Getting Tough on China

May 10, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a week highlighted by one tweet.  That tweet, as you’ve probably guessed, was from President Trump who threatened to upend trade talks with China and increase tariffs to 25% on an additional $325 billion of Chinese goods.  Market volatility increased as investors tried to figure out the probability of a trade deal emerging by today.  That task was accentuated by the misinformation found in mainstream media and the seemingly contradictory tweets coming from the President.  To say it was a tumultuous week would be an understatement.  However, with no deal in hand as of last night, the President held true to his word and tariffs were increased on virtually all goods coming from China starting today.

Why should we care?  Well, there are two reasons you might want to take notice.  The first is that anything we buy that was made in China will become more expensive.  To be clear, it is not the manufacturers that pay the import tax.  The cost is born by consumers in the form of higher prices.  Everything from the clothing you buy to the smartphone in your pocket will likely go up in price causing a general increase in the rate of inflation.  This leads to the second issue which is that as inflation rises, consumer spending tends to fall.  Or put another way, each dollar spent has a smaller impact on growing the economy.  Rising inflation has the side-effect of slowing economic growth which is something we all need to watch.

The good news is that a trade war would be mutually destructive to both the United States and China’s economies.  I consider this good because it is in both countries’ interests to find a resolution sooner rather than later.  We expect China to retaliate in coming days with tariffs on U.S. products, most likely including a 25% tariff on U.S. auto imports which had been previously suspended.  This comes at a particularly sensitive time for Tesla who is just starting to sell its electric vehicles in China.  If this negotiation tactic forces both parties to come to an agreement, then it will not have been in vain.

In other news, it seems Iran is flexing its muscle one year to the date after the U.S. pulled out of the Iran nuclear accord.  Iran declared this week that it is no longer committed to the agreement and gives the remaining signatories (the U.K., France, Germany, China, and Russia) sixty days to implement their promises to protect Iran’s oil and banking sectors.  The decision is problematic given the tensions between the United States, China, and Russia.  Ultimately, it gives them the choice to follow President Trump or engage with the Islamic Republic in violation of American sanctions.  Given the tensions, it shouldn’t come as a surprise that oil prices are on the rise.  The energy sector will finish the week about 3% higher despite the market sell-off.

We also learned this week that pharmaceutical and biotech companies will be required to disclose prices in television commercials for medications that cost more than $35 for a month’s supply.  Not surprisingly, there is a lack of enthusiasm from the pharmaceutical industry who believes showing the list price of drugs is both misleading and could have the unintended consequence of causing those who are ill not to seek medical care believing they could not afford the treatments.  To be fair, this new requirement only applies to those drugs which are advertised on TV, which is a relatively small number of medications.  Occupying the top spot is Pfizer, which is responsible for more than half of TV drug ads during the most recent twelve months.  According to one industry analyst, the company paid more than $600 million for 37 unique ads over the past year, including nine for the medication known as Lyrica.  AbbVie is the second most affected, having spent $288 million on 18 different ads for top selling Humira.  Legal challenges are almost certainly coming with the drug industry preferring a mention of a pricing-related website in TV ads rather than outright pricing disclosure.  Expect to hear more on this topic.

In closing I came across a story that sounded so unusual I had a hard time believing it was true.  Well, in this case it turns out to be true.  Microsoft is working on an update to Microsoft Word that will use artificial intelligence to make your writing more politically correct.  For example, it might underline places where your writing exhibits gender bias, i.e. suggesting “mailman” or “Congressman” be replaced with “mailperson” or “Congressperson”.  If you use the term “gentleman’s agreement” it might suggest you use “unspoken agreement” instead.  The term “disabled person” would be replaced with “person with a disability” while the new version’s inclusiveness check searches for words or phrases that might be considered offensive.  This new feature should be available in June.  Now you know.

May 10, 2019

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