The beginning of August was met with an equity pullback spurred by the Trump Administration’s new proposed tariffs on an additional $300 billion of Chinese goods. During this same time period, the Chinese yuan currency dropped in value suddenly and considerably, and the Treasury Department characterized the move as manipulation. As the month progressed, the S&P 500 traded within a close sideways range until finally breaking out to the upside on news that the two sides will once again meet at the negotiating table “sometime” in early October. (1)
Trade Negotiations & Currency Devaluation
Trade representatives from the U.S. and China are planning to head back to the negotiating table early next month. This news came Thursday from China’s ministry of commerce, which confirmed a verbal agreement among Secretary of the Treasury Steven Mnuchin, U.S. Trade Representative Robert Lighthizer, and Chinese Vice Premier Liu He.
On August 5, China shocked financial markets worldwide by devaluing its main currency, the yuan, to a level unseen since the 2008 credit crisis. The rationale for this move was clear: by cheapening the yuan, China could make its exports more affordable for American buyers, effectively countering tariffs. (2)
Reaction on Wall Street was swift with U.S. stocks netting their worst day of the year. The Department of the Treasury immediately called China a “currency manipulator.” With China’s economy growing at its slowest pace in 30 years, the move could invite greater inflation. As the trade war continues, expect to hear more news about currencies in the coming months. If global growth continues to stagnate, central banks will likely justify interest rate cuts as a mean to stimulate business growth. However, another motive for interest rate cuts - which is often overlooked by media coverage - is to weaken the value of the underlying currency to spur inflation.
Global inflation has been stagnant in recent times which is concerning for the current “fiat currency” banking system. Central banks have many tools to control inflation – both to increase and decrease the phenomenon as a means to control economic growth. On the other hand, deflationary environments are very difficult for the current banking system to control, as interest rate and money supply changes do little to spur growth. Japan is one example of a country that has experienced long-term deflationary conditions, yielding little economic growth for decades.
The Fourth Quarter Approaches
Global and domestic economic data continue to flash mixed signals. Among the most perplexing is the substantial rally in bonds and gold over the past two months while the stock market has remained near all-time highs. Generally speaking, bonds and gold tend to move inversely relative to the stock market. The recent parallel between these historically uncorrelated sectors raises many questions as we move toward the fourth quarter.
The Federal Reserve will once again take center stage next week when they announce their latest interest rate policies. One thing that we can say with a high degree of confidence is next month’s Economic update will cover this announcement and the seemingly endless trade war saga. Until then, we remain optimistic, yet cautious, that the U.S. economy may remain steady through the end of this year.
Monthly Financial Tip:
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1 - piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide [8/30/19]
2 - cbsnews.com/news/u-s-china-trade-talks-scheduled-for-october-beijing-says-2019-09-05/ [9/5/19]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.