Consumer Confidence, Currency Devaluation, and the Politics of the Trade War

I was talking with a friend last night and he just happens to be a financial planner. He called to discuss old vacations and the potential for an upcoming vacation this winter. With both of us being involved with the market and investing, the conversation eventually wrapped around to the market and everything going on with the trade war. It was interesting to get his thoughts and he pointed out some things that I hadn’t considered and I pointed out some things he hadn’t considered.

One of the things Paul pointed out was how various politicians and media members have stated that the tariffs on Chinese goods are being paid by U.S. consumers. In theory this is true—the tariffs cause a rise in prices and that hurts the consumer. However, in this case, the devaluation of the Chinese Yuan has offset the tariffs and we haven’t really seen a jump in the Consumer Price Index.

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This bypassing of the tariffs has allowed the Consumer Confidence to remain high and in fact the index jumped to 135.7 in July and the June reading was adjusted up to 124.3 from an initial reading of 121.5. The reading for July is the first time the index has gone back above the 135 mark since last fall when the September, October, and November readings were all above that level. Prior to last fall you had to go all the way back to December 2000 to see a reading above 135 and that was as the index was falling from a peak of 144.7 in July of that year.

Of course I have pointed in a number of articles that the Consumer Confidence Index should be considered a contrarian indicator as the highest readings have come at peaks in the stock market. My own studies show that it isn’t the high readings are the major concern, but rather it is when the index starts falling from the peaks that you have to worry as the declines tend to go hand in hand with bear markets.

Another thing that Paul and I discussed was the timing of President Trump’s tariff announcements. Each time the heat has been increased, the S&P 500 has been at or near an all-time high. They moves also tend to come after the U.S. has just received positive economic news. The announcement from last week came just after the second quarter GDP report showed growth of 2.1% and that was better than the forecasts. It was also right after China’s economic reports showed continued slowing in the Chinese economy.

We were discussing how well Trump has timed the announcements and how they have come at times when the market could handle the news. Yes we have seen the market get hit with selling each time, but it has been able to recover each time.

We also discussed how the battle with China needed to be fought and that President Trump was the beneficiary of being president as the Chinese economy was weakening. I have said before that I applaud him for addressing the trade issue, but I might not agree with all of his moves. Either way, he has been able to push the Chinese government further than I would have thought and that is due to them having to deal with their own economy.

Don’t get me wrong, China’s economy is still growing, but it is growing at a much slower pace than it was 10 years ago. One thing about China that is hard to account for is that it is transitioning from a developing economy to a developed economy. We don’t yet know where the “normal” GDP growth rate will be for the country. We also have to factor in how to predict and estimate the fact that it isn’t a true capitalist economy. There are still a number of variables that we don’t know how to address with China, but President Trump is taking them on at a time when they are not operating from a position of strength.

As we were talking last night, I pointed out to Paul the move from our Treasury to label China as a currency manipulator and how S&P futures were down sharply on Monday evening. China then made the move to fix the exchange rate to the dollar and that settled investor fear and S&P futures were up sharply on Tuesday morning.

The last thing Paul and I discussed was the volatility we are seeing and expect to see going forward. Of course I don’t mind it as much as it gives me material to write about and because I have always played both sides of the market. For Paul, his income can vary because of swings in the market, so he isn’t as much of a fan.

Both of us plan to lower risk exposure and plan to advise others to do the same. For Paul he will contact his clients directly to discuss changes in their portfolios. For me, I do it with written articles and for anyone that takes the time to read them. Either way, expect the wild swings to continue for the foreseeable future.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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