Donald Trump and Xi Jinping

I’m in the Colorado mountains this week. yet, I must note the significance of the reports this morning that Chinese companies have put a stop to purchases of U.S. agriculture products, moving the lengthy trade war into new territory.

I’ll turn the rest of today’s column to my colleague Chris Scott, an expert on international economics, particularly with regard to China. And will rejoin the conversation when I’m back at my desk on Thursday. – Rodney


Markets attempted on Tuesday to scrape back some of this year’s gains. Markets were cut nearly in half since last week, when trade talks with China fell apart.

But the modest dead-cat bounce – buoyed by signals that China would support the yuan at its current level of 7 to the dollar – has proved just that. And there’s every reason to believe that this standoff will continue to weigh on investor confidence. At least until the Federal Reserve swoops in with another save.

China’s decided to let its currency cross the psychologically important line of 7 on Sunday. And that was a carefully calculated signal that Beijing officials have given up on a trade deal coming together some time soon.

The Effect on U.S Farmers

That was made all the more apparent Tuesday via official announcement that Chinese companies will halt purchases from U.S. farmers. China had previously agreed to restart importing U.S. agriculture products when President Trump met with Chinese President Xi Jinping. They met earlier this summer and the two decided to restart negotiations.

In response, Trump suggested in a tweet on Tuesday that he is prepared to bail out American farmers with more subsidies. But those farmers remain the soft underbelly of the trade war. And have little cause for hope in the near term.

The Chinese side is now prepared to wait on the outcome of the 2020 presidential election. This is understandable; Democratic frontrunner Joe Biden, who currently polls well against Trump, has signaled anything but a hard line against the country. Simplistic, perhaps, but that’s the 6,900 mile viewpoint from Beijing.

Trump issued a threat of additional tariffs just last week-the catalyst for this new escalation. The president has calculated that the political benefits of beating up on the far east powerhouse outweighs the standoff’s domestic casualties.

So What Will The Fed Do?

Some went so far as to speculate that Trump short-circuited trade talks because of disappointment in Fed Chair Jerome Powell’s suggestion last week. Powell suggested that the rate cut was just a “mid-cycle adjustment” and didn’t necessarily portend aggressive easing.

For now, the prospect that the Fed will come to the rescue in the face of more trade uncertainty offers little comfort. If it does (and it probably will), it will come on the heels of more market turmoil. Or signs that consequences of the trade war are showing up in economic data.

The U.S. has weathered the trade conflict while maintaining a strong economy. But cracks might start to show if Trump follows through on the threat of new tariffs. Which will be the first to really ensnare consumer goods.

 

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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.