China's Real Response To Tariffs

Written by Dennis Slothower
Posted August 3, 2018 at 8:00PM

The stock market initially struggled on Thursday, with the Dow 30 opening 200 points lower over trade worries, but traders began to buy the dips ahead of Friday’s jobs report, finishing the day mostly higher.

The jobs report was expected to show about 200K new jobs created. Last month, new jobs were 213K, so the report confirms whether the economy is strengthening or weakening.

It came in at 157K new jobs. Needless to say, traders weren't impressed.

On Thursday, President Trump stated the government is seriously considering raising the 10% tariffs on China to 25%. The market largely brushed it off.

China’s investors reacted poorly to the threat, with the Shanghai Stock Exchange Composite Index plunging sharply and pushing deeper into bear market territory.

On Friday, China announced another $60 billion in tariffs, but its real response to the U.S. tariffs is to simply devalue its currency to make up the difference.

This is nothing new. China has been devaluing its currency, making its goods cheaper while driving up the U.S. dollar. This makes U.S. goods more expensive and thus destroys the ability of U.S. businesses to compete globally.

The Trump administration has already threatened to put tariffs on $200 billion of various goods from China, but at 10%. This week, as I said, the administration increased the threat to a 25% tariff. It has already threatened that, if $200 billion is not enough, it will tariff $500 billion of goods from China until China faces its trade imbalances with the U.S.

China’s response: the U.S. needs to correct its attitude, says China’s foreign ministry, even as it devaluates its currency.

This is another reason why the Fed is raising interest rates, because weakening the U.S. economy hurts China more.

The U.S. stock market is not immune! The tariffs are only starting to bite. It won’t be long before the U.S. begins to feel sharply higher prices on Chinese goods. This trade war comes at a bad time for both countries.

Consumer Getting Pinched

In the meantime, the U.S. middle class continues to be squeezed.

Home prices are at an all-time high in more than half of 112 metropolitan areas with a population of 200,000, according to Attom Data Solutions U.S. Home Sales Report. As home equity prices go higher, people borrow more, carry more debt, and are strapped out more.

Furthermore, new home construction is falling with higher mortgage rates, so fewer affordable homes are being built to meet demand. Because housing is so expensive, especially in the coastal states, rents are sky high and becoming more and more unaffordable.

This is causing a ballooning number of homeless people reminiscent of the Great Depression, as more and more people can’t afford to rent.

This situation is only going to get worse as tariffs bite harder.

GDP Rigged Again

What about the +4.1% GDP in the second quarter? You might be interested to know the Fed just happened to make huge adjustments to the real GDP in the second quarter, once again to generate the +4.1% gain.

“What the Bureau of Economic Analysis released Friday as part of its GDP report was a huge pile of revisions and adjustments going back years. It included an adjustment to the tune of nearly $1 trillion in ‘real’ GDP. And it lowered further its already low measure of inflation.

"Comprehensive updates of the National Income and Product Accounts (NIPAs), which are carried out about every five years, are an important part of BEA’s regular process for improving and modernizing its accounts to keep pace with the ever-changing U.S. economy. Updates incorporate newly available and more comprehensive source data, as well as improved estimation methodologies. The timespan for this year’s comprehensive update is 1929 through the first quarter 2018.

Where did it get the nearly $1 trillion from? It simply lowered the rate of inflation in its computation of the “real GDP” and presto, a higher GDP!

The BEA:

“For 2012-2017, the average rate of change in the prices paid by U.S. residents, as measured by the gross domestic purchasers’ price index, was 1.2 percent, 0.1 percentage point lower than in the previous published estimates.”

The GDP is a political number designed to be manipulated by politicians.

We are at a very key juncture in the economy. Investors need to be prepared themselves for a decelerating economy. We are nearing the 8th interest rate hike and tariffs are going to start biting. So, investors need to buckle their seat belts.

Growth has peaked. Portfolios will begin rotating out of risk towards more defensive positions and raising cash in order to prepare for this deceleration as we head into late summer/early fall. Get ready for this. The Fed will not be adding a five-year adjustment to its GDP numbers as it did this last quarter and oil prices are vulnerable going forward.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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