, and the best way to protect your portfolio and even profit from the falling dollar is to add some non-dollar-denominated investments to your portfolio.
Here’s what you should be doing:
- CUT YOUR ALLOCATION TO U.S. STOCKS; INCREASE YOUR INTERNATIONAL STOCK ALLOCATION. Without fail, history tells us that a country with a debauched currency is headed for some serious economic pain … or worse. Where you want to invest is in countries that run a budget and trade surplus as well as increasing GDP. Today, the only places you can find that are in Asia and South America. I highly recommend a heavy allocation to Chinese stocks.
- CUT YOUR ALLOCATION TO LONG-TERM U.S. BONDS. An inevitable consequence of a falling dollar is rising interest rates. At some point, we will have to offer higher yields to compensate them for buying bonds that continue to lose market value. The last thing you want to own are long-term bonds in that environment, so keep all your maturities under five years.
- INVEST IN A MOUTNAIN OF INFLATION-FIGHTING HARD ASSETS. Hard assets — gold, oil, copper, coal, uranium, timber, potash, iron ore, cement, etc. — are one of the few asset classes that could thrive in the falling dollar trade war that I see coming. Also consider hard assets companies, such as China National Offshore Oil Corporation (NYSE: CEO), Yanzhou Coal (NYSE: YZC), Sino Gold (Australia: SGX), and BHP Billiton (NYSE: BHP).
- BET AGAINST THE HOUSE. And if you’re really adventurous and have a little mad money you can afford to lose, you could consider investing in some inverse exchange traded funds. These inverse funds are designed to increase in value when stock prices are falling and are tied to benchmark indexes such as the Dow Jones Industrial Average, the S&P 500, or even allow you to target specific sectors such as technology or retail.
Lastly, I want to warn you that the WORST MOVE you can make today is to do nothing. The United States may be hastening the arrival of a bear market with an ill-conceived trade strategy, but we’ve been running insanely high budget and trade deficits for years. Like a yuppie with a wallet of maxed out credit cards, we’re in big, big trouble.
The four moves I outlined above will not only help you avoid the pain, they will help you profitably zig when everybody else is getting clobbered by the zags.
Regards,
Tony
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