November 20, 2018
This past week had investors dealing with gyrating markets, wild headlines, and what seemed to be some rips in the fabric of this nearly 10-year-old bull market. Heading into what is supposed to be a highly confident time of the year – especially during times of a strong domestic economy – the thunder of a banner third-quarter earnings season is being swept to the sidelines by the high-profile politics of a countdown with China on doing a deal so the market can check the “tariff” box and trade higher – delivering the catalyst that satisfies the widespread thirst for a year-end rally.
The political ping-pong match being played by President Trump, China’s President Xi, and the senior staff members of each nation is going down a bad road, in my view. On Friday, through a tweet, President Trump reiterated his claim that China wants to make a trade deal. He said that China sent a “large” list of things they are willing to do, but the list is not yet in-line with the President’s standards. Nevertheless, the market, desperate for a positive solution on trade, reacted positively to the President’s comments.
Also, a more dovish perspective from Fed Chairman Jerome Powell acknowledged that the global economy was slowing, which he called “concerning.” Powell tried to downplay recent stock market turbulence but did admit that the Fed is “looking really carefully” at how financial markets, the economy, and business contracts are responding to rising interest rates. Powell gave both bond and equity markets a huge vote of confidence when he said, “We have to be thinking about how much further to raise rates, and the pace at which we will raise rates,” adding that the Fed’s goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.”
So, let’s put these responses from Trump and Powell into perspective, because they are arguably the two most powerful men in the world – sorry President Xi, you are #3 on the short list of “Who Matters Most in the World.” The S&P plunged by over 10% in three weeks and the yield on the 10-year benchmark Treasury gapped higher from 2.82% to 3.24% from early September to early October, producing a nasty correction. Now we have a change in tone from both Trump, tweeting “a deal is in the works,” and Powell, back-peddling hard on his now famous “we’re a long way from neutral” statement.
What we have here is the bond and stock markets dictating how Trump and Powell are shaping domestic policy – and quite frankly, it’s unsettling that the animal spirits have taken hold of the narrative of what has become what I call a “drama queen” market. Not doing the right thing to reign in the decades of abuse by China for the sake of making the year-end numbers is nothing short of shameful. I’d say Trump ought to back off from promising a deal when Wilbur Ross, Mike Pence, Peter Navarro, Robert Lighthizer, and Larry Kudlow all state we are a long “country mile” away from any real deal.
Will America Finally Stand Up to China’s Excesses?
This past weekend, both Mike Pence and President Xi exchanged harsh criticism of each country’s trade policy, and Pence laid out in no uncertain terms what the situation is and what needs to happen if there is any shot at coming to terms. China is grossly abusing the boundaries of mutual trust. But would anyone expect any other sort of behavior from a nominally communist country set on economic, political, and military dominance? I’d say, “Take off the rosy red Chinese glasses and get a clue.”
And yet, as painful as it is for me to admit, Wall Street and Main Street investors seem to be stooping to a bad case of ‘weak knees’ and sniveling millennial values, fully capitulating to the long-term risk of letting the U.S. get “played” once again because of our heroin-like addiction to short-term market gains.
Until there is an end to China’s theft of intellectual property rights, forced exchange of technology to Chinese companies in return for access to their markets, restrictions of U.S. companies taking large stakes in Chinese companies, government sponsored cyber-attacks on all manner of U.S. property, imposing tremendous barriers to foreign companies entering its giant market, recognizing international waters in the South China Sea, and dialing back its aggressive “Belt and Road Initiative,” then there should be no let-up in tightening the grip on China’s economy.
This is what goes on in China. Aside from getting the shaft in almost every channel of business, Ron Baron, at his 2018 Baron 27th Annual Investment Conference, made a big point about the over one million Uighurs that have been committed to “re-education camps,” which the Chinese state has denied exist.
Why does Beijing condone the annual “dog meat festival,” where over 10,000 dogs are skinned alive and boiled down as an aphrodisiac for thousands of crazed Chinese men? This is insane behavior and yet it is completely ignored by American intermediaries because of the power of the almighty dollar (or yuan). Have our elected officials lost their soul? So, before everyone gets all steamed up about why a deal isn’t getting done yet, it’s because we’re dealing with something akin to the devil himself, and thankfully, we have some people that are sticking to principles.
Ronald Regan broke Russia by outspending the Kremlin in a massive arms race and, aside from Vladimir Putin baring his chest on a sad-sack horse from time to time, Russia is of no global economic significance these days. China is leveraged to the eyeballs, as Ivan Martchev and I have noted for several months here. The U.S. has a huge opportunity to neuter China now and hopefully bring about dramatic concessions that will alter the way the world does business with a corrupt regime over the next 100 years.
This needs to happen now, despite any short term pain it may cause.
So, heading into the holiday season, when many squeamish investors that just want to make a buck and want the whole China thing to just go away, we need to see what’s at stake. China is going to do what it takes in its negotiation tactics to try to get Trump to do a deal on their terms. My fear is that Trump puts his finger in the air, like a true reality show star, and compromises, so as to take a bow. It kind of fits the profile of his deal-making history, as anyone knows who got stung by his bond dealings in Atlantic City.
What the Chinese don’t want to deal with is Mike Pence – because he “gets” it. The real question is: Does today’s America’s populace have the stones, or even care, to put down a fire-breathing dragon like China? I guess, for the sake of the American republic, it is this last question that concerns me the most.