As I write this, the Dow is down about 700 points. One of my favorite market sages pointed out this morning that “we’re only one tweet away from a new high!” Yes, the market is just that volatile now and could turn around quickly (which means it is dangerous to short anything). Obviously, the market is “freaked-out” about the China negotiations or lack thereof.
Are we going to have a trade war with China? We’ve been in such a war for months already. Nobody knows how long it will last or how deep the market will drop. If we were dealing with mature, rational national leaders, we could assume they would “fix” these negotiations, but we are not. While President Xi is rational by Chinese standards, don’t forget the Chinese mindset is very different from the American one. We think in positive terms of working hard and doing well. They think in terms of grievances, as they have already been invaded or controlled by a multitude of countries. Their sense of independence is even stronger than our sense of independence. Maybe, it is a contest of ego versus paranoia? I don’t know. My biggest fear is we will push the Chinese too far. How far is too far? Nobody knows.
A better question is how bad could it get? A serious trade war could ease the U.S. into recession pretty quickly, but not a depression. China would be hurt much worse than us. Importantly, at this point, I don’t see any element of a financial crisis on the horizon. Sure, they could “dump” the $1.2 TRILLION of U.S. Treasury Bonds that they own, but they would only be hurting themselves, as the values of those bonds would drop badly, hurting the Chinese sellers.
If the global financial crisis of 2007/8 caused the Dow to drop 52%, I think that is the worst any trade war or recession could hurt us. Do I think that will happen? Absolutely not! But, I do see it as the outer boundary. Since then, the Dow has risen over 300%. We will recover the today’s loss or any other losses from this trade war. Of course, the market falls like an elevator and rises like an escalator. Be patient! This too shall pass . . .