December 11, 2018
It was truly bizarre to watch the carnage in financial markets last week upon the arrest of the Huawei CFO in Canada and hear the explanation from the Canadian Prime minister that this was a routine arrest at the request of the U.S. Justice Department and thus it was not politically motivated. While technically that might be true, the stock market sure did not buy it, as the market proceeded to disappear into a black hole, with the retail investors’ favorite index, the Dow Jones Industrial index, declining up to 800 points.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While the alleged felony of the Huawei CFO caused great confusion for investors, who aggressively sold after the market gapped down on Thursday, the index found a low before noon and rallied impressively into the close. In the investing business, you prefer a bad open and a good close to be relatively sure that the market is close to finding a bottom. Things looked good at the close on Thursday – until Friday, when Felony #2 hit the market.
Friday’s admitted felonies (which amounted to eight counts of financial crimes) belonged to Michael Cohen, President’s former personal lawyer, whose announced misdeed derailed the stock market Friday. Cohen admitted to committing these crimes at the direction of “Individual No.1,” and despite cooperating with the Special Counsel’s office, he must serve serious time behind bars with only minimal leniency. The Special Counsel’s court filing said so itself. If I were “Individual No.1,” I sure would be worried…but, as it is the policy of the Justice Department, a sitting President should not be charged with a crime.
Then the question arises: If this is just a “policy” and not the law, could that policy be changed? If I were Individual No. 1, I sure don’t want to hear a positive answer to that question.
So now we have a wild week of trading where the market gapped up on the good news of the China trade war truce – which became a textbook invitation to sell, after a sizeable run up in the preceding week – and then a market not reacting well to Michael Cohen’s felonies. In baseball, they would call that a curve ball.
The Huawei-Cohen 1-2 Punch
I don’t have great experience in how to analyze felonies as economic events, but I know something about macroeconomics and security analysis after 20 years in the trenches in the fascinating world of finance. In my experience, if the alleged Huawei CFO felony and the admitted Michael Cohen felonies do not turn out to be economic events, the market should rally because we are way too far away from a recession, and the economic backdrop is still positive. But I think the potential for the Huawei CFO alleged felony to turn into an economic event is large and difficult to forecast as to how much it might spiral out of control.
A Washington Times article (“Huawei arrest threatens global markets, Trump-China trade truce”) quoted David Dollar, a senior fellow and China scholar at the Brookings Institution, saying “the move was what U.S. officials said it was: a move to punish Huawei for trading with Iran in defiance of U.S. sanctions.”
The same article also quoted Dean Cheng, senior research fellow at the Heritage Foundation’s Asian Studies Center, who spelled out what is on most investors’ minds: “Both sides are looking at this through their respective lenses and seeing it verifies what they think. It will make it much harder to trust each other. The two largest economies are eyeball-to-eyeball in a showdown, and now you have the CFO of one of the primo companies from one country seized in a third country and awaiting sentencing. What does the rest of the world make of all this?” Mr. Cheng also pointed out that the ripple effects are significant, especially for European countries already confronting Washington over the Iran deal.
I genuinely hope that President Trump will finish his first term, get a trade deal with the Chinese, and denuclearize the North Korean peninsula, but the repercussions from his erratic nature, so far contributing to the felony conviction of his former personal lawyer, Michael Cohen, is contributing to this stock market volatility. And the arrest of the Huawei CFO in the middle of an important trade negotiation with China looks like one hand of the administration does not know what the other hand is doing.
Even if President Trump did not know that the Huawei CFO was about to get arrested in Canada as he was shaking President Xi Jinping’s hand, he must appreciate how this is perceived by the investing community. I don’t know if President Trump can do anything about the release of the Huawei CFO – after all, she is still in Canada and that is a decision for the Canadians – but it strikes me a compromise worth pursuing in order to get a very important trade deal done. It is also possible that President Trump knew about the arrest and by facilitating the release of the Huawei CFO he would get on the good side of China.
I certainly would not put that type of maneuver past the person who inspired Trump: The Art of the Deal.