For years, everyone’s been leeching of America.
Unfair trade practices from China…
Member states underpaying their NATO contributions…
Stealing US ideas and tech IP…
Sending graduates over to learn our skills…
That’s the gist of Donald Trump’s position.
And his solution: all-out trade war, whatever the cost.
It IS your problem
Right now, it all seems a bit obscure.
Like it’s just Trump rattling his stick and throwing his weight around…
It might seem like it’s not your problem.
But it is – or will be – when things really get out of hand.
When investors finally get spooked and stampede for the exits, sending stock markets crashing and global economic growth goes into reverse.
We need to think about this carefully now. And we need to prepare…
Most people won’t know the name Li Yanhong.
Li’s early life was unremarkable.
He was born on November 17, 1968. The fourth of five children born to factory worker parents in the city of Yangquan, in North China.
His family wasn’t particularly poor. But it wasn’t well-off either.
A “lower middle-class lifestyle” is how MoneyInc describes it.
But Li’s mother taught him ambition.
No back-door way in
She pushed him hard from an early age.
She stressed the importance of education. And instilled in him a strong work ethic.
“We don’t have a back door,” Li remembers his mother saying. “If you want a better life, a better job in the future, you will have to study hard and ensure you get into the best college.”
The young Li took that on board and worked hard at school.
He developed a passion for computers.
He’d take part in programming competitions, which he often won.
And when he left high school in 1987, he got the best score of all students across his entire city.
Fast forward 31 years and all that hard work paid off.
Li is one of the most famous and wealthiest businessmen in the world.
With an estimated fortune of $18.5 billion, he’s China’s 8th richest man.
And Forbes ranks him at number 58 in its list of The World’s Most Powerful People in 2018.
How did get there?
This is where it gets interesting – and where, if you didn’t already know, you might recognise who we’re talking about.
Arrival of the Google slayer
These days, he calls himself Robin Li.
And he’s also been called “the man who took on Google and won”.
Knowing what we know about Google and how all-powerful it is, that’s an impressive nickname!
Here’s what happened…
Google was once a major presence in China, as it is in most of the world.
But according to CNN, Google “pulled out of China in 2010 after refusing government demands to censor search results in the country”.
By that time, the company Li had co-founded in 2000, Baidu, was already China’s largest search engine.
With Google’s exit, things just got better.
Baidu has an 80% share of China’s search market, making it the fourth most popular website in the world.
As Time reports, Baidu “has grown into a $60 billion behemoth rivaled in China only by social-media-focused conglomerate Tencent and Jack Ma’s online shopping empire Alibaba. Baidu Maps directs every Chinese motorist, Baidu search results enlighten every student.”
The thing is, Li owes much of his success to America.
OK, he started off doing a BSc in information science at Peking University.
But China certainly wasn’t known around the world for its superiority in computer technology back then.
In fact, Li tells the story of when he first applied for a graduate programme in the US.
From Time: “The interviewing professor asked him, “Do you have computers in China?” It left the young man stunned. “I was very embarrassed,” says Li, 49, breaking into a grin from the penthouse office of his Beijing headquarters. “I thought, one day I’ll demonstrate that China has a really powerful computer industry.”
Made in America
But he knew America was the place to go to develop his skills.
And he ended up at the State University of New York where he did a fellowship programme and then his Masters degree.
After that, he got a job with a subsidiary of Dow Jones & Company, publisher ofThe Wal Street Journal.
It was there that Li started developing and improving search engine algorithms.
Then ultimately, he took the knowledge and expertise he’d developed there and at other US companies back to China and founded Baidu.
It’s a great story of a boy from a modest background who made good.
Of course, the way things are going now, Li couldn’t make the same journey via the US today.
Donald Trump wouldn’t allow it…
Students: The latest casualties in the US/China trade war
To stamp out what he calls “theft of US intellectual property”, Trump’s making life hard for Chinese graduate students.
According to the Associated Press, this means a “one-year cap on visas for Chinese graduate students who are “studying in fields like robotics, aviation and high-tech manufacturing.”
A one-year cap? Is that as far as he’ll go? I doubt it. Maybe if things deteriorate further, he’ll put a stop to Chinese students coming over at all.
He doesn’t want more Robin Lis coming over on student visas, getting a job in US companies, using their resources to learn their skills… and taking them back to Beijing.
One of Trump’s main gripes with China is what he calls the “unfair technology transfer practices” at the core of its “Made in China 2025” policy.
That’s a strategic plan Beijing set up in 2015.
Its aim is to upgrade Chinese industry, particularly high-tech stuff like pharmaceuticals, biotech, IT and robotics…
All areas of tech that America leads the world in.
Trump’s trade adviser, Peter Navarro explains:
“China has engaged for a very long time in the theft of our intellectual property as well as practices like forced technology transfer. We’re hopeful that China will basically work with us to address some of these practices.”
It’s no wonder Trump hates the Made in China 2025 policy…
It forces US companies to transfer their technology and compromise their intellectual property rights in exchange for access to the world’s largest market.
Trump says China’s actions are in direct violation of the World Trade Organisation.
Of course, China isn’t about to lie down and accept those allegations!
It’s prepared to fight the allegations. And it’s committed to the policy.
“Bring on the trade war!”
A spokesperson for China’s Foreign Ministry said on Tuesday that “If China hadn’t abided by WTO rules, why would it have chosen to join the WTO?”
It may be Trump who’s the aggressor here. But China’s not backing down.
Beijing has long accepted a trade war is inevitable.
Which is exactly what’s happening.
And it’s getting more intense…
In June, America announced 25% tariffs on $50bn of imports from China.
Beijing immediately came back with 25% tariffs on £$45bn US exports to China.
Now it’s gone up a gear.
From the Associated Press:
“Last week, Washington announced 10 per cent tariffs on US$200 billion worth of Chinese goods, that will not take effect until at least September.”
So, taken together, that’s new US tariffs on $250bn – almost half of the $505bn imported from China in 2017.
“Over to you, Beijing!” I imagine Trump saying.
And that won’t be the last of it. Beijing didn’t flinch as it warned of further retaliation.
Meanwhile, as Trump completed his tour of insulting European leaders this week, he labelled the EU one of America’s greatest “foes” in terms of trade.
The rising threat to the world economy and financial markets
It’s no wonder the International Monetary Fund (IMF) is starting to panic…
The Guardian: “Rising trade tensions between the United States and the rest of the world could cost the global economy $430bn (£324bn), with America “especially vulnerable” to an escalating tariff war, the International Monetary Fund has warned.”
You’d think when the IMF starts throwing projections like that around, the market might wobble a bit, wouldn’t you?
Shouldn’t investors be taking a little cash off the table? I’d have thought so…
But not according to Swiss banking giant, UBS, which says the markets could be in for a major drop… once investors wake up.
Business Insider picks up the story:
“A major further escalation in President Donald Trump’s trade war could see the S&P 500 drop by more than 20% in value, and markets are not ready, according to new research from strategists at the Swiss bank UBS.”
The bank’s analysts reckon that markets are “dramatically underestimating how bad things could get if Trump were to further antagonize China”.
Hmmm.
What are the chance of that happening on a scale of 1-10? Trump further antagonising China, I mean…
I’d say nearer 10 than 1, right?
It’s probably a dead cert, given that China is quite happy to give as good as it gets… and Trump is unlikely to take that, the mad megalomaniac that he is.
Be prepared
So, guys, let’s not make the mistake that the broader markets seem to be making: pretending like this is all going to go away.
It’s not. Not for a while.
And sooner or later it will all get too much… investors will start to panic and rush to get out… and the market will react.
Maybe UBS is right: we get a 20-25% drop on the stock market, “driven by a combination of lower earnings and multiple contraction.”
They’re not the only ones making a bearish call.
Another respected voice is Larry Fink of money management giant, BlackRock, quoted in Business Insider:
“The market’s having a hard time digesting the whole change in globalization and trade,” he told Bloomberg this week. “The foundations of international trade are being raised and being questioned,” he added, saying markets could fall as much as 15% on the back of the trade war.”
If you’ve been following markets for any length of time, you’ll probably know that eventually complacency gets punished.
It just seems to be the way things are.
The market allows investors to get comfortable until they’re all in and acting like nothing can go wrong.
And then something happens and it all comes crashing down – taking as many investors as possible with it.
I’ll be honest: I have no idea whether it will be DT’s trade war that will be the thing that sets it all off.
It could well be.
But maybe it will be something closer to home for us. Like the Brexit chaos that’s unfolding before our eyes.
Or an inflation/interest rate shock – as the world’s multi-trillion-dollar debt mountain starts to rumble.
Or it could be something else – some totally unexpected event… a ‘black swan’ that isn’t on the radar of even the smartest guy in the room.
We don’t know what the exact trigger will be… only that there are multiple threats out there right now.
I’ve been reading some compelling evidence about another existential threat to the markets coming from the heart of Europe.
There’s no time to go into it right now – but I’ll investigate it further and report back to you next time.
And in the meantime, I’m putting together some ideas for ‘escape route’-type investments…
Places you might think about putting some of your money before it all goes to hell out there…
And stock markets collapse, wiping out billions of pounds of savings that’s been growing without a care in the world for the past 10 years.
It makes sense to be prepared.
I’ll be back with more on that… soon.
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