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Keep Cash Ready: Tariffs to Make for Bargain Stock Buying

Keep Cash Ready: Tariffs to Make for Bargain Stock Buying
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Friday, 10 May 2019 09:41 AM Current | Bio | Archive

From this morning on, $200 billion imports of goods partially made in China will be subject to a 25 percent tariff, or tax, instead of the 10 percent tariff (or tax) it has been until now.

So, hopes that President Donald Trump might decide to hold off from increasing the 10 percent tariff (or tax rate) to 25 percent at the last minute as the negotiations continue didn’t come through.

Earlier Thursday, Trump told reporters the U.S. was also taking steps to impose fresh 25 percent tariffs on $325 billion in Chinese goods that aren’t currently taxed. If that happens, virtually all Chinese exports to the U.S. would face 25 percent tariffs, the Wall Street Journal reports.

In the meantime, negotiations between the U.S. and China are continuing, China has pledged to retaliate with taxes of its own. These are likely to focus on U.S. agriculture and other politically sensitive areas but may also include creating problems for U.S. companies that operate in China.

So, what does all of this mean?

In effect, the U.S. tariff (or tax) increase will start in 2 or 3 weeks’ time. Goods that already have been bought will incur the 10 percent tax and as it takes 2 to 3 weeks to ship products across the Pacific that means that there is in effect a “pause.” If a deal were to be reached within the next 2 weeks, then very few Americans would actually pay the higher 25 percent tax.

There is a lot of paperwork to fill in before taxing “everything” partially made in China. That process will take at least 2 or 3 months.

Because negotiations are continuing, prices are not likely to change. The tax is therefore not inflationary “in the very short term.” Instead, the tax will eat into the profits of U.S. companies as they are unlikely to pass on the tax in the form of a price rise for their customers if they think the tax rise will only last a short time.

Companies may try a new existing inventory rather than order in new goods, which is of course a higher risk strategy.

The longer the negotiations go on, the greater the economic damage.

The “uncertainty” that negotiations create will deter investment by companies hurting hereby global trade in and global manufacturing of investment goods.

Companies may start to consider to relocating out of the U.S. or out of China to avoid the tariffs.

The longer negotiations go on, the greater the likelihood that U.S. companies will pass on the trade tariffs to their customers. This would first show up as an increase in “core” producer price inflation.

For markets, the worrying issue is that negotiations will increase the importance of the Trump’s Twitter feed.

For investors, it’s very important to keep in mind that the length of the negotiations and the likely final outcome of the negotiations matter far more to the financial markets than to the economy at large because what Trump has done is effectively "tax" the equity markets.

This means that if Trump’s Twitter feed is “volatile,” and it is possible that his Twitter feed will indeed be volatile, financial markets will be also volatile.

The stabilization of growth we have had in the global economic data of late, will continue for the next month or two because the data then will represent a time when companies had assumed there would be no new tariffs.

If the negotiations drag on, that stabilization of growth globally will come under pressure.

This doesn’t automatically mean a “recession.” The strength of the consumer is still there and any job losses associated with these tax increases will take months to emerge, but after nearly eight years where global growth has barely moved from “trend,” a prolonged period of uncertainty could produce a period of “low trend” global growth. 

Besides that, today we got U.S. consumer price inflation (CPI) data that at the moment isn’t really being driven by market forces that increased 0.3 percent in April on a seasonally adjusted basis after rising 0.4 percent in March. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.

As a long-term investor, I would prefer to have a good part of my portfolio in cash-equivalent instruments because when markets fall because of Trump's trade tariffs, it could be a great buying opportunity.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
As a long-term investor, I would prefer to have a good part of my portfolio in cash-equivalent instruments because when markets fall because of Trump's trade tariffs, it could be a great buying opportunity. 
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Friday, 10 May 2019 09:41 AM
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