Ted Bauman, the US investor behind popular contrarian investment newsletters The Bauman Letter and the Sovereign Investor Daily send out a strongly bearish message this week. He believes US, and subsequently global, stock markets are heading for a hard landing the abrupt end of their lengthy bull run if President Trump’s current approach spills over into a trade war. Tomorrow, on June 30th, the Trump administration is set to publish findings of an ‘investigation’ into US trade with China. Bauman cautions all those investing online in equity markets to pay close attention to the outcome.
Trump argues that the US’s conventional trade balance figures show deficits of over $330 billion in favour of China and $550 billion in favour of the rest of the world. He believes this makes the U.S the victim of unfair trade patterns, with other countries not reciprocating the same openness to U.S-made goods and services as the U.S. does to imports. He believes increasing tariffs will narrow this trade deficit and promote more domestic production and, subsequently, jobs.
What Bauman argues the Trump administration fails to grasp is that the current trade balance deficit is one that US companies have actively been involved in creating, rather than being the victims of it. Since the 1980s, corporate America has move away to low-tax, low-labour cost countries. The biggest U.S companies such as Apple have most or a significant part of their manufacturing in China and other lower labour countries. Chinese consumers are also now one of their biggest markets and U.S. companies earn over $100 billion a year from China. If a trade war meant either significantly higher tariffs for their products or being forced to move manufacturing, they could become vulnerable.
That is particularly the case with stock market valuations at stretched multiples. Bauman also argues that Trump’s administration is also not taking into consideration foreign income generated by U.S. companies by operating abroad. He says when this is taken into consideration the U.S. actually has a trade surplus with many of the countries Trump had criticised, such as Canada and Mexico.
With price-to-earnings ratios high, the fear is that any reduction to revenues that resulted from a trade war would like be enough to tip the market into bear territory. This would spill over into international equities markets, with the London Stock Exchange also likely to be heavily impacted. Economic fundamentals are solid around the world but the bull market looks like it no longer has the same spring in its step as last year.
Richard Turnill, asset manager BlackRock’s global chief investment strategist echoed similar concerns earlier this week:
“Even without a full-blown trade war, escalating frictions could weigh on business confidence and growth”
Those investing online in U.S. companies deriving a significant section of their revenues from China would be advised to keep a close eye on developments over the weekend and next week. Equity markets more generally will also be watching with some nerves.