Don’t Bet the Ranch on a China–US Trade Deal, the Worst Is Yet to Come
Are the markets melting up before they melt down?
The Dow Jones Industrial Average is trading at yet another all-time high, ticking over 28,000 earlier this week.
It’s a similar story with the S&P500, reaching 3,121. Also sitting at all-time highs.
Whereas Australia’s major index, the S&P/ASX200, is sitting at 6,766. About 80 points lower than its all-time high it reached a few months back.
In the meantime, the US dollar price of gold is stuck around US$1,470. And I suspect it will bob along this price point for a little while longer.
For investors, this can be confusing.
The US market is steaming ahead, yet Aussie stocks can barely challenge a decade-old high. And the yellow metal is range-bound for now.
Normally, when gold is down and stocks are up, it suggests that there are no major risks in the marketplace.
Does that mean US stocks — and maybe Aussie stocks — are set to move higher?
If you follow mainstream thinking, then perhaps.
Overnight a collection of economists gathered in Sydney. All of them with the view that the trade war is practically over…
The president of UBS Asia Pacific, Edmund Koh, told the room that China has won the trade war.
Adding that China has less to lose from this, and reckons that a resolution will be coming before quarter one. Meaning that a resolution between our biggest ally and our best buyer could come as soon as March 2020.
Another notable expert in the room, Larry Jeddeloh, quoted a US defense document. Pointing out that China is using predatory tactics in the South China Sea, making them more powerful then we realise.
Furthermore, Jeddeloh noted that there’s only two things China wants from the US, with the Australian Financial Review writing:
‘Jeddeloh said the Chinese want two things to happen before they sign a trade deal. The first is to force the Americans to dump a bill put forward by Republican Senator Marco Rubio called the Hong Kong Human Rights and Democracy Act, which would place punitive measures on those who infringe upon “basic freedoms” in the Hong Kong.
‘The second thing the Chinese want, according to Jeddeloh, is for the US to lower tariffs.’
If these are met, then the trade war could be off, implied Jeddeloh.
The mainstream suggests to us that the US–China trade war could be all wrapped up not long after Christmas…
That view is completely at odds with Jim.
He has called the trade war’s twists and turns right for almost two years now. Not only does Jim think the trade war is far from over…
…but it has much longer to run.
Jim reckons markets are pricing the China trade war as if it was a ‘done deal’. Meaning stocks and gold are acting like all the risk has been taken out of the market.
Whereas he reckons the trade war is about to get a whole lot worse.
And investors could be caught off guard.
Until next time,
The recent rally in stock prices has had two main drivers (and no, earnings are not one of them; earnings have been OK relative to manipulated ‘expectations’, but they are down year-over-year).
The drivers have been Fed ease and good news on the China trade war issue.
Fed ease will continue and act as a tailwind for stocks over the next year. But the China trade war news is more problematic.
The market expectation is that the US and China will reach a ‘mini-deal’ (known as phase 1) in the coming weeks.
This might include a delay of additional tariffs planned by the US for 15 December, along with substantial commitments by China to purchase over $20 billion of US soybeans and hogs.
The tariff relief might go further to include a rollback of existing tariffs.
The Chinese purchase commitment might be larger than $20 billion.
Yet even this mini-deal is not a done deal…
Market priced for a deal…what if that doesn’t happen?
This mini-deal was supposed to happen on 17 November at a summit conference in Santiago, Chile.
The summit was cancelled due to riots in that city and no acceptable meeting venue for presidents Trump and Xi has yet been announced.
China is pressing for more concessions by the US in the meantime.
In any case, the market is priced for a done deal.
Any disappointment on substance or timing will throw stocks for a loss. Beyond that, there is almost no chance of a phase 2 deal or anything that would end the trade war once and for all.
The unresolved issues include theft of intellectual property, opening of Chinese markets to US investment, and cyber-espionage through Huawei and other Chinese tech giants.
A recent CNBC article describes another deeper and more profound impediment to good relations.1
China is one of the most horrific human rights abusers since the end of the Third Reich.
China is rounding up Uighurs and Christians and putting them in concentration camps.
The unlucky ones have their organs removed without anaesthetic to support an organ transplant industry.
The victims’ bodies are then cremated, exactly as the Nazis cremated Holocaust victims.
China has said criticisms of its abuses are not ‘helpful’ for trade talks.
But China’s reaction to criticism is not ‘helpful’ to the stock market.
The bigger question is why the US does business with China at all.
Slowing global growth and decoupling from China
Despite economic happy talk from Wall Street and the White House, the fact is that the global economy is slowing down.
The evidence for this comes from near-recession conditions in Germany, Italy, and the UK — and from steeply falling GDP results from the US and China. Global trade is contracting in lockstep with global growth.
The most recent productivity statistics for the US show an actual decline for the first time since 2015.
Considering that all economic growth is simply the output of two factors — population and productivity — these new productivity figures are disturbing.
Beneath these headline factors, there are even more troubling trends.
These underlying trends include specifics on manufacturing data, external liabilities, world trade in relation to GDP, shrinkage in the supply of ‘safe assets’, changes in global reserve holdings, and more.
Whether viewed as headline data or from down in the weeds, the combination of declining growth, increasing debt, reduced trade, and liquidity stress is not reassuring.
There’s little chance of a recession in the short run.
But investors who don’t prepare now for another liquidity crisis or financial collapse may regret it sooner rather than later.
All the best,
PS: As you know Jim and I are good friends. He’s regularly my go-to person for an alternative take on the market. However, my circle is far wider than that. Over the next couple of weeks, I’m going to start showing you exactly how big it is…and how you can benefit from it. Keep your eyes peeled.