Home About Archives RSS Feed

@theMarket: The Summer of Financial Discontent

By Bill SchmickiBerkshires columnist
As we close out the summer, investors have had anything but a sleepy three months. The volatility caused by the Fed's actions, Donald Trump's tweets, Brexit, and tariff threats had markets gaining and losing billions — if not trillions — of dollars in assets on a weekly, and sometimes, daily basis.
 
The question you might ask is "Will it continue?" The short answer is yes, at least into October, unless a trade deal is signed. And what are the chances of that happening? Not very high, if you listen to the experts who profess to know and understand China. 
 
A respected Deutsche Bank economist, Yi Xiong, wrote in a recent report that China has made up its mind to play the long game, something I have been warning investors might happen. Rather than come to the table, China will look to strengthen their domestic economy, while enduring any tariffs the Trump Administration might inflict upon them.
 
In order to understand their decision, you need to realize that China has been working for almost a decade to transform their economy from an export-led economy to a consumer-driven domestic powerhouse. As a result of this transition stage, China's GDP has been cut roughly in half from 12 percent annually to 6-6.5 percent today.  The government hopes to complete the transition by 2025 or so.
 
As such, external trade makes up a small portion of their economy, no more than 20 percent of GDP and this percentage keeps shrinking. Contrary to the rhetoric you may be hearing or reading on Twitter, the majority of that trade is not with the U.S. As much as 80 percent of China's exports have gone to other countries, rather than the United States.
 
As a result, the trade impact thus far on China has barely dented economic growth, contrary to claims made by others. While the overall economy has slowed, most of the decline can be accounted for by China's own actions. In their stated desire to reduce national debt, government investment has declined, as has consumer spending, which accounts for most of the shortfall in their economic growth.
 
In response to the expected levy of U.S. tariffs on all their exports, China plans to adopt measures to grow their domestic economy. Additional spending on infrastructure and measures to boost domestic consumption have already been announced and are being implemented today.
 
At the same time, the government is diversifying its supply chain. It is accelerating efforts to open up their economy to other countries, while reducing reliance on the U.S. over the longer term. And as for combating the tariff hit to the price of their export goods to the U.S., China will most likely continue to devalue their currency, the yuan. This last month, the yuan has lost about 3.7 percent against the greenback, the biggest monthly decline since 1994.
 
What will all this mean for our markets and economy? More of the same, in my opinion. Without a trade deal, U.S. companies will continue to put off investment, which will, in turn, slow our economy (and earnings). Most other regions of the world are already in worse economic shape than we are, so don't count on any spill-over in growth from elsewhere. Interest rates should continue to slide, sparking more and more calls for an imminent recession.
 
Our side will continue to raise, and lower hopes of a deal (most of which will be simple fabrication), while blaming the Fed for any shortfall in growth.  The president will deny that his tariff war has any impact on the economy, while desperately seeking ways to shore up the economy by more tax cuts, etc. If he fails, I expect he can always blame the Fed.
 
The only saving grace out of all of this may be the central bank and what it decides to do in two weeks. If they cut rates (and by how much), it may give the financial markets some support. In which case, you could see a big spike up as a result. Otherwise, expect more volatility while being trapped in a wide trading range.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Clarksburg Joining Drug Prevention Coalition
Pittsfield Road Cut Moratorium
Adams Lions Club Makes Anniversary Donations
2nd Street Second Chances Receives Mass Sheriffs Association Award
Swann, Williams College Harriers Compete at NCAA Championships
MassDOT Advisory: South County Road Work
ACB College Financial Aid Event
The Nutcracker At The Colonial Theater
McCann First Quarter Honor Roll
Pittsfield Looks to Update Zoning for ADUs
 
 


Categories:
@theMarket (509)
Independent Investor (452)
Retired Investor (217)
Archives:
November 2024 (6)
November 2023 (1)
October 2024 (9)
September 2024 (7)
August 2024 (9)
July 2024 (8)
June 2024 (7)
May 2024 (10)
April 2024 (6)
March 2024 (7)
February 2024 (8)
January 2024 (8)
December 2023 (9)
Tags:
Unemployment Commodities Economy Federal Reserve Markets Japan Banks Europe Rally Pullback Jobs Oil Crisis Euro Recession Debt Ceiling Interest Rates Debt Currency Congress Selloff Qeii Stock Market Fiscal Cliff Energy Bailout Stocks Deficit Stimulus Metals Taxes Retirement Greece Election President
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Stocks Should Climb into Thanksgiving
The Retired Investor: Thanksgiving Dinner May Be Slightly Cheaper This Year
@theMarket: Profit-Taking Trims Post-Election Gains
The Retired Investor: Jailhouse Stocks
The Retired Investor: The Trump Trades
@theMarket: Will Election Fears Trigger More Downside
The Retired Investor: Betting on Elections Comes of Age
@theMarket: Election Unknowns Keep Markets on Edge
The Retired Investor: Natural Diamonds Take Back Seat to Lab-Grown Stones
@theMarket: As Election Approaches, Markets' Volatility Should Increase