Tags: federal reserve | china | trade war

'Safety First' Remains Best Advice for Long-Term Investors

'Safety First' Remains Best Advice for Long-Term Investors
(Jakub Jirsák/Dreamstime.com)

By    |   Monday, 26 August 2019 04:53 PM

After all the uncertainties that are directly related to the U.S.-China trade tensions and “tit for tat” actions from both trade blocs that have dominated last week and that have caused serious damage in the markets, especially on Friday, when global stock markets tanked after the latest measures were announced, the China’s Yuan currency (CNY) fell to a fresh 11-year low while investors streamed into the safe harbors of U.S. Treasuries and other sovereign bonds, the Japanese yen, gold, and yes, the U.S. dollar for which I still expect a debt-ceiling related liquidity crunch before the year is out.

Today, Monday, August 26, China’s Vice Premier Liu He, who is President Xi Jinping’s top economic adviser and who has been leading the trade talks with Washington, said China is willing to resolve its trade dispute with the United States through calm negotiations and resolutely opposes the escalation of the conflict. Liu He also said nobody benefited from a trade war…

On Friday, China’s Ministry of Finance announced on its website that it will apply new tariffs of between 5 percent and 10 percent on $75 billion worth of imported goods from the United States. The bulk of the Chinese tariffs will take effect on September 1, while the rest of the duties will be implemented on December 15. In this context it might be helpful to take note that the Chinese Ministry of Finance announced that a 25 percent tariff on U.S. automobiles and auto parts will be reinstated on December 15.

President Donald Trump tweeted on Saturday that duties on goods imported from China will be increased: On October 1, tariffs on $250 billion such products will rise from 25 percent to 30 percent. Tariffs planned for September 1 on $300 billion worth of Chinese goods will now be 15 percent, instead of 10 percent.

I don’t think it’s an overstatement to say that all this represents a serious escalation of the U.S.-China trade war.

As an investor it might be wise to scale back on risk and take a more wait and see attitude. I don’t think that for the time being “Buy the dip” is the best way to go.

I would “try” to buy the dip when there is real panic, which is of course not the case yet.

“Uncertainty” will probably dominate everything for quite some time to come and investors will have to face a lot of volatility, which is not the best environment for long-term investments.

Fed Chair Jerome Powell said in his prepared speech in Wyoming on Friday, “Fitting trade policy uncertainty into this framework is a new challenge. Setting trade policy is the business of Congress and the Administration, not that of the Fed. In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy. While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade.”

And the Fed Chair is right. There is no doubt whatsoever that the Fed will do its outmost best to comply with its dual mandate it got from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates," but the trade “dispute” with China cannot be placed under its mandate and, unfortunately, the trade dispute could seriously disrupt the U.S. economy as well as the behavior of the U.S. Consumer and if that would be the case then a recession is near…

“Safety first” remains the best action long-term investors could perform for now. At least, that’s how I see it for the time being.

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

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“Safety first” remains the best action long-term investors could perform for now. At least, that’s how I see it for the time being.
federal reserve, china, trade war
Monday, 26 August 2019 04:53 PM
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