May 29, 2019

With about a month to go before the G20 summit in Osaka, it is unlikely that we will see any more key developments on the trade front between China and the U.S. The U.S. has already declared that it will cut off Huawei from key components and technology, but it has given them a 90-day waiver to “stock up.”

It looks like the Chinese either never intended to make a trade deal and were just stalling to buy time, or they are testing the limits of President Trump, who may have oversold the progress of the trade deal as “90 percent done” and “on the 5-yard line” just days before he tweeted his tariff hikes. It is very likely that the U.S. trade negotiators were mis-led in calculated fashion into this awkward position.

If readers of this column want some top-notch entertainment on how Asians tend to negotiate, I would recommend the 1993 film Rising Sun about the takeover of a fictional U.S. semiconductor company by an equally fictional Japanese conglomerate. Despite the numerous entertaining twists and turns, the film does a good job of delving into the “cloak and dagger” strategies of how some countries negotiate. At any rate, this certainly appears to be true about the calculated last-minute U-turn by the Chinese trade delegation.

If the Chinese have decided to go into a full-blown trade war with the Trump administration, that means they have concluded that they have more to win without a trade deal than with the one that seemed “90 percent done” just a few weeks ago. I suppose we will find out soon enough if the Chinese were merely testing President Trump or had decided long ago not to have a trade deal.

Right now, this trade friction is not yet an economic event, but it has the potential to become one very quickly. This is why the 10-year Treasury yield dropped to 2.29% last week, below the fed funds rate. This is why the eurodollar and fed funds futures markets are calling for an interest rate cut by the Fed!

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The classic slope of the yield curve, as reflected in the 2-10 spread, is still not inverted, even though both the 2-year and 10-year note yields are dropping, as the trade headlines worsen and as German bund yields go further into negative territory. (Europe and Brexit are another big source of global deflation.)

While a deal can still be saved (if the Chinese were merely testing Trump), the worst case scenario of no trade deal (where the Chinese were just buying time) should make the economic environment much more hostile, suggesting further drops in Treasury yields and perhaps a Federal reserve rate cut, especially if the Chinese have decided to devalue the yuan, which would be a deflationary shock to the global economy.

We should not forget that the December 1993 yuan devaluation sowed the seeds of the Asian Crisis of 1997-1998. The 1993 34% yuan devaluation capped a period when the yuan was devalued from 3.73 in 1989 to 8.73 in 1994. The trouble is that the Chinese economy is now 20 times larger, so a devaluation to counter U.S. tariffs and create the necessary inflation to inflate away part of the mountain of debts in the Chinese financial system will have a much bigger effect on the global economy than it did in 1993.

An Anecdote on Chinese IP Practices

I have an acquaintance, a semi-retired tech executive who used to work for a company that makes optical components for telecom equipment in China. My friend relayed and interesting experience he had while working for the company in China.

When the executive arrived in China, his predecessor warned him that there were likely some eavesdropping devices in the offices and that he should take sensitive discussions out of the office (reminiscent of the film, Rising Sun). Our tech executive flew in a sweeping team from Japan (out of concern that any such service delivered within China might be compromised). The Japanese team swiftly presented him with a map of 300 listening devices and warned him not to disrupt the devices as they feared that they will just show up in different locations a month later. Removing eavesdropping devices would be pointless, as this was a normal practice in China.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives