Here we are. At last. The long awaited "bake in" where the bad trade news is at last getting baked into the stock market. I have been waiting for this moment for a long time because we need everyone to understand that neither China nor the United States is going to give in so easily on trade. That means investors have to recognize that the president is leaning into slapping 25% tariffs on the last $300 billion in goods that are currently coming in here unfettered.
We need to bake in as much negative news as possible so if we are ever going to get it, a real bottom can be put in and it's not going to be easy. This market may have to go down a great deal more than it has.
Why have things gotten so grim? Oh, let me count the ways.
First, it's becoming clear to people that this is no longer a trade war; it's a war over who is going to lead the free and not free world. China is the first challenge since the old Soviet Union and the president is surrounded by cold warriors the likes of which we haven't seen since the Kremlin was going to bury us. We had Secretary of State Mike Pompeo on Squawk Box today and at times he sounded like a Secretary of War. In other words, it's become a little existential with the Chinese. It's all about what Vice President Pence outlined back in October of 2018 at the Hudson Institute: a godless nation that incarcerates its own citizens who want nothing more than religious freedom. The Chinese, he said, think nothing of stealing our technology to destroy our own profits with knockoffs they would not be able to build without our technology. They flood our country with imports with a supply chain that's impossible to replicate so we are stuck with them.
Second, the president is adamant that the tariffs will pay for themselves because he thinks that 21% of the 25% tariff is paid for by the Chinese in the form of price cuts that they themselves have had to put through to keep our business. The American people pay only 4% of the tariff and that they can easily buy product made in another country if they work hard enough to find it. Of course, in a world where Amazon (AMZN) is where you shop you can compare easily and pick the goods that are cheaper and are not made in China. As more and more goods are manufactured out of China, the president believes that the Chinese will not be able to be as aggressive in its military ambitions or its Belt and Road initiative. The 25% tariff also assures that U.S. companies would be nuts to open new facilities in China and that's vital if the Chinese economy is going to grow at the high speed the government needs to stay in power.
The one thing the president is adamant about: the tariffs will help close the budget deficit. He expects the tariffs to bring in $100 billion a year from the tariffs, a total of $1 trillion in 10 years. He is unshakeable on the math and he continues to say that that we will bear no hurt. He does not think it is a tax on the American consumer. And he never will. If you say it, you will most likely be fired. Remember firing comes easy to this president; he did it all of the time on TV.
Third, the president believes that the Chinese negotiate in bad faith and so they have to pay a daily price because of that. I mean think about it. We all knew Huawei is a bad actor. We have known it forever. It is written. I think that the vast majority of policy makers on both sides of our aisles agree. So why not just kick them the heck out. Why do this, ahem, Chinese water torture? It is typical of why it is so hard to get all of this negativity priced in. We keep getting this on again, off again, on again reprisal nonsense which just makes investors hopeful that there is some sort of thaw in the freeze. It is impossible to find a bottom when there are people who hang on for good news in trade or a reprieve at some point that will make it all good. It isn't going to be all good.
Fourth, because of the vacillating we believe that there could be good news but today we saw, as far as the bake in, that oil collapsed $4 and interest rates hit a low not seen in two years. That's the give up you need to help equities get to the bottom but it hasn't been hit yet because we have not had the big estimate hacks we need from those who believe that the 25% tariffs on the next round isn't going to happen. It should be up to all analysts to show their hands on what their numbers would be for their companies at 25 and presume the worst. Oil is presuming the worst. Treasuries are presuming the worse. Stocks haven't done so yet.
Fifth, the president believes that it is not difficult for companies to move out of China. The White House is confident that every company can leave China easily within the time frame - more than a year - he has given them. But because many companies didn't or don't expect the next round of tariffs they haven't taken action. They have to do so even if it's difficult because if the tariffs are made permanent than China will be a very expensive place to do business.
I think many companies haven't moved with the alacrity they should have. But this market is very concerned that there are not exceptions, that no company here will be immune, that, after the Huawei ban, no semiconductor company is safe and worst of all the biggest taxpayer in our country, Apple (AAPL) is incredibly exposed to retribution. I think that Apple is likely to be a big casualty of where we are going because the president is unlikely to deem it as a national treasure. It's more likely that the White House wishes that it take manufacturing out of China. Apple will get no credit that 2 million people here and more than 2 million people in China are going to be hurt if Apple's boycotted in China as a method of retribution for Huawei.
I think we haven't seen the final bake in to the cake until we see Apple in it. Maybe, given how negative sentiment might be, all we need is for the Chinese to utter Apple's name. Let the market take care of everything else and it will be done.
Remember, though, the president has one eye on the Dow. He might look at today's decline and start talking about his great friend President Xi whom I believe he now hates more than Senator Schumer and Speaker Pelosi, although that is a really high bar, and say that he is going to call Xi to get the talks back on track. Yes, he hates the Dow being down this big so much that he will flirt with a positive riposte.
And that's why this cake is so hard to bake. He keeps taking out key ingredients and putting them back in. Eventually the ingredients will stay in no matter what and investors will get the Marie Antoinette treatment President Trump is giving them: Let them eat cake.