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Unless you’ve been living under a rock, you may have noticed that the US and China have been getting…a little testy with each other.
Dow Dives as Markets React to Trade War with China
–CNN, May 13, 2019
Boston Fed President: Tarriffs Have The Potential To Slow Down Economy
–CNN Business, May 22, 2019
Dow in Freefall as Terrifying 15 Year US China Trade War Looms Large
–CCN, May 23, 2019
Yikes.
OK so what’s going on here? Why are the US and China in a trade war? What does it mean for our investments? And what changes (if any) are we making to our portfolio in response?
Let’s get into it!
It wasn’t Trump’s Fault (This Time)
FIRECracker has a, let’s say, “complicated” relationship with the Chinese government.
To briefly summarize her family’s long and tortuous journey to Canada, FIRECracker’s family lived under brutal persecution under the Communists while they were in China. Because her family came from the wrong background, they were labelled as “enemies of the people” and as such were frequently targeted by the Chinese government. Multiple family members were killed during the Cultural Revolution, and her dad spent 10 years in a labour camp. Not fun.
After her dad (with great difficulty) got into university, he was able to leave by applying for a student visa abroad. He chose Canada to study in order to get his PhD. His immediate family, meaning FIRECracker and her mom, were forced to stay behind in China to act as de-facto hostages. The understanding was that he was to return to China after he completed his PhD or “something bad” would happen to the family he left behind.
Then the Tianamen Square massacre happened. You may have heard of it.
The resulting media frenzy and international pressure forced the Communists to stop with the whole “killing dissidents” thing, so when travel restrictions eased, FIRECracker got the Hell out of Dodge and immigrated to Canada.
Anyway, the point of this whole story is that FIRECracker understandably inherited an extreme distrust of Communists because of all this. Which is why to this day she has a golden motto that she continues to abide by, and that rule is:
Never Trust Communists
So what does this have to do with the US/China Trade War?
Ever since Trump got elected, he has made it a habit of starting trade wars with pretty much everyone he was doing business with. First Canada & Mexico, then all of Europe, and now finally China. With allies such as Canada, Mexico, and Europe, those trade wars made little sense because those countries were, for the most part, playing by the established rules of their existing mutually-beneficial trade relationships. Pissing off allies in order to extract concessions that were, at the end of the day, really minor, made no sense.
China was a different story. Trump and his trade negotiator Robert Lighthizer felt that China was stealing US intellectual property, which they absolutely were (1 in 5 US companies reported having their IP stolen by China in the last year). There were other issues such as accusations of currency manipulation and a $500B trade deficit, but the main issue was the IP theft. In order to do business with China, companies had to form joint ventures with Chinese firms, at which point all their IP would get stolen and copycat products would start appearing. That shit ain’t cool, and is one of the very few things I agree with Trump on.
So after the initial chest thumping and penis-waving, it looked like China and the US were actually getting things done. Trump agreed to halt all further tariffs as a show of good faith, and it looked like China and the US were about to sign a grand bargain that resolved most of the issues the Americans had raised.
Then China decided to pull a switcheroo on the agreement, sending out an altered version of the text in which all the things China had agreed to had been removed. Apparently, they had been hoping that the US would treat the document the way we all treat software EULAs, and hit “I agree” without actually reading it.
When the ruse was discovered, talks broke down, tariffs got raised again, and that’s the situation we all find ourselves in.
Which just goes to prove once again FIRECracker’s motto.
Never Trust Communists.
Don’t Bet On China…
Our distrust of Communists also seems to be shared by the investment community. Despite the fact that China is the 2nd largest economy of the world, it doesn’t seem to show up very much in world stock indexes. The MSCI EAFE Index for instance, only holds a weighting of 3% in Hong Kong. For comparison, it holds 7% in Australia and 24% in Japan.
The reason for this is that the Chinese stock market isn’t nearly as well-regulated as those of other developed countries. If a stock’s price starts to fall, the government can (and will) freeze trading to prevent losses. Accounting transparency is a huge problem. And while insider trading is generally considered a crime in Western countries, it’s deemed “hilarious” by the Communists. That’s what happens when you have a government acting as both the regulator and the owner of many of the companies on the stock market.
Never Trust Communists.
J.L. Collins has argued that there’s no need to own an International Index over the US Index since so much of US companies’ profits originate from overseas, and while we may disagree on that, when it comes to exposure to China I’m 100% in agreement. I’d much rather own stocks domiciled in countries with proper regulators that do business in China rather than Chinese companies themselves. And if you build a portfolio similar to the one we write about in our Investment Workshop, that’s exactly what you end up doing.
…But DO Bet On the World
But despite our inherent distrust of the Chinese government, this trade war, like any geopolitical event, is why we don’t bet on individual countries based on stuff we read about in the news. Instead, we hold an equally balanced portfolio of stock markets all around the world.
I don’t know when this trade war will end, but by holding the world we are naturally insulated from the impact of any one country. Even if this trade war drags on for years, Chinese and American companies aren’t going to just sit there and patiently wait for their respective govenments to stop squabbling. They’ll eventually look elsewhere around the globe to sell their products, and whether that means China increases their trading relationships with Europe or South America steps in to service the American market, by holding the world indexes you’ll benefit wherever it goes.
And also, in the grand scheme of things it’s important to remember that the world continues to live and prosper. I recently pulled up my trading platform to dump in some spare cash I had lying around, and while the near-term performance of the US stock market looks scary…
When we pull back the YTD performance of the same index, the impact of these tariffs really come into perspective.
On the whole, the US (and the world) economy is still in pretty great shape, and even though the two largest economies are currently in a trading war, as long as it doesn’t develop into a real war I’m not too worried. The two sides will eventually resolve their differences or some other country will step in to fill the void.
Either way, we win.
But seriously, Don’t Trust Communists.
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Wow. I wasn’t expecting that from you FC. I understand what you have been thru with communist China but don’t you have any bit of proud in being Chinese? If wasn’t for China all these gadgets you can afford today wouldn’t be available.
I’d add to never trust a communist but never trust a capitalist either. They see you as a big $100 bill and that’s all you are to them- At least I feel that way since I moved to the US. I don’t trust this government (not just Trump’s) for a second. Edward Snowden showed us how much of a good guy US of A is and everyone seem to have forgotten of this hero (weird isn’t it?).
I do believe China will surpasse USD as the biggest economy of the world in my lifetime and honestly the WTO projections also confirm that.
Being Chinese and being communist are very different things. Just ask the Taiwanese.
I don’t believe China will surpass the US. Too many restrictions on individual freedoms which is extremely limiting.
It’s also interesting that you say “don’t trust a capitalist”–China’s economy is actually more capitalist than communist. And the only reason it’s been prospering for past few decades is because it switched from a communist economy to a capitalist one after millions of people died under the old system.
Capitalism has it’s problems, I agree it’s not perfect. But it incentivizes people properly and doesn’t result in death camps/labour camps like communism. I would pick capitalism over communism any day.
That’s right! “Just ask the Taiwanese”
Thanks for sharing the story about your dad and family – that’s an era of history we don’t learn much about in schools, and hearing from someone who went through it helps.
Have you watch the documentary The China Hustle? It’s all about Chinese companies that go public and rally international money – but there’s nothing behind the curtain. It’s a really good look behind the scenes and it definitely made me more cautious to international investing (I still hold a bunch in a general Vanguards intl fund, but would be hesitant to go country-specific).
Welp, I know what I’m watching tonight!
Great article as always been following since the beginning
It’s always appreciated hearing perspectives like yours. I work with a lot of Chinese PhD programs in my department and it’s amazing how brainwashed they are when people like you have seen the reality and lived to tell the tale. And as the child of refugees who fled another Communist controlled country (Vietnam) I trust China about as much as you do.
See? You get it.
Damned commie bastards.
I’d say – don’t trust authoritarian regimes. Trump would love to run the US as an authoritarian country if he has his ways. I don’t trust him any more than Xi Jinping.
Anyway, China has to stop stealing secrets. If we have to play hardball for a while, then be it.
I don’t trust Trump that much either, but the beauty of democracy and term limits is that any one person who’s doing a bad job will eventually be replaced.
Xi Jinping just banned term limits for himself, which makes him the most powerful Communist leader since Chairman Mao. That’s terrifying.
Great post. It’s always a good idea to take a wider view ( zoom out on those charts) and think long term. I agree a balanced portfolio needs some solid low cost international index funds. It’s also gotten cheaper, Fidelity has lowered fees on international index funds like FSPSX to 0.04%. A 20th of what many international ETFs and indexes charge. My kind of numbers.
I’ve been hearing mixed reviews on Fidelity. How are you finding their platform?
Overall I’ve had a very good experience. I’ve consolidated just about everything there including; brokerage accounts, retirement accounts, rollovers, HSA account etc. They also reimburse for all foreign/domestic ATM transactions and have free bill pay. Good rates on cash accounts as well. The apps and website are solid as well.
Oh good to know!
it’s always somebody messing up the business for us who’s in office. Let’s hope this time around China doesn’t view us as a hostile and opposing nation. China is a very rich economy and always successful. the United States can do a lot better how they treat them. We are supposed to set a positive example of a superpower nation. Agree?
Totally agree, “Don’t Trust Communists.” Full stop.
Correct. They are the worst.
Sino Forest-when you have a company about lumber-there should actually be trees?
Great article FIRECracker. I agree with your commentary on Trump doing the right thing on the China front. I think short term losses will end up as long term gains if they are forced to play by WTO rules.
Yeah the problem is that Communists have a great deal of difficulty admitting when they’re wrong, so this could take a while…
To get some perspective and make yourself feel a bit more relaxed about the whole trade war thing it helps to look up the trade stats between the two countries. I’ve googled it and was pleasantly surprised. While there are different numbers from different sources and years, they all seem single-digitish to low-double-digitish.
i.e. U.S. exports less than 10% (8%-ish) of its exports to China and imports about 20%-sh of its imports from China.
China exports less than 20% (18%-ish) of its exports to US.
Like, yeah, sure 10%-20% of one’s stuff is a huge slice and one doesn’t want to treat such large trading partners lightly, but …
… then it doesn’t feel so huge that it’s the end of all your trade if you lose it.
To listen to all the doom and gloom in business media, I would have thought those numbers were more like 50% and more.
That U.S. and China are joined at the hip in an unbreakable til-death-do-us-part trade marriage and a divorce would spell mutually assured destruction of the two countires’ economies and instant Great Recession for the world.
Perhaps the whole “Chimerica” idea is a bit overblown. Maybe the two countries can afford to take a break from each other or some slowdown in their trade relationship without their economies coming to a gruesome end…
I hate Communists as well. This story is very similar to my own except replace China with Vietnam. FUCK the Communists and FUCK the Chinese government. There are plenty of good people in China, amazing culture, and a plethora of great things too long to list. However, the government over there is trash and things are pretty scary over there. Social credit, facial recognition everywhere, suppression of information….
I like the cut of your jib. Commies are the WORST.
Economies run on productivity. Good productivity good economy. China is largely mercantile and its productivity is not its own but from theft. China is very good at making cheap knock offs , not so much at innovation. In the end productivity wins.
China does have its own burgeoning tech sector but I’m deeply skeptical about the amount of innovation vs theft that goes on there. How can you innovate when thinking for yourself is deemed a threat to the government?
Thanks for the clarification on what the tariff wars are really about.
As for your parents and your journey to freedom, that is truly amazing and would make for a great book/movie. It’s something that everyone should know about.
Funny you should say that…
Stay tuned for a big announcement coming up on Monday 🙂
I’ve waited! Who is playing you?
This Monday’s announcement: FIRECracker enters the MCU and her origin story will be told in the movie “FIRECracker: The Revolution”. Spoiler alert, she joins the Avengers.
Sincerely,
ARB–Angry Retail Banker
I’m glad to find another Millennial that hates communists. It’s a fantasy that liars and parasites sell to lazy people so they can rally support and take advantage of children and honest, diligent workers. Your story will be another reason why I’ll never set foot in a communist country.
This article is in firm alignment with the principles set forth in The Simple Path to Wealth. There’s always something scary around the corner… don’t let it shake you.
Nice to get your take on things Wanderer/FireCracker. I agree — Don’t trust the communists.
Agreed on the whole Don’t Trust Communists thing. FIRECracker’s story is definitely insane. And by insane, I mean sickening. She definitely earned and deserves FIRE, though I doubt that China won’t be on the Let’s Go Exploring! set of articles anytime soon.
As far as investing in China goes, I’m still fairly bullish on them. They are a huge economy that’s growing at an incredible rate, and one way or another, they’ll have to learn to play by the rules if they want to do business with foreign countries (both in terms of having foreign companies come into the country and of foreign countries allowing Chinese companies access to their markets). I just don’t see IP theft as a long term solution for them economically, and I really feel like they’ll have to play by the rules and allow innovation to flourish in their country if they really want to tap into the potential growth that they have.
As an investor, I wouldn’t touch the Chinese exchanges. But I don’t mind buying Chinese companies off the American exchanges, where they need to comply with SEC regulations.
As far as the tariffs go, I don’t really support them, but I do understand the need to take some action against China. Unfortunately, Trump sold the tariffs to his base as a way to get back at China for “stealing” $500 billion from us (showing that he nor they know what a trade deficit is). The MAGA hat wearers cheering the tariffs on the loudest? Honestly, I don’t even think these people know what tariffs are. I’m completely serious; they went nuts over Trump’s promise to “tax China”, I truly believe these people think China’s getting a 1099.
Sincerely,
ARB–Angry Retail Banker
What did I pull out of this blog post?
Don’t. Trust. Communists.
EVER!
That works for me. ?
Thank you for saying this. I think Millennials are way too trusting of Communists. Our universities don’t talk nearly enough about all the people murdered by the communist regimes in China, the USSR, and elsewhere. Personally, I don’t think that’s an accident.
I’ve never heard anyone in my generation (Millennials) voice any sort of trust, support, or anything like that for Communism. And I remember vaguely learning about these communist regimes in college. Though it’s been a few years since I was in school, but I remember knowing even back then about the brutality of Stalinist Russia, the awful conditions east of the Berlin Wall, and the brutal rise of revolutionaries like Che Guevara. Some of this I actually learned in high school, though I can’t remember what I learned when (again, I’ve been out of school for over a decade).
To be honest, I always wondered where these claims of Millennials needing trigger warnings, safe spaces, censorship, and communist indoctrination came from. I went to a liberal blue state school and saw none of this. Then again, I’m dense enough to have possibly not noticed it.
I do feel like my generation is becoming very sympathetic to socialism, but socialism is not communism. And considering how everything the modern Republican Party hates is considered to be “socialism” and thus the greatest evil that ever lived, I wonder which group is overreacting to which.
Sincerely,
ARB–Angry Retail Banker
Socialism definitely. We need that here in America. Our people became so capitalist that everyone is just money to one another. It’s a very sad situation.
You’d die if you can’t afford medical and dental care nowadays. All it’s about money.
We need a democrat in power that can change that urgently. When you have cancer and not a dime left in your pocket you need somebody who looks over to you and not your money
Nobody knowingly supports Communism. But lots of people do unwittingly. That’s because it’s been repackaged. If you graduated from college more than 5 years ago, you might not have experienced trigger warnings and whatnot. Things have changed a lot in a short amount of time. Jonathan Haidt (an academic himself) has 1:45 minute lectures on how this happened in a short amount of time on YouTube. Socialism is just a stepping stone to Communism. It’s essentially more state control of resources, no matter how you slice it. It presents itself as an antidote to out of control capitalism. But in Western Countries the corporations and the governments are in bed with each other, so that’s a joke. The situation in Western Countries (as far as the state and the corporations being in bet with each other) is really not much different than what they have in China. It’s really just a matter of degree. In China, they’re blatant about it. In Western Countries, we still have our illusions that things are different.
I agree with ARB. There are a lot of wrong conclusions about what Millennials think (definitely coming from the GOP), except that no millennial I know actually thinks that way. And yes, socialism isn’t communism.
Great post. I don’t like Trump, but he’s not always wrong (although when he’s right, it’s often for the wrong reason). Like Benny Hill said, “Even a clock that’s broken is right twice a day.”
The Chinese government is longing for the days of old when conquest and expansion were the norm. They’re just using more high tech and political methods these days.
The most extreme examples today are:
– The Huawei code injection and spying issues https://www.secureworldexpo.com/industry-news/huawei-security-flaw
– The China debt trap https://qz.com/1223768/china-debt-trap-these-eight-countries-are-in-danger-of-debt-overloads-from-chinas-belt-and-road-plans/
– and the Islands they are BUILDING in the South China Sea https://www.reuters.com/article/us-china-southchinasea/china-building-on-new-reef-in-south-china-sea-think-tank-says-idUSKCN1NQ08Y
These methods are too nefarious. But I guess that also reflects on the relatively peaceful time that grew up in.
This was a really interesting post, thanks for the content and context! Very interesting take.
Very interested to see your opinion on this matter. I wasn’t aware that’s why the recent talked had fallen apart, but after dealing with multiple employers here I’m hardly surprised to see them trying to pull that.
偷偷摸摸
Capitalism needs a makeover!
A 4 day work week, manage National Debt better and reduce Health Care costs!
I was downsized by Chinese imports! FIRE saved us! Thank you MMM. JL, Root of Good, Frugalwoos and you!!
Agree. Capitalism could always be improved.
Congrats on using FIRE to save you and happy this blog could help!
I’m not into politics like that. But I would like to travel to China someday because I do believe it’s a beautiful place. 🙂
Can you please comment on this? I would love to know your thoughts.
https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos
https://m.imgur.com/gallery/rkfINIt