Yesterday, I covered the shots across the bow from both the U.S. and China in the growing trade war. Today, I’m going to take a deep dive into both parties’ next moves and how the markets would inevitably react.
With the mid-term elections coming up in November, it looks like the Chinese are cleverly exerting pressure directly on the President and the Republican Party.
In a deft political move, the Chinese are targeting U.S. products coming out of “Red” states. Specifically, they are going after products made or grown in counties that voted for Donald Trump for President.
That’s putting pressure on Trump supporters, who are now at odds over losing income and jobs and still believing in the President’s agenda and politics.
And that’s not the only curveball China will be lobbing at the U.S.
What Could Send Markets Into Freefall
Optimistic investors still believe that pressure will level off as President Trump slows down tariff talk against the Chinese until after the election. Their belief is that no bad news on tariffs is good news for stocks, and they’re right.
The shock to come may be what the Chinese call “the biggest trade war in history” escalating and not ratcheting down.
If President Trump doesn’t relent, Beijing has threatened to swamp U.S. firms operating there with red tape, including using a weaker yuan as a weapon.
Ironically, the Chinese currency has been falling relative to the dollar. That makes Chinese exports cheaper to buy for U.S. importers. That usually stimulates exports from China to the U.S. and will add to tensions between the two countries.
[Say NO to Stocks] Are you ready to pull out of this mess?
“The longer the spat drags on, the harder it will be to unwind,” says Bill Reinsch, senior adviser at the Center for Strategic and International Studies.
“While the short-term damage of the tariff back-and-forth isn’t too painful, the cumulative impact is significant,” he said, adding that he foresees “a long-term dispute, not a quick resolution.”
Trump “only has one strategy, which is to hit harder,” Reinsch said. “It’s like two 8-year-olds having a staring contest.”
The prospect of a protracted trade war will eventually weigh on equities, while the lobbing of any tariff nukes would instantly upend investor optimism and take stocks down to test their support level lows.
If they break those support levels, market losses could be steep and swift.
Investors and traders have been counting on those support levels, at the same time preparing to exit positions if they’re broken to the downside.
Any steep market selloff would panic so-called passive investors into turning active and selling packaged products with all the highflying stocks in them, specifically index ETFs.
Get Ready – While You Still Can
Technically, any panic-selling of the big tech stocks that have led the market higher for years now, would cause ETF “authorized participants” (the traders who maintain ETF portfolios and create and destroy units of the trusts as investors buy and sell them in the open market) to sell portfolio positions worth hundreds of billions of dollars of all stocks in those products. This is especially true for the big name stocks investors expect to hold up the market.
As authorized participants keep getting sell orders to liquidate ETF units, besides selling portfolio holdings, they’re going to get ahead of any panic selling by shorting those stocks they know they’re going to have to sell when they get their orders to liquidate more units.
Their shorting would hit big-time market-leading stock being watched by investors, triggering a negative feedback loop that could take the market down 10%, 20% or more in short order.
That’s what could happen, and quickly, if the first volley of tariff shots turns into a war.
Of course, for the richest Americans, things couldn’t be better.
The 1% – the CEOs, Silicon Valley titans, Wall Street insiders – are making off like bandits.
But for regular folks, losing it all is only a few emergency expenses away.
And today, you will see the truth:
That things are about to get much worse.
Because contrary to what the fake media says:
America never recovered from the Great Recession.
And an economic event of such magnitude is about to occur…
That will irreparably fracture America as we know it.
No one will admit that this future is rapidly approaching.
But as you’ll soon see, America is set to face an economic upheaval the likes of which no one alive has ever experienced.
I’m here today to inform you of the events that will soon unfold…
You’ve been warned.