Trade War & US$80 Oil

I hate to be overly optimistic. Because you will get clobbered when you are not totally accurate. I haven't been writing much about business or stocks since the May elections because we needed things to settle.

1) we needed to know the extent of the mess, which our Finance Minister and his team have done properly so far, let it all out in the open

2) I have said before, should PH won the elections, chances are high that the local bourse will be in the doldrums for at least 6-12months. Even so, knowing full well I will lose some money from my portfolio ... I think most of us will RATHER suffer some losses in our portfolio than to see BN re-elected

Things appear to have settled down now. I have mentioned that we needed oil prices to be much higher so that Petronas can sell at higher levels so that the government can request for a special dividend (if needed) to dig us out of the mess by the previous government.

The US$80 oil is as good as one can expect. we just need it to stay above that for at least another 3-6 months.


The Trade War

Didn't write much about the trade war because it could have been over within weeks. Noting the unpredictability of Trump, the trade war went tit-for-tat for months now. Even China is running out of products to impose duties on.

Trying to read Trump's actions, it is likely he won't back down as he is as belligerent as an 8 year old boy who must have his ice-cream or else.

3) the trade war is now so extensive that it would be quite some time to unravel and unwind the entire process, even if both sides wanted to

4) the consequences are huge as the trade war drags on and on... both China and US will be losers, what happens in a prolonged trade war is US businesses dare not invest in new capacity to take advantage of the tariffs, same for China ... the stalemate will result in a dramatic pullback in capital investment from both sides

5) the electoral backlash in the US will be more pronounced as things drag on, farmers and other exporters to China will feel the pinch, which will soon evolve to a loping off of their limbs ... the backlash in China will be muted owing to the different political landscape.. in fact, Chinese citizens will be more willing to suffer rather than see Beijing kowtow to Trump

6) there will be some important midterm elections in the US and that could spell disaster for the Republicans

7) plenty of products will now be served by their substitutes, thus benefiting many emerging market economies, but again no one knows how long it will last, thus nobody is willing to put up any new investments into capacity 

8) China has in the last several months made a contingency plan of what to do. China is increasing trade with India, Africa and the European Union. China will be able to offset most of the damage from increased U.S. tariffs. The real impact will be on U.S. companies which export their own products from China. These items will become more expensive for U.S. consumers

9) no jobs will go back to the States .. If U.S. firms can see no end of the trade war, they will reorganize their supply chains and locate low-cost production in “safe” countries like Vietnam, Malaysia, Indonesia, Mexico, and Peru. They will not move much production back to the United States. Likewise, Chinese firms that buy high-tech industrial inputs from the United States will move some of the production to “safe” countries like South Korea, Canada and Australia. But the Chinese government will strongly encourage Chinese firms to produce many of these inputs at home, even though the cost will be much higher


The Next Trade War Phase

THE US$ - I believe Beijing will have to dump some Treasuries soon if Trump stays belligerent. If that cycle starts, funds should flow to emerging markets away from the US. Even a trickle will be effective for emerging markets.


Conclusion: There is no conclusion. It still fluid. Trump could be impeached. Upcoming midterm  elections could prove disastrous and lead the Republicans to rally against Trump. US$ could dive 10%-20% ... you guess the consequences there.