Dumb and Dumber

If you stand on a level crossing and you think you can hear a train coming, you might move off. If you can actually see a train coming, you would be a fool not to move off. If you see trains coming from both directions, you need to get moving immediately.

This idea came to me as I read back through my posts of the last 16 months, since the site went live. 2 themes come up again and again: Brexit (of course) and the US President’s enthusiasm for trade tariffs. These are the 2 trains heading inexorably towards our portfolio valuations. For once we might have a market setback with 2 co-incidental causes. Two political choices that may seem pretty dumb with hindsight.

Reader’s know where we are with Brexit. So this time I am passing on that topic. It keeps my blood pressure down.

This post is intended to draw your attention to the now noted heavy down valuation of the the Chinese currency (renminbi/yuan) against the US dollar. This is the not altogether unexpected way in which they have dealt with US tariffs. They naturally get less dollars for their goods but as they own plenty of US Treasuries (now worth more in local currency) there is at least for them some sure fire hedging.

What this means is that US consumers may not have seen much of a price rise but are just paying more tax (not that they will understand that, I fear). Chinese imports to the US have not fallen, but US exports to China have (now more expensive by a double hit, currency and retaliatory tariffs) and I have read of some severe stress in parts of the US agriculture sector.

That means President Trump may lose votes rather than gain them, but that is not my concern.

This situation has some similarities with the 1997/98 Asian Tiger crash that spread to impact the global economy. In 1994, China devalued heavily to undercut prices in the economies of its Pacific neighbours and that was the key factor in destroying their fragile economies, whose debt was linked to the US dollar. Once their currencies (starting with the Thai Baht) devalued away from the greenback, almighty recessions followed.

There are not exact parallels, but the impact of Chinese goods becoming cheaper will not only be felt in the USA – something I pointed out a long time ago. And more than that – competeing with the Chinese will be more difficult for everyone. That is a parallel.

So, I hear the 2 rumbles that have been building over the last 18 months getting louder. Time to take evasive action? I am.