Two Troubling Signs for the Economy
Another day, another trade escalation... Trump strikes back... Has the trade war already gone too far?... Two troubling signs for the economy... Time is running out on this special gold offer...
When we wrote to you on Friday, we warned you to prepare for more trade-war turmoil...
In short, after China had announced an unexpected round of retaliatory tariffs that morning, U.S. President Donald Trump promised to respond "shortly."
Given the tone of his midday comments on social media site Twitter, we suspected the president's response would be less than forgiving. The only question was exactly what he had in mind.
It turns out we didn't have to wait long to find out...
At exactly 5 p.m. Eastern time on Friday – the very second that U.S. equities futures markets closed for the week – President Trump launched another "tweetstorm" revealing his plan. As we did on Friday, we've compiled his tweets below...
For many years China (and many other countries) has been taking advantage of the United States on Trade, Intellectual Property Theft, and much more. Our Country has been losing HUNDREDS OF BILLIONS OF DOLLARS a year to China, with no end in sight.
Sadly, past Administrations have allowed China to get so far ahead of Fair and Balanced Trade that it has become a great burden to the American Taxpayer. As President, I can no longer allow this to happen! In the spirit of achieving Fair Trade, we must Balance this very unfair Trading Relationship.
China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%.
Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!
China has not officially responded to this latest announcement...
But there are signs that the country could already be digging in for a much more serious fight. As Bloomberg noted on Sunday...
China is "seriously making" preparations for relations with the U.S. to deteriorate, according to Global Times' editor-in-chief Hu Xijin...
The Global Times is a Chinese tabloid run by the People's Daily, which is the flagship newspaper of the Communist Party. Hu has said the paper voices opinions that official sources can't.
The U.S. is "starting to lose China," Hu said Saturday on Twitter. China "has 'lost' the U.S. already," Hu said, citing high tariffs, the ban on telecommunications company Huawei Technologies Co., political hostility, and actions toward Hong Kong and Taiwan.
Worse, China now appears less willing to "play along" with positive White House rhetoric as it has in recent months. As financial news network CNBC reported this morning...
Earlier Monday, Trump said U.S. trade officials received overnight calls from the Chinese saying Beijing was ready to return to the negotiating table.
"China called last night our top trade people and said. 'Let's get back to the table,' so we will be getting back to the table and I think they want to do something. They have been hurt very badly but they understand this is the right thing to do and I have great respect for it. This is a very positive development for the world," Trump said. "I think we are going to have a deal," he added.
In Beijing, Foreign Ministry spokesman Geng Shuang said he was not aware that a phone call between the two sides had taken place. And Hu Xijin, editor-in-chief of Chinese state-run newspaper the Global Times, denied that negotiators had held the phone calls Trump described. "China didn't change its position. China won't cave to U.S. pressure," said Hu.
We've said it from the beginning...
And we'll say it again today: No one ever "wins" a trade war. And this type of tit-for-tat escalation is exactly why.
For now, we continue to hope that cooler heads prevail. But that's looking less and less likely by the day.
Unfortunately, this isn't the only troubling news we have to share today...
Lost among last week's trade headlines were a couple of concerning reports about the economy.
First, on Wednesday, the U.S. Department of Labor noted that the jobs market may not be as strong as prior numbers have suggested. As financial news service MarketWatch reported that morning...
Turns out hiring wasn't nearly as strong in 2018 and early 2019 as the government initially reported – by about a half-million jobs.
The economy had about 501,000 fewer jobs as of March 2019 than the Bureau of Labor Statistics initially calculated in its survey of business establishments. That's the largest revision since the waning stages of the Great Recession in 2009.
The newly revised figures indicate the economy didn't get a huge boost last year from President Trump's tax cuts and higher federal spending. They also signal the economy is a bit weaker than previously believed and could give the Federal Reserve even greater reason to cut interest rates in September.
It's still early, of course... But according to data from hedge fund Crescat Capital, the last time we saw payroll revisions suddenly increase by this magnitude was in late 2008.
On Thursday, industry information provider IHS Markit released its latest U.S. Purchasing Managers' Index ('PMI')...
This survey showed overall U.S. business activity – as measured by its Composite PMI, which includes both services and manufacturing activities – continued to grow in August. But it, too, contained some troubling datapoints.
For example, it showed new business activity is rising at the slowest rate since October 2009... job creation is at its weakest since February 2010... and business confidence in the year ahead is at its lowest since this index began in July 2012.
Most concerning, it showed the U.S. manufacturing sector is now in outright decline for the first time in a decade. From the report...
The IHS Markit US Manufacturing PMI dropped to 49.9 in August 2019 from 50.4 in the previous month and below market expectations of 50.5, a preliminary estimate showed. The latest reading pointed to the first month of contraction in the manufacturing sector since September 2009.
Like the yield curve 'inversion' we've been following, these datapoints are no reason to panic...
But they do suggest that the end of this long bull market could be closer than most folks expect.
Stay long, but don't be careless...
Hold some extra cash. Own gold, silver, and at least a small allocation to high-quality gold stocks. If you have a large percentage of your portfolio in equities, consider "hedging" with a few short sales or long put options. And as always, keep a close eye on your trailing stops, just in case.
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In today's mailbag: A subscriber weighs in on Antonio R.'s gold worry... and it appears some folks missed our humor. As always, send your general questions, comments, and concerns to feedback@stansberryresearch.com.
"I have owned physical gold and silver ounces for over a decade, and although I don't like doing it, I have sold physical on several occasions. I live in a major metro area, which has numerous reputable dealers, so this may not apply if you are in the country... however I never sold and took a big hit to spot price. I have sold at a premium to spot, however. Dealers mark up from spot to sale, and as far as I can tell, always buy at or near spot for quality bullion. I can't say I have tried to sale during a pronounced correction, but I know all my sales were not during the heart of a bull market.
"I never sold junk silver, but eagles, maple leaves, U.S. silver dollars, etc I have. I would warn you about going into any 'we buy gold' or pawn shops, they will try to fleece you. My experience with top rated bullion dealers has been good. I have never been told no, or even been offered a price discounted to spot. In fact, selling gold and silver is safer then placing a market order, no gaps to worry about. Just bring your smart phone and look up the spot price while selling. If your choice of dealer is trying to buy at a discount, shop around a bit more. My guess is you will find a reasonable price given a little effort." – Paid-up subscriber R.H.
"This [exchange] was posted [in the mailbag on Friday]:
'Why did the Fed lower interest rates? I put this out there for you to think about. If inflation is soaring, then they raise the rates to rein in the inflation. If the economy is in a recession, then they lower the rates to give the economy a boost. With the economy perking along nicely, there was no reason for lowering the rates, save one.
"The only possible reason for lowering the rates was to invert the yield curve in an attempt to make President Trump look bad and to see if they can force a recession as we near Election Day 2020.
'It is a conspiracy to get President Trump out of office, pure and simple.' – Paid-up subscriber Rob M.
Brill comment: You're absolutely right, Rob...
"I assume Brill's comment was facetious, especially after he [shared two] of Trump's tweets DEMANDING lower rates.
"There is a large grain of truth that plenty of people want to see Trump out, but the second paragraph is absurd on the face. If, as the reader states, 'lower rates give the economy a boost,' then this should HELP Trump.
"[Besides,] the Fed lowered the fed funds rate, the shortest of the short rates. Rates on the 10 year are little affected [by this change]. The [10-year yield] has plummeted based, I assume, as a flight to intermediate term safety due to global recession fears. Fed lowering makes inversion MORE difficult, not causes it." – Paid-up subscriber Clinton M.
"I don't believe Justin Brill's response to the conspiracy theory. He is almost as paranoid as the President! Just saying." – Paid-up subscriber Ian L.
Brill comment: Sorry, Ian, but Clinton is correct... We were simply poking a little fun at Rob M. If you've been with us for long, you know we're certainly no fans of the Federal Reserve. But to suggest that the Fed's recent rate cut was meant to hurt the president – when the president himself has been urging the Fed to cut even more – is just silly.
Regards,
Justin Brill
Baltimore, Maryland
August 26, 2019