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Why the Problems with the Stock Market and China Won't Go Away Anytime Soon

It is hard to believe that this trade war has been going for over a year. I think that we might be saying the same thing a year from now. There are elements of this situation that would require the world shifting to get resolved. Back in 1929, Congressman Smoot and Congressman Hawley thought a trade war was a good idea. The result was the deepening of the great depression and the end to both of their political careers.  


This trade war is not just another political negotiation. It is an all out economic war. There is the trading of tariffs which both countries have done. Then China delivered a blow over the weekend. They devalued their currency which is a bad thing for the US. It also helps reduce the impact on the United States imposed tariffs. They also reneged on an agreement that they would purchase agricultural products from the US. This is a blow to the farming community who President Trump vowed to support.   


So why can't this get resolved like other political fights?


100's of Years of Culture Says That China Is Not Backing Down


This is about diplomacy, honor, and respect which is not in our President's tool kit. He is negotiating this like a business deal. It is much more involved than that or this would have already worked itself out. Threats don't work. China could very well roll the dice and drag this out to the elections in 2020 hoping for a democrat in the White House. The new president would more than likely craft an agreement that looks like an advantage to the US but really isn't. 


It Is Not in President Trump's DNA to Back Down


You hit me, and I will hit back. That is how our President operates. It doesn't appear that is going to work. This is a war he is not willing to lose. In retrospect, it would probably have made more sense had he started this fight after a re-election. Now, this is a problem for his  re-election especially if it causes a recession.


The Effect on the Market 


Obviously this has a negative effect on the market. The biggest risk is the collateral damage of an economic war that is unexpected. It is always the unexpected that rocks the market. This trade war is fertile ground for surprises. 


So What Do You Do?


Know your risk level and be comfortable how you are invested. This environment is ripe for the start of a bear market. If you want to take our risk survey, go to this link. Take it and I will send you a written analysis of your risk tendencies which will help you in making decisions. If you have questions about how you are invested or want a second opinion, email me at bob@prudentmoney.com.

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