US-China Trade War Explained

Hey guys, happy Saturday. Welcome to another video. Today we're going to be discussing the US-China trade war and hopefully demystifying a few things because it is, I think, very confusing and all the different elements of it. So tensions have been rising between the two world's largest economies and they spiked in recent weeks. And officials on both sides are suggesting now that a hard-won trade deal that basically defused an 18-month trade war could be abandoned months after it was signed in January. So I know January feels like a long time ago. We've all been in lockdown and felt the wrath of the coronavirus, but this is now leading to the trade war increasing in intensity. Yet again. And investors were holding their breath all week waiting for Donald Trump's press conference that happened on Friday night. So thanks, Donald, really wanted to spend my night waiting for your press conference. And actually, it was a disappointment. I think disappointment if you were one expecting there to be fireworks. A good thing for equity holders. So Trump basically came out and said our actions will be strong but reasonable. He basically pulled back from the WHO and was actually quite soft, to be honest. And I think investors obviously took that in their stride. And he said he's not planning to scrap the Phase 1 trade deal. And yeah, investors moved on. But do expect and kind of be protected if you can from retaliation from China, because I think that is definitely to come. Um, it is a political exercise at the end of the day. It's no coincidence that Trump has started to strum up, um, you know, the China talk, um, because the stock market's at all-time highs and he bangs the drum, um, when he looks good, right? He— did you hear anything about, um, China, uh, and the tensions between the two, um, when there's— when we're at the March 23rd lows? Of course you didn't. Because he's got a few kind of feathers in his cap that he likes to roll out to strum up his voters, one being China and one being the stock market. So the stock market is at all-time highs, and now he has the wiggle room to take fire at China. And in amongst the devastation that coronavirus has caused to the real economy, you know, this is an easy target. China is an easy target. Millions are unemployed. And given the emotional nature of this virus, I think, and the kind of pain that it's caused, it's going to definitely stimulate a lot of bad feelings, a lot of nationalist feelings, I think, in not just the United States but in Europe as well. And I think this is a really big risk to global GDP and obviously then stock markets, even though the stock market doesn't seem to care about the real economy at the moment, there will be a point where it has to. So the big risk is protectionist measures being stimulated again. But as you know, the United States start to unwind the lockdown measures, and as we kind of progress to the November 2020 election date, he's going to further alienate China. And as the stock market's at all-time highs, he's got more wiggle room. To do that. We have to talk about the virus because since the pandemic originated in Wuhan, there's been increasing accusations that China failed to control the virus at inception, with some comments coming out of the White House and Washington and Trump claiming that Chinese scientists potentially created the virus. And now, of course, we're never going to know that, and I don't really have an opinion on that. To be honest, we'll never know anyway. But what Trump's done is use this and called it the Chinese virus. Of course, we know that a pandemic and a virus cannot have— can't be assigned to a country. But this is what he's going to use to stimulate his core voters as well. And JPMorgan have definitely written in their note recently the increased chance of politicization of the coronavirus pandemic and blaming it on an ethnic group or a country is just such a convenient excuse for basically failings at home, wrong policies, all the people that are unemployed, the income inequality, the wealth inequality. And it's an easy excuse. But the big risk is that it provides a pretext to push a geopolitical or protectionist agenda. And this is paired with the coronavirus as we kind of step into that kind of chance of a second wave, but also the recovery really of the real economy as people do go back to work. Um, you know, the consumer and lots of economic data points were relatively strong heading into the virus if you're talking about unemployment, the consumer, things like that. So it's not going to take too much time to recover. The only thing stopping it, of course, is the big thing that is the lockdowns. But the rolling back of globalization, which is definitely a trend that I think we're going to see, and the politicization of this virus could lead to equities rolling over. And this is easy to kind of use because there's been more than, or at least 100,000 American deaths, far more than what China have reported. And of course It's a well-known fact that Chinese data can be somewhat elusive at times, so that number is likely to be higher. But of course, it stimulates a lot of kind of bad feelings. So Trump is terminating the relationship with the, the WHO, and he's basically said that the cover-up of the virus has cost lives in the US and elsewhere. Hong Kong is another really sensitive subject. So on Thursday, Beijing's Politburo Standing Committee officially wove a new national security law in the Hong Kong constitution, taking advantage of basically this loophole that required Hong Kong to always have a national security law on its books. And many have decreed the move as crossing of the Rubicon, that Beijing no longer cares about its placating its Western allies as it cracks down on the freedoms of the territories that it basically claims. And Trump basically came out yesterday and said that they're going to act to revoke Hong Kong's preferential treatment and order— and Trump orders the beginning of the process of eliminating the Hong Kong exemptions. So the Hong Kong issue is putting additional strain on this kind of US-China relationship. Risking a renewed flare-up, again further downward pressure on the renminbi, and an acceleration of the US-China decoupling. And US lawmakers are pushing the president to hit China with sanctions or other measures for its increasing grip— so China's increasing grip on Hong Kong and human rights abuses toward the minority Muslims. And Pompeo's come out of the Washington— out of Washington and said on Wednesday that Hong Kong has effectively lost its autonomy and no longer warrants its special treatment that it gets under US law. And this declaration essentially opens up the door for Trump to impose penalties ranging from modest sanctions to try and curb China's actions against its kind of territory, to revoking Hong Kong's special trading status. So of course China is going to vow to hit back at the US while moving ahead with the national security legislation over Hong Kong. But this is more fuel to the fire, and we're seeing investors fleeing Hong Kong. The Hong Kong dollar is pegged to the US dollar, just to put it out there. More, you know, more investors are actually fleeing Hong Kong, selling their once really valuable real estate. And it's the Hong Kong dollar is trading towards a stronger end of its band against the US dollar as the dollar weakened against the euro and several over its major rivals. So Hong Kong residents— and this is coming out of Bloomberg— have been exchanging more of Hong Kong dollars holdings, their Hong Kong dollar holdings, into foreign currencies at banks and money exchange counters. Of course, the trade war. Basically, Trump has said that, you know, they're going to keep the Phase 1 trade deal intact, at least for now. But of course, this spells really bad kind of connotations for US companies with significant exposure to China. So, for example, SimpleScreen, 40% of revenue generated in China. Companies like Dell, Texas Instruments, Monolithic Power Systems, they're going to reel at these increased tensions as well. Any Chinese companies listed in the United States are definitely, you know, they're going to be toast in my opinion. So companies like Alibaba, recently the US Senate has passed a bill to delist these Chinese companies, which obviously has implications for companies like Alibaba being barred from being listed in the United States. And This new bill essentially requires companies to certify that they're not under the control of a foreign government. And last year, obviously in 2019, when trade war tensions were kind of at their peak, Washington, Washington banned US firms from doing business with Huawei. Short seller Carson Block, Muddy Waters Research, he believes that the majority of Chinese companies listed in the United States are committing some level of fraud, with around 30 to 50% of revenues being fictitious. He does believe that there are some good Chinese companies, of course, but there are some kind of short opportunities there as the kind of auditing standards that take place in China are somewhat more relaxed than in the United States. So Kudlow again said that, reinforced the point that the Phase 1 trade deal is going to continue for the moment. And, you know, there's progress there. But I think this will be the case, you know, kind of up until November. Bear in mind where the stock market is. But as we kind of, you know, go past the election, then he'll come down with the hammer, in my opinion. Again, the currency war— this was August 2019 when it broke that kind of symbolic 7 level. Um, the kind of yuan is not freely traded, um, of course, and the government limits its, uh, movement against the United States dollar. So another element of this kind of US-China, um, kind of conflict, um, is that China does actively manipulate its currency to make its exports more attractive. So this was, um, when the kind of yuan fell below 7 in August. It's now about 7.2, but this was the lowest, um, since 2008. Um, and this is gonna be another, um, kind of thing that, that everyone's gonna focus on. Um, it keeps, um, its yuan low to keep export prices low compared to the United States dollar. But also invest heavily in the US Treasuries as well. So okay, China has accumulated lots of, you know, a huge amount of US Treasuries over the last few decades. As of around December 2019, they owned $1 trillion, or about 5% of the $23 trillion— of course that's a lot more— US national debt, far more than any other country. But some analysts and investors are fearing, of course, that they could— China could dump these treasuries in retaliation. And this isn't a new thing, but how this essentially works is it essentially weaponizes them, the treasury holdings. And this would essentially— putting more supply into the market would send interest rates higher, hurting economic growth. But of course, remember, we've got this coronavirus decimated the real economy. So this would be another really bad thing that, of course, they would want to avoid. So dumping this $1.1 trillion into the market. But on the flip side, Guggenheim's projections, as a result of the coronavirus, of course, the government have been issuing lots of treasuries to finance, you know, the recovery. So there's going to be $5 trillion in debt issuances this calendar year. Which could be conservative. So another $1 trillion, you know, you think, what's another trillion? You've got the Fed to backstop this now. And there would be more pressure from Trump on Jerome Powell if this was the case. I do think this is unlikely, though. Of course, we need to look at consumers in the United States that are likely to contribute a lot to the recovery of the United States. But we had some data out And they— and US consumer spending plunged in April by the most on record. And this was as a result of the stimulus payments being received but actually saved. So incomes posted a 10.5% increase, but outlays, so household expenditure, fell 13.6%. So shows that the consumers of the United States aren't dumb. They're doing the actual sensible thing, even though this is not what, of course, what the Fed want and the government want consumers to be doing is saving these stimulus checks, for example. And if you haven't— if you don't— if you're not aware of a stimulus check, check the previous video that I've recorded. And there's been some research that essentially the tariffs that, you know, have been implemented, the US are actually paying And US companies and consumers are paying almost the full cost of this. And this is coming out of the National Bureau of Economic Research. And this came out, out in January. So the United States consumers and companies are actually suffering from these tariffs, even though Trump and his senior advisers have basically insisted that China was paying the full cost of this. So spending's falling off a cliff, and there was not enough of an uptick or a recovery that we saw. And savings is through the roof. So this is something to be aware of. JP Morgan have advised now that they're going to start trimming back equities, and this is coming out of their strategist Marko Kalanovic, who actually caught the somewhat of the March bottom. And he's basically said that you should start trimming, or they are starting to trim their equity holdings, and not because of the coronavirus, but actually as tensions heat up as a result of US-China trade war. So they're dialing down their positive outlook on equities, and they'd like to see these more of a normal normalization of these political, uh, risks. Um, so this is another risk to equities at the moment. And of course, um, I did a video a few months ago where equities are overvalued. They've been overvalued for a long time, but expensive things tend to get more expensive and cheap things tend to stay cheap or get cheaper. So the forward P/E multiple for the S&P 500, um, is now above 23. So this is the highest since the early 2000s. So more stress from a valuation, valuation perspective. Mid and small caps are at all-time high valuations and so is leverage. So there's been a huge amount of assumptions in this kind of equity market rally. And if you've caught the kind of jet fuel injected rally from the Federal Reserve, great. But I think you always need to keep aware, keep aware of the valuations. There's more stress there and there's a lot of assumptions that are priced almost but for perfection. And what's been leading this rally is these growth stocks, so Google, Apple, Facebook, for example. And cyclicals really haven't participated, although they did for a bit the last 5 days or so, and they remain very cheap. So it's always worth, in amongst all of this kind of China-US tensions, keeping in mind valuations and what the smart money is doing in, in the context of these kind of US-China trade wars. So another increase in the net short position in the E-mini S&P futures contracts. And this is coming out— Bank of America confirmed that the trend of smart money is selling stocks, with the bank's private net high net worth individuals not only selling stock for 7 consecutive weeks, but last week it recorded the largest week of equity selling since June 19th. So what are private clients doing with this newly released cash? Buying gold, apparently, and other products including healthcare to basically hedge the coronavirus risk, uh, TIPS as an inflation hedge, and investment-grade credit, which again is backstopped by the Fed. And there's an increasing risk of retail investors basically lacking the analysis, but they're bidding up these battered stocks. So, um, you've— I'm sure you've seen the Robinhood top holdings are really just punters So American Airlines, Carnival, lots of cruise line operators, some biotech stocks like Moderna, which obviously is down around 40% from that pop where they essentially cured the— had a vaccine and cured the coronavirus. Little did everyone know that it was only 8 people and it wasn't very effective yet. The owners of Moderna obviously raised a lot of equity there. Who are the losers from this kind of coronavirus-infueled US-China trade war increase in tensions? So there's— no one benefits from a trade war, but Wall Street giants such as Goldman Sachs, JP Morgan have tens of billions of dollars at stake in China as political tensions rise of its $45 trillion financial market. So they have a combined $70.8 billion to China, with JP Morgan alone plowing $19.2 billion in lending, trading, and investing, a 10% increase. But companies obviously with more exposure to China are more affected. So Dell, as I mentioned before, despite all of this, they are the worst kind of impacted. Who are the winners? So Economists estimate that the trade war would shave more than 0.5% off growth, but some countries have benefited in the fight, which redirected around $165 billion in trade. So analysts at Nomura identified Vietnam as a country that would gain the most. The UN identified Taiwan, Mexico, and Vietnam as we saw US orders ramp up last year. So there could be some good opportunities there. The Fed also found that increased American imports boosted American— sorry, Mexican economic growth by around 0.2%. Malaysia was another big winner from round 1, taking around 1.8% market share of the tariffs, and it's shrinking China's share of US imports. And again, there's lots of these peripheral Asian companies with cheap supply chains like Vietnam, like India, that are going to take a lot of share. So there are winners, there are losers, but in general, no one really benefits from a trade war. But this is just going to be a kind of an ammunition tool that is used by Trump heading into the election. So a lot covered there. I hope you enjoyed the video and have a good weekend.