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Is There No End to the Trade War?

Written by Briton Ryle
Posted May 12, 2019 at 8:00PM

A new chapter in the U.S.–China trade relationship starts this week. And it frankly doesn't look good. 

If we are to believe the reports, China has backtracked on some things it had agreed to earlier in the negotiation process. The U.S. responded quickly, raising tariff rates from 10% to 25% on the $200 billion worth of goods that had already been announced. 

That was enough to keep stocks on the defensive all week. 

The S&P 500 sold off 2%. It could've been worse. It was actually down 3% for the week at midday Friday, but a strong late rally pushed the index into the green by the close. While that rally might look like a positive, it was simply shorts covering their downside positions before the weekend.

(My Real Income Trader subscribers bought Micron puts right out of the gate last Monday, and we sold them on Wednesday for a 75% profit. We are now averaging 51% per trade this year.)

Twitter Risk is a huge uncertainty for traders right now. Trump can literally say anything at any time.

And as it happens, he's been tweeting all weekend about the positive effects the tariffs are having on the U.S. economy.

Just this morning, he dropped this little chestnut on us: “The unexpectedly good first quarter 3.2% GDP was greatly helped by Tariffs from China. Some people just don’t get it!”

Someone is going to have to explain to me how this works. Because I am definitely one of those people who just don't get it. 

Of course, the president has tried to say that the Treasury is showing a net gain from tariff payments, so it's all good. But that's not really how it works...

1 Minus 1 Does Not Equal 2

At best, tariffs are a zero sum game. But in this case, it's not an even give and take. We are losing money. And when I say "we," I mean you and me. Certainly not the government. The Trump administration gets to spend as much it wants and tell us that everything is hunky-dory...

As in, yes, the Treasury might take in a little loot. And if that's all you look at, hey, great! But as of a few months ago, the U.S. has committed about $1.2 billion more to subsidize farmers who have been crushed by falling ag prices than we are taking in from tariffs.

So that puts us in the red. 

And then if you look at the way tariffs are enforced, you can see why Trump's claims that "China is paying" are at best misleading... 

The New York Times says:

The mechanics of tariffs are not complicated: The government sends a tax bill to the company that brings goods into the country. Most of those tax bills go to American companies, often import firms that specialize in dealing with the customs process.

Seems pretty obvious to me that if a company is paying more for its products (or materials to make its products), that company is going to charge more. And even then, sometimes the company won't be able to offset all it costs with price hikes. That's why Ford said tariffs will cost it a billion dollars of profit this year.

Price hikes mean we (you and I) are paying more for stuff. It means you and I are footing the bill for this trade war.

I've said repeatedly that this is a fight worth having. It is absolutely true that China steals intellectual property from companies that do business in China. Sad! Very unfair! 

It's been going on for decades. And Trump is the first president to really take this issue seriously. But at the end of the day, wouldn't it be better for the president to simply say that yeah, we've got to deal with this problem and it's going to hurt for a little while? Because lying about it and saying that tariffs are making us wealthier is nonsense.

Dear Briton, That's Great. What About My Stocks?

I'm not going to lie to you; it doesn't look good. China's Galaxy Quest bluster that it will "never surrender" sure makes it sound like both sides have dug in their heels. But of course, the trade talks went on last week...

China has to save face by publicly refusing to bow to a foreign power. That's basic Leadership 101. 

The problem is, the market has been rallying in part because we've already counted our trade deal chickens. That is apparently not happening anytime soon. Check out this last paragraph from a Reuters article from this morning: 

White House economic adviser Larry Kudlow said on Sunday that there was a “strong possibility” Trump will meet Chinese President Xi Jinping at a G20 summit in Japan in late June.

Uhhh, strong possibility? Late June??? Oh boy...

Buckle up, folks. Over a month before Trump meets Xi? Stocks can do a lot of bad stuff in a month.

Right now I am about to pull the trigger on some more puts for Real Income Trader subscribers. There's time for you to get on board if you wanna make some loot.

Until next time,

brit''s sig

Briton Ryle

follow basic@BritonRyle on Twitter

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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