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8 Things to Know About the USA-China Trade Dispute

by Jack Reutemann | Apr 24, 2018 | Stock Market News

The headlines are filled with rumors of a trade war between the United States and China. You’ve probably heard by now that both nations have announced tariffs on many of each other’s goods. This has many economists concerned about a trade war. A trade war, in case you’re not familiar with the term, is “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.”
In response, the markets are doing their best impression of a see-saw – falling and then rising again. Because this story probably won’t go away any time soon, let’s break it down.

Eight Things to Know about the USA-China Trade Dispute

ONE: The U.S. has announced tariffs on almost $50 billion in Chinese exports.¹
The list, which stretches to over 1300 items, includes goods like medical equipment, chemicals, televisions, and automobile parts.¹ This is on top of an earlier spate of tariffs on Chinese steel and aluminum. However, many of the most commonly-used goods Americans use, like shoes, clothing, and phones, are not included.

TWO: China has retaliated with tariffs of their own.
On April 4, China announced plans to levy a 25% tariff on roughly $50 billion worth of American goods.¹ This includes airplanes, cars, soybeans, and other vegetables. Earlier, China had already declared tariffs on $3 billion worth of agricultural exports, like fruit, nuts, and pork.

THREE: The two countries aren’t actually in a trade war – yet.
Notice how often I’ve used the word “announced”? As of this writing, none of these tariffs have gone into effect yet. The U.S. intends to hold public hearings sometime in May, and has 180 days after that to decide whether to go through with the tariffs.² China, meanwhile, has avoided mentioning any specific dates. It’s possible both sides are hoping to engage in talks before the tariffs are in place. If successful, there’s a chance the tariffs never will.
In other words, a trade war has been declared, but the “fighting” hasn’t started yet.

FOUR: Both sides see the situation very differently.
It’s safe to say neither country wants a trade war – hence the delay. But that doesn’t mean negotiations will be simple or easy.

The issue, at least from the U.S. administration’s standpoint, is a $375 billion trade deficit²with China, which many see as being due to unfair or even illegal trade practices. China has a long history of forcing American companies to share their technology in order to do business there, making these companies less competitive than they might otherwise be. In some cases, Chinese companies are alleged to have outright stolen American intellectual property. The administration believes that tariffs will stop these practices and reduce the deficit. China, of course, doesn’t see it the same way. The Brookings Institution, a well-known think tank, describes it like this: “From Beijing’s perspective, the U.S.-China trade imbalance is a result of many factors—automation, evolving global supply chains, increased competitiveness of Chinese firms, the Federal Reserve’s normalization of interest rates, and the Congress’s deficit-increasing tax cuts. Because the trade balance is the difference between savings and investment, Beijing also views U.S. fiscal and monetary decisions as contributing to America’s overall trade deficit—including with China.”³

Overcoming this basic difference in opinion will probably need to happen before the two countries can strike a new deal.

FIVE: Trade wars can impact markets…
Again, we’re not yet in a trade war. But should these tariffs go through, history suggests it will have an impact on the markets.

Tariffs are a tax on imported goods and services. They essentially make it costlier and more difficult to import certain things, like metals, foodstuffs, consumer products, and so on. That can be a major boon to industries that produce those same things, because it forces consumers to buy domestically. On the other hand, China’s tariffs could make it harder for U.S. companies to sell their own goods. For those companies that do a lot of business in China, this can have a major effect on their bottom line. As a result, some companies’ stock price could suffer.

SIX: But that doesn’t necessarily mean the markets are going to plummet.
To give you an example, take this past Wednesday, April 4^th. When the markets opened, the news out of China caused the Dow to drop 510 points. But the Dow rallied later in the day, ending up 300 points.⁴

While a trade war can be unsettling for investors, it’s important to remember that the day-to-day movement of the markets is based on many factors. Trade is only one of these. The overall economy is still doing well, unemployment remains low, corporate earnings continue to be solid – you get the idea.

The point is, the U.S.-China trade dispute is important, but not the be-all and end-all. It’s something to keep an eye on, but not something to overreact to. And again, we’re not yet in an actual trade war! If history is any judge, there will be a lot more twists and turns to this story. A lot can change over the next few weeks and months.

SEVEN: This is an opportunity to practice discipline.
The markets are in the habit of jumping at the slightest sound – but we’re not. We rely on the news to stay informed and up-to-date, but not to dictate our every decision.

As a financial advisor, I can’t tell you what President Trump will do, or what China will do, or whether a trade war will happen. I can say that we’ll keep seeing a lot of headlines on this. Remember the see-saw metaphor? As the situation develops, it’s not unlikely the markets will continue to rise and fall as investors digest the news coming out of Washington. For that reason, it’s wise to expect more volatility – but let’s bear in mind that volatility doesn’t equal catastrophe.

All this means we have a wonderful opportunity to practice discipline. To avoid getting caught up in the day-to-day. To not let headlines – and the emotions they evoke – control us. The more we do this, the more we’ll keep moving toward our goals.

EIGHT: We here at Research Financial Strategies are monitoring your portfolio.
This is our job: to monitor your portfolio. If at any point we feel the trade situation could harm your holdings and impede your progress towards your goals, we’ll let you know immediately.

In the meantime, remember: My team and I love hearing from you! Please let us know if you have any questions or concerns. Our door is always open. Have a great month!

¹ “All the Goods Targeted in the Trade Spat,” The Wall Street Journal, April 5, 2018. https://www.wsj.com/articles/a-look-at-which-goods-are-under-fire-in-trade-spat-1522939292

² “U.S. Announces Tariffs on $50 Billion of China Imports,” The Wall Street Journal, April 3, 2018. https://www.wsj.com/articles/u-s-announces-tariffs-on-50-billion-of-china-imports-1522792030

³ “How to avert a trade war with China,” The Brookings Institution, February 27, 2018. https://www.brookings.edu/blog/order-from-chaos/2018/02/27/how-to-avert-a-trade-war-with-china/

⁴ “Trade war? Not so fast. Why stocks are rallying again,” CNN Money, April 5, 2018. http://money.cnn.com/2018/04/05/investing/stocks-rebound-trade-war-us-china/index.html

Weekly Market Commentary – April 23, 2018

by Jack Reutemann | Apr 23, 2018 | Weekly Stock Market Commentary

The world is in debt.
The April 2018 International Monetary Fund (IMF) Fiscal Monitor reported global debt has reached a historically high level. In 2016, debt peaked at 225 percent of global gross domestic product (GDP) (the value of all goods and services produced across the world). Public debt is a significant component of global debt. The IMF wrote: “For advanced economies, debt-to-GDP ratios have plateaued since 2012 above 105 percent of GDP – levels not seen since World War II – and are expected to fall only marginally over the medium term…In emerging market and middle-income economies, debt-to-GDP ratios in 2017 reached almost 50 percent – a level seen only during the 1980s’ debt crisis – and are expected to continue on an upward trend.”

There are numerous reasons high levels of government debt (the amount a government owes) and significant deficits (the difference between how much a government takes in from taxes and other sources and how much it spends) are a cause for concern:

Higher interest payments. Governments typically finance debt by issuing government bonds. When bonds mature, the government issues new debt. If interest rates have risen, the cost of that debt increases. As a result, high debt levels can make tax hikes and spending cuts a necessity, explained the Committee for a Responsible Federal Budget.
Lower national savings and income. You may have heard the phrase, “Robbing Peter to pay Paul,” which means taking money from one source to pay another. When a country runs a deficit, a similar thing happens. In The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment, the Congressional Budget Office explained, “…a dollar’s increase in the federal deficit results in…a 33 cent decline in domestic investment.”
The tax lag. In his book, Do Deficits Matter?, Daniel Shaviro suggests sustained deficit spending creates a ‘tax lag’ by shifting responsibility for current spending onto future generations.

The IMF Fiscal Monitor wrote, “countries need to build fiscal buffers now by reducing government deficits and putting debt on a steady downward path.” Last week, the interest rate on 10-year U.S. Treasuries rose above 2.9 percent, which raised concerns about inflation. Markets moved higher early in the week and tumbled later in the week. The major U.S. stock indices finished the week higher.

Data as of 4/20/18	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.5%	-0.1%	13.3%	8.3%	11.3%	6.8%
Dow Jones Global ex-U.S.	0.3	0.1	16.4	3.5	4.4	0.2
10-year Treasury Note (Yield Only)	3.0	NA	2.2	1.9	1.7	3.7
Gold (per ounce)	-0.5	3.1	4.3	3.8	-1.3	3.8
Bloomberg Commodity Index	0.6	1.9	6.4	-3.9	-7.3	-8.2
DJ Equity All REIT Total Return Index	-0.8	-8.6	-6.1	0.9	5.4	6.1

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

Are you an Insect Gourmet? Throughout history, people have eaten bugs. According to National Geographic, hunter-gatherers probably learned which insects were edible by watching birds. People’s appetite for bugs didn’t disappear as they became more civilized. Pliny, a Roman scholar, wrote beetle larvae fed a diet of flour and wine were a favorite snack of aristocratic Romans. The tradition of eating insects continues today. According to National Geographic, “Gourmands in Japan savor aquatic fly larvae sautéed in sugar and soy sauce. De-winged dragonflies boiled in coconut milk with ginger and garlic are a delicacy in Bali. Grubs are savored in New Guinea and aboriginal Australia. In Latin America cicadas, fire-roasted tarantulas, and ants are prevalent in traditional dishes.”

Reuters said in Germany, Netherlands, and Belgium, shoppers can buy burgers made of buffalo worms (the larvae of buffalo beetles) at the local grocery. It’s a visually pleasing product, according to one of the burger company’s founders, because the insects don’t show.

In North Carolina, diners can order a tarantula burger, described as “…a hamburger topped with a crunchy full-grown, oven-roasted tarantula.” It comes with a side of fries – and possibly a drink to wash it down as fast as possible. Other restaurants across the United States offer fried silkworm larvae, red ant salad, cricket crab cakes and cricket pastry, and grasshopper rolls, according to Reuters and Spoon University.

Bon appetit! (Or should that be bug appetit?)

Weekly Focus – Think About It
“Then I say the earth belongs to each of these generations during its course, fully, and in their own right. The 2d. generation receives it clear of the debts and encumbrances of the 1st., the 3d. of the 2d. and so on. For if the 1st. could charge it with a debt, then the earth would belong to the dead and not the living generation. Then no generation can contract debts greater than may be paid during the course of its own existence.”

–Thomas Jefferson, Third President of the United States and principal author of the Declaration of Independence

Best regards,

John F. Reutemann, Jr., CLU, CFP®

Investment advice offered through Research Financial Strategies, a registered investment advisor.

* This newsletter and commentary expressed should not be construed as investment advice.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Stock investing involves risk including loss of principal.

* Consult your financial professional before making any investment decision.

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Sources:

http://www.imf.org/en/Publications/FM/Issues/2018/04/06/fiscal-monitor-april-2018 (Click on Chapter 1, Full Text of Chapter 1, page 1)

https://www.investopedia.com/articles/personal-finance/081315/debt-vs-deficit-understanding-differences.asp

http://www.crfb.org/blogs/marc-goldwein-national-debt-yes-rising-annual-deficits-threaten-us-economy

http://www.cbo.gov/sites/default/files/cbofiles/attachments/45140-NSPDI_workingPaper.pdf (Page 6)

http://www.press.uchicago.edu/Misc/Chicago/751120.html

http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html (Click on “U.S. & Intl Recaps,” then “Geopolitical concerns ease”)

https://web.archive.org/web/20171025003222/https://news.nationalgeographic.com/news/2004/07/0715_040715_tvinsectfood.html

https://www.reuters.com/article/us-germany-food-insectburger/german-shoppers-sample-burgers-made-of-buffalo-worms-idUSKBN1HS0JF

https://www.reuters.com/article/us-north-carolina-tarantula-burger/you-want-tarantula-with-that-at-u-s-burger-joint-its-an-option-idUSKBN1HO29S

https://spoonuniversity.com/place/us-restaurants-that-serve-insect-dishes

http://library.intellectualtakeout.org/content/quotes-united-states-national-debt-budget-deficits

Weekly Market Commentary – April 2, 2018

by Jack Reutemann | Apr 2, 2018 | Weekly Stock Market Commentary

In like a lion…
Investors roared into 2018. During the first week of the first quarter of the New Year, the Dow Jones Industrial Average rose above 25,000 for the first time ever. Less than two weeks later, it closed above 26,000. The Standard & Poor’s (S&P) 500 Index and NASDAQ Composite also reached new all-time highs.

Strong performance was supported by strong fundamentals. In December 2017, Mohamed A. El-Erian wrote in BloombergView economic and policy fundamentals, including synchronized global recovery, progress on U.S. tax reform, improved certainty around Brexit, and orderly acceptance of changing U.S. monetary policy, “…reinforce the prospects for better actual and future growth, thereby increasing the possibility of improved fundamentals validating notably elevated asset prices.”

During the first quarter, the global economy remained robust, reported Forbes. American companies were profitable (profitability is measured by earnings) and earnings per share for the S&P 500 Index are expected to increase during 2018. FactSet reported analysts currently estimate the S&P 500 Index will deliver double-digit earnings growth (18.5 percent overall) during 2018. Here’s what the analysts anticipate each quarter:

Q1: Earnings growth of 17.3 percent
Q2: Earnings growth of 19.1 percent
Q3: Earnings growth of 20.9 percent
Q4: Earnings growth of 17.1 percent

Improving expectations for American companies can be credited, in large part, to tax reform, which lowered corporate tax rates significantly. In addition, rising oil prices may help companies in the Energy sector, and rising interest rates may give a boost to companies in the Financials sector.

Despite a robust global economy, strong earnings, and improving earnings per share (EPS) expectations, the major U.S. stock indices delivered negative quarterly returns for the first time since 2015. On March 29, the last trading day of the quarter, the Dow closed at about 24,100. If fundamentals are strong, why did major indices in the United States (and many indices around the world) finish the quarter lower? Financial Times suggested uncertainty might have something to do with the retreat:

“The tax cut has been achieved. We are no longer so sure that [President Trump’s] remaining ideas are so good, and most investors think his ideas about trade are downright terrible. And so the market has started reacting to presidential tweets… Most importantly, though, key assumptions have been stripped away. We can no longer rely on low volatility. And critically, the positive view of a low-inflation strong-growth future has been called into question – but only after the stock market had priced in that assumption as a done deal.”

Market declines may also reflect concern about valuations. One financial professional told Financial Times many asset classes have gone from being very expensive to being expensive. They haven’t yet gotten inexpensive.

Out like a lamb…
The last week of the quarter was a good one for U.S. stock markets, which pushed higher. However, the major indices were unable to overcome deficits accumulated earlier in the quarter. The Dow Jones Industrial Average gained 2.4 percent last week, finishing the quarter down 2.5 percent. The S&P 500 Index was up 2.0 percent last week, down 1.2 percent for the quarter. Likewise, the NASDAQ bounced 1.0 percent last week, but ended the quarter down 2.3 percent, reported Barron’s.

Data as of 3/29/18	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	2.0%	-1.2%	11.9%	8.2%	10.1%	7.2%
Dow Jones Global ex-U.S.	0.6	-1.5	13.6	3.9	3.9	0.6
10-year Treasury Note (Yield Only)	2.7	NA	2.4	2.0	1.8	3.4
Gold (per ounce)	-1.7	2.1	5.8	3.8	-3.5	3.6
Bloomberg Commodity Index	0.0	-0.8	2.4	-4.1	-8.5	-8.0
DJ Equity All REIT Total Return Index	3.7	-6.7	-0.3	2.7	6.7	6.9

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

If you asked Artificial Intelligence (AI) to bake, what would it make? Janelle Shane at PopSci.com wrote, “When computers try to imitate humans, they often get confused. But simulated brain cells in so-called neural networks can mimic our problem-solving skills. An AI will look at a dataset, figure out its governing rules, and use those instructions to make something new. We already employ these bots to recognize faces, drive cars, and caption images for the blind. But can a computer cook?”

Shane addressed the question by training a computer’s neural network to write a recipe. The computer reviewed a dataset of more than 24,000 online recipes (647 of them began with the word chocolate and 8 included blood as an ingredient). After two days of processing, the network delivered a remarkable recipe that includes a title, category, ingredients, and directions, although the nonsensical word choices are likely to leave bakers uncertain about how to proceed:

CHOCOLATE BUTTERBROTH BLACK PUDDING
cheese/eggs
4 oz cocoa; finely ground
1teaspoon butter
½ cup milk
¼ teaspoon pepper
¼ cup rice cream, chopped
1 lb cream
1 sesame peel

– Date Holy –
1 large egg
1 powdered sugar serving barme
¼ cup butter or margarine, melted

Brown sugar, chocolate; baking powder, beer, lemon juice and salt in chunk in greased 9×2 inch cake. Chill until golden brown and bubbly. Place serve garlic half by pieoun on top to make more use bay. Place in frying pan in preheated oven. Sprinkle with fresh parsley for cooking. Eating dish to hect in pot of the oil, pullover half-and half…Yield: 1 cake”

AI seems to have missed an important governing rule for recipes: Instructions should not include unlisted ingredients and all ingredients should be included in the instructions. DATE HOLY is particularly baffling. The author suggested the neural network might have been trying for frosting. It is a cake, after all.

Weekly Focus – Think About It

“We are surrounded by hysteria about the future of artificial intelligence and robotics – hysteria about how powerful they will become, how quickly, and what they will do to jobs…Mistaken predictions lead to fears of things that are not going to happen, whether it’s the wide-scale destruction of jobs, the Singularity, or the advent of AI that has values different from ours and might try to destroy us. We need to push back on these mistakes.”

–Rodney Brooks, Australian robotics entrepreneur

Best regards,
John F. Reutemann, Jr., CLU, CFP®

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Securities offered through Investment advice offered through Research Financial Strategies, a registered investment advisor.