Saved by the Fed? Or at least saved from what could have been a hideous day, one that seemed destined to be a really bone crusher and was still nothing to be sanguine about as the trade war with China keeps getting in the way of some real good news from a very dovish yet realistic Federal Reserve.
Today the Fed put interest rate hikes on hold, perhaps for the whole year, because, as we have been saying forever here, there is almost nothing in this U.S. economy right now that is stronger than it was back in October of 2018 when Jay Powell called for multiple rate hikes and we stepped up the trade war with China. Plus, there's no real inflation so why bother to tighten? Why not let things be. Those comments by the Fed were enough to turn the stock market from deeply in the red to nicely in the black before a bit of backslide in some of the averages.
You see when Powell says "it is a great time for us to be patient," because they are downgrading their economic forecasts, it's a very big deal. The change in policy, the recognition of the newfound weakness, means the bulls will not have to fight the Fed, perhaps all year, and that's a fantastic place to be even if earnings for most companies won't be spectacular. An economy that's good, not great, with a Fed that's done tightening, has often been one of the best kinds of markets. And an economy that is weaker because of problems that could be imported from overseas is even better because it means there's plenty that's good here that's worth investing in, especially fast growing companies that don't need a strong economy to expand.
But let's not get too crazily bullish because there are two things that have to go right for this market to go higher. We need to see the Fed stop it with the rate hikes. We got that, which is why some of the averages rallied.
And we need a trade deal with China. Ah, now that's a horse of a different color and it is why the stock market was getting clubbed before the Fed recognized that it really failed to anticipate the weakness that has now visited the U.S. economy. It's also why stocks gave up a nice gain after Powell gave you his new forecast and called off the rate dogs of war.
The Fed stopped the rate hike madness at 2 pm. Until that, comments by President Trump about the need to keep tariffs on China, perhaps even after a deal is reached, were weighing heavily on many of the stocks that rallied after the Fed announced its commonsensical view not to tighten into economic weakness, a decline that resumed about a half hour after the Fed spoke.
Trump's making these negative, hard-line comments because he believes he has the upper hand in the trade talks with China. More important, as we saw today, when will people realize that he doesn't trust the Chinese and isn't going to trust them until AFTER he verifies what they are doing?
So, he's talking about leaving the current tariffs in place even after a deal is consummated, if it can be consummated. And that's why the stock market went down earlier in this session. To me it is growing obvious that, the President, cognizant that he's doing well in the polls and the Dow Jones has been strong, can afford to make statements that one-up the strong stance that Ronald Reagan made against the Soviets.
This is all about history, not trade history, but military history, projection of power history, containment history. And it's about not being had again by the now formidable military opponent that is China.
That's why the President is talking about not trusting China with a removal of the tariffs until we can verify Chinese compliance with any agreements that are being reached.
How about a quick history lesson to give you some context?
I can't count how many times then President Reagan told the Soviets in the 1980s that he was willing to do a missile treaty and that he trusted the Russians. But he always emphasized, especially at a time of the big missile treaty of 1987, that there would be an extensive verification process to be sure the Russians were complying.
"Trust but verify" became the watchword.
Now we are at a crossroads in the China talks and it is becoming clear that Trump doesn't think you can trust the Chinese at all. I think he trusts his "good friends" in Beijing less that Reagan trusted his not-so-good friends in Moscow.
He believes they want a deal really badly. He recognizes, however, that their record of compliance is not so good.
You would think this is all about trade because that's what the media constantly talks about. But it is being driven by the Chinese ignoring a 2016 ruling by the Tribunal of the Permanent Court of Arbitration, otherwise known as the Hague, that the Chinese have no historical title over the waters of the South China sea. The Obama administration trusted China to obey the Hague. That trust was mistaken as the Chinese military moved aggressively into those waters.
It wasn't the first time that it was mistaken. Back in 2015 President Xi told President Obama at a White House visit that he had no intention of militarizing the South China seas.
Then Xi went ahead and did exactly that. James Mattis, when he was Secretary of Defense, warned repeatedly that the Chinese were taking claim of that stretch of water. But President Xi last June told him, "We cannot lose even one inch of the territory left behind by our ancestors," according to a New York Times story.
Mattis accused China of using "intimidation and coercion " for placing surface to air missiles in areas that are also claimed by countries such as Taiwan, the Philippines, Vietnam and Malaysia soon after he told Obama he would do nothing like that.
The Chinese didn't care.
The hardline trade people in the White House have said over and over again that they don't want to be had as they think the Obama administration was. They have the upper hand in the White House especially given the statements today from Jay Powell that inflation is negligible and the economy is fine, not too hot and not too cold. If the tariffs were hurting our country's trade or employment it would be a different story. If the tariffs were causing earnings of big cap companies to go down it might even be a different matter.
But they aren't.
So the President wants to risk the talks because of the poor Chinese record of obeying any agreement.
How at cross purposes are these two countries? The Chinese are talking about buying soybeans. Trump's talking about the end of theft of intellectual property. The Chinese are talking about maybe or maybe not buying Boeing planes. Trump's talking about the closing of state sponsored enterprises that regularly dump goods that hurts our industry. The Chinese are trying to assuage the President with a buy of semiconductors. The President wants the Chinese to stop trying to dominate the world with its Belt and Road and Made in China initiatives which project Chinese power all over the globe.
Yep, it is not about the trade gap. It is about the trust gap. And until people realize that, we are going to forever be playing this game of "will there, won't there" and when we get a "won't there," as we did before the Fed release then the stock market gets hammered.
Can a deal be reached? It's tough to tell because the Chinese don't even acknowledge that they are doing what Trump doesn't like. And Trump, for his part, isn't in a hurry. He sees U.S. companies fleeing China to get ahead of more tariffs. He is probably ignoring what Fred Smith, the CEO and founder of Federal Express (FDX) said last night, that China is too big an economy for our companies to leave quickly and it will remain a gigantic force in world trade. Trump fears being had more than he fears no deal.
So, don't jump the gun. It's terrific to have the Fed on the side of the bulls. But trade's not going the bulls' way.
At least for now.
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