China has more ammunition than Trump realises …

And how investors should play this ..

Trump is playing a dangerous game.  Even worse, he appears to have no idea what he’s doing.

On Wednesday Trump blinked first and backtracked, announcing a 90-day pause in his tariff plan.   Only 24 hours prior, he firmly stated there would be no turning back.

Don’t believe this is all part of a deliberate grand plan.  It’s plain incompetence that risks a severe crisis for the US economy.

The key to understanding why Trump backed down lies in US Government bonds – which have been selling off since China hardened its stance.

The World’s most important asset …

Before getting into the details, let’s take a minute to understand why US government bonds (aka Treasuries) are the single most important asset in the world.

To be an effective set-and-forget investor we don’t need to master the details but it’s interesting to be aware of this right now.

US bond yields set levels for everything:  mortgage rates, house prices, stocks, crypto markets, business confidence, US government borrowing costs, pension annuities and more.

If US bonds are sold-off, yields will rise. Which isn’t good.

Remember Liz Truss’s mini-budget when UK bonds plunged and yields surged?  Trump will now also understand that reckless policy is always punished by the bond markets.

See how US bonds have sold off (i.e. yields have risen) below …

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How might China (or other countries) impact US bonds ?

This is China’s ‘Trump’ card.

We know the US has a trade deficit with China.  That results in approx $300bn in US dollars flowing from the US to Chinese businesses, per annum.

Those dollars then need to be exchanged for Chinese Renminbi so the businesses can pay their costs with local currency.  Post exchange, the US dollars end up with the Chinese government (known as ‘foreign reserves’).

But that’s not the end of the story because those dollars need to earn a (safe) return for the country.  So the majority end up buying US Treasuries.

China has total foreign reserves of around $3trn with the largest part being in US Treasuries ($760bn).  Japan owns even more – $1.1trn.

As for the US, it needs to fund its budget deficit. Its annual borrowing is $1.8trn, funded by issuing new bonds.

So, given China and Japan’s accumulated ownership of US bonds, we can see how that can turn into ammunition.

And that is their ‘Trump’ card:  If China, Japan and others decided on the extreme measure of dumping US bonds that creates a catastrophe for the US economy and its housing market, US businesses and government finances.

China and Japan would need to tread carefully here because any dumping would harm the value of their own holdings and cause the US dollar to sell-off.  But there’s evidence of some of it starting already (see chart above and below).

The significant threat of further damage to the bond and currency markets is probably why Trump has reversed course, in fear of crushing the US economy.

The US Dollar sell-off this year ..

When the US dollar sells off, it reduces confidence in the US economy – for investors and businesses.  Combined with a bond market sell-off, that results in more damage to the US economy.

So Trump can’t continue to act recklessly and he seems to have discovered that already.  It’s unlikely China, Japan or others would dump dollar assets en masse but the option exists and that should be enough to water down the proposed tariffs.

If (or when) that happens, the markets will find equilibrium from which normality will ensue.  Whether that point has been reached, we can’t yet tell.

What This Means for You – Portfolio Strategy …

Our best strategy is to own a balanced portfolio that protects for now and captures future upside.

That means staying diversified and being aware of your exposure to the US, as I have warned a few times this year.  I think there’s a real risk that global investors will view the US as toxic as long as Trump is president.

One clear protection and beneficiary has been Gold. I have been adding to my exposure via ETFs and Options, earning a good monthly income at the same time.

And if you have your wealth managed by someone, check with them to see if they are effectively balancing your portfolio.

What you should not do is trade around and react to short term newsflow which is just low quality noise.

Stocks always fluctuate. That’s why they make great long-term returns. This will be a fantastic opportunity to pound-cost-average in – like with every historical period of volatility.

Stocks remain the best long-term passive wealth creation tool that exists.

Always Remember:

• Time in the Markets always beats timing the markets
• Stay Diversified 
• Minimise those leakages:  Fees, Inflation, and Taxes
• Financial Markets are a great source of recurring income  
• ETFs, Balanced Funds and Options achieve all the above
• Being educated helps you outperform 99% of the population

… to ensure your investments work for YOUR financial freedom (not someone else’s)     

And … 

For more guidance, our Investment Academy will help you implement all of this in a step-by-step way.   

Thousands of people have learnt how to diversify and pound-cost-average into low-cost, set-and-forget ETFs & Funds for inflation-beating growth.  And Options to create recurring income.

Click here to learn about our Investment Academy

Finally …

– Don’t take the above as advice as it may not apply to you personally

– Your Capital is at Risk

– You may not be covered by the FSCS

– Anything mentioned in a podcast or in a previous article was valid at that time and may not continue to be now