Two camps. Remember, there are always two camps on China in the White House, the one that wants to do business on our terms and the one that doesn't want to do business if it hurt our national interest. Last night's arrest of the CFO of Huawei, a $100 billion in sales telco company was a huge win for the latter camp, the one that's had it with China and regards it as a predator nation that wants to rule the world.
Let's go over the stakes here because they are high and huge and were integral to today's selloff.
The peace faction in the White House, led by Larry Kudlow, the president's chief economic adviser, and Treasury Secretary Steve Mnuchin, wants to sell the Chinese more goods, including grains, because farmers vote, planes, because Boeing (BA) is a huge employer and automobiles because the President is sick of letting our so-called trading partners rip us off with tariffs when we are pretty much free trade all over the place.
Then there's the war faction, led by Peter Navarro, the president's trade rep, with fellow travelers Vice President Pence and Robert Lighthizer, who is the head negotiator with China on trade who really doesn't seem to want to do a lot of trading with the enemy. This is the faction that says some pain must be taken, even if it hurts corporate profits, if we are ever going to stop China from trying to not only be a toe-to-toe superpower but a dominant country. This faction holds that we need to starve the Chinese of their export dollars, because it feels the Chinese do not play fair, want imperialist control via its infamous Belt and Road initiative, and would love to dominate us militarily.
This group looked like the loser in Argentina's G-20 meeting, the one where the president granted China a stay of the 25% tariff solution, meaning Trump wouldn't take tariffs from 10 to 25% in January. Instead it would be the end of February, a helpful bit of time for our companies that source in China to get away from that country's manufacturing.
But in an amazing almost 24-like day, a reference to a television show where the republic was at stake every hour and the jets were always 20 minutes out, our President sat down with close friend President Xi and reached a historic cooperative framework to do business at pretty much precisely the moment when the single most damaging action I can think of to doing more trade was occurring north of the border, the arrest of Meng Wanzhou, the daughter of the founder of Huawei, the huge telco conglomerate.
The charge is a serious one, trafficking in American technology with Iran, in clear violation of the embargo with that country.
What's incredible here is that you have to believe this violation was incredibly brazen or what the heck would the Canadian authorities be doing our bidding. This isn't cartel assassination for heaven's sake where extradition by the Mexicans can happen. This is trade. It has to be criminal, which be a huge derail of the White House Peace Camp's efforts.
Is this a sign that we mean business? Was it a coincidence? Who knows.
But we do know that, like the ZTE Iran violations before this, these are serious issues that directly address what the hardliners have been saying all along: you cannot trust the PRC and this company is actually run by the PRC.
To say this is an escalation is one of the bigger understatements of the year. To say that it could wreck any further negotiations seems reasonable. No matter what, it is a gigantic win for the no-trade war faction. Which means, to me, that any tech company that does a ton of business in China, including Apple (AAPL) or Micron (MU) or Intel (INTC) or Skyworks (SWKS) or Qualcomm (QCOM) , is worth less today than yesterday and until we know more we have to figure more downgrades are ahead and more pain is to come unless the CFO is released and allowed to return to China, and even then, we are in about as uncharted waters - at least when it comes to our international tech companies - that I have come across in my near 40 years in the business of picking stocks for a living.