Hopium Floats, and That’s How the Market got High on Friday…(3 Back To Back Attacks…)

Monday, May 13, 2019
By Paul Martin

By David Haggith
May 12, 2019

So much for the trade war being “good and easy to win.” Let’s be honest. Trump has been grinding away on it for almost a year now, and China has barely flinched in its negotiations. On Friday the tariff war became personal because it will now tap your own budget and every business budget in town.

If you think Trump’s boosting of the amperage means China will settle quickly, you may be one of the people I talked about in my last article, “The Zombie Epocalypse: A River of Denial Floods Markets Everywhere.” Since you are a reader here, however, that is unlikely. In which case, this article is not to restore you sanity but to help you maintain it in an environment where you are surrounded by opiated fools.

To my own surprise, it turned out my last article understated how lulled in denial market madness has become, for Friday yielded a revelation that the Zombie Epocalypse has infected the entire earth when stocks everywhere rose euphorically upon receiving news that the tariff war is fully engaged!

While the US market started off in week-long depression, it ultimately lifted to where the Dow posted its first gain in an otherwise miserable week (+114), though the S&P and Nasdaq barely lifted their heads from their stupor to look around. Bull and bear alike, however, had expected the market to plunge if Trump and Xi failed to find a meeting of the minds, but it didn’t.

Mind you, Friday’s delirium may prove to be transitory. Reality could set in on Monday. At first, people are scared and the market tumbles, as it did at the open; then they see that it isn’t tumbling as badly as they feared, so their drug-addled brains return readily to their former euphoria; and, so, the weekend party begins. However, the hangover and indigestion from the party bombards them all day Monday as they start to think more soberly.

Until we see how Monday goes, we have a market that went from Mayhem to madness on Friday. It fell in May in anticipation of larger tariffs and then rose when they arrived on the hope that they really didn’t. I’ll tell you why that is madness, starting with a layout of the new impacts of the fully engaged tariff war, followed by the reasons that were most commonly given to explain or justify the market’s optimism on Friday, and end with a clear presentation of why those reasons are all a boatload of baloney.

The real impacts of Trump’s tariff war
Let me start by saying, I’m not against fighting China with tariffs, though there was a smarter way to go about this. Cheater China needs to be fought, but let’s not be stupid about the real costs to the US, and let’s remember that soberly that American protectionism helped make the Great Depression what it was.

Contrary to the baloney Trump is blowing out his horn about China paying all of this into America’s coffers, the move to phase two in the tariff wars, which escalates tariffs from 10% to 25% on $200 billion worth of goods imported from China is a tax that falls on American importers, businesses and ultimately consumers.

To some extent, Trump has been right about China paying so far. That’s only because, to some extent, American businesses managed to put the 10% phase-one tax back on Chinese businesses by getting some to lower their prices to offset some of the tax. However, American businesses still had to absorbed as much as they could in order to avoid passing any of the tariffs on to consumers. They didn’t want to pass them along because that would result in declining sales, which could turn into declining market share, which in some cases means a permanent loss of loyalty toward a customer’s preferred brands. So, businesses on both sides of the Pacific have sucked up the 10% tax, hoping it would be short-term so they could endure their new very thin margins.

That now changes. Businesses claim to have absorbed as much of the tariffs as they can; so, more than doubling the 10% tariffs, places businesses where they won’t be able to absorb the increase. As a result, the 15-point increase is almost certain to pass entirely along as a tax to you, the consumer. (And there flies out the window whatever tiny stimulus the US may have derived from the miniscule tax cut that was dribbled out to the middle class.)

Let’s talk for a moment about the real-life drain that places on the US economy, which is certain to extend to the global economy to some extent. That applies especially, of course, to the already pekid Peking economy, which has been vital to the world in helping lift it some through the Great Recession. It won’t be lifting it any longer.

The third phase of new 25% tariffs on an additional $325 billion worth of imported Chinese goods — still just being talked about — will mean essentially all Chinese goods will be taxed at 25%. Trump threatens that will kick in one month from now if China has not reached a deal with the US.

The consumer’s alternative to all these new tariffs will be to shift toward non-Chinese brands that used to be more expensive but now compete favorably. That would be good in part for the US if it meant shifting toward American brands, but it doesn’t because many American brands are loaded with Chinese parts or resources, so they will also go up in price. And, let’s face it, a huge amount of the items that flood your Walmart shelves with a cornucopia of delectably cheap diversions, entertainments, must-haves and needful things come from China. Moreover, any non-Chinese brand you switch to will still be more expensive than what you were paying, or you wouldn’t have gone with the Chinese brand in the first place. It’s not like buying “Made in China” was ever a quality choice.

The American consumer is already deeper in debt than he or she was when the Great Recession began, and credit defaults have doubled over the last couple of years as the Fed raised interest rates on all of that debt and tightened money supply. Houses are more expensive in many areas than they were at the start of the Great Recession, though that is starting to reverse in some areas as sales have been declining for nearly a year now. Prices on consumer goods are, of course about 30% higher overall than they were when the Great Recession began, while wages over that same time have risen about half that much.

Here are some estimates being given of the real costs of these tariffs:

The second phase of tariffs that has just gone into effect on goods that originally had a 10% tariff applied to them could cost America an estimated 900,000 jobs and cost the average family an estimated $767 a year. By the end of 2019, these tariffs will have cost the US economy an estimated $29 billion and cost the global economy $105. Not too hard to absorb, but not something that should make the stock markets of the world all rise either. (Some estimate a loss of $62 billion by the end of the year by guesstimating Chinese retaliation.)

The Rest…HERE

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