Are we going to remain hostage to these trade talks between China and the U.S. for the duration? Is this all that really matters in the end, and as long as the fighting goes on we are done for? Is there no real hope for advancement?
No. That's just not the case.
If it were the case, do you think the averages would be anywhere near where they are now? Do you think we would have had such a magnificent run for so many stocks?
The answer, from 30,000 feet, is that the trade talks, as tense as they are, simply are not an impediment to the entire market advance. In fact, they are an impediment to a much smaller amount than people realize. I am going to explain what happened in the last four days, tell you why they seem so frightening, and then give you the real skinny on what's occurring and what can occur in the future.
A week ago, we learned that the globalists in this administration, and here I am speaking about Treasury Secretary Steven Mnuchin and Chief Economic Adviser Larry Kudlow, coupled with their private sector allies, Hank Paulsen and John Thornton, former Goldman Sachs (GS) execs and Stephen Schwarzman, CEO of the Blackstone Group (BX) , had high hopes that the U.S. could reach a deal with the Chinese that, perhaps in return from staying the Dec. 15 tariffs, could open up the Chinese market to our financial companies in an unfettered way.
On the other side, the less globalist, more realist advisers to the president warned him that if the globalist wing kept talking deal, what would happen is that China would change the terms it's offering. The hardliners said that the globalists were tying the president's hands and that he would not be abler to walk away from a deal that had already been made.
The president seemed willing to go with a deal and had spoken positively about it, which made it seem that we were about to have our first real break in the talks and that sent the stock market higher in anticipation of a deal. He apparently felt this way, despite that the hardliners have repeatedly told the president that China had made no efforts to cut down cyber hacking -- something I know is the case because I talk to literally all of the cyber security companies -- and had no real intention to sop the theft of intellectual property.
The president didn't have long to wait. This weekend he apparently learned that China was no longer content with a stay of the Dec. 15 tariffs, it now wanted a rollback of the existing tariffs as a precondition for any deal involving the so-called "phase one" agreement, which the president increasingly was seeing as a giveaway to large, undeserving banks, anyway.
So, in two days, the president struck back. First he brought back tariffs on steel imported from Argentina and Brazil. Why not? Those are countries that China has historically sold steel into that could be dumped into the U.S., aided by the pathetically low valuation of their currencies -- hence the president's lash out once again about the federal reserve and how strong the dollar is because our rates are so high relative to most of the developed world.
Second, backed into a corner by his own globalist team, the president decided to throw a real roundhouse, saying maybe it would be better to wait until the election to make a deal.
Here, I think the so-called omnipotent Chinese government -- a government that is perceived by the mainstream media to be made up of geniuses who never fail, again overplayed its hand. Imbued by endless talk of impeachment, I think China forgot how to count votes: No Republican senators have broken rank with the president, and they are the jury. Right now the jury has judged the president to be innocent. Second, I don't think China sees the common ground the leading Democratic candidates other than Joe Biden have with Trump. They are pro-worker and they don't want opioid deaths from Chinese fentanyl and they are even getting push back from big businesses that enough is enough with China. As long as China was trying to be greener, there seemed to be some commonality. But now China's going headlong into coal plants again, which means that it will be the sworn enemy of every Democrat. So the "why not wait to the election" statement of the president is a not an idle threat.
Now all of this news broke Monday and Tuesday. At first investors seemed skeptical that Trump meant business against China when he put the kibosh on Argentinian and Brazilian steel. By the end of Monday, however, they were getting rumblings that things were a little off track.
By 4 a.m. Tuesday, the pajama traders started feeling their bullish oats, though, sending the futures higher, giving the appearance of a bounce-back.
Then, by 5:18, the president made the off-handed comment about the open-ended time frame on the tariffs with China. Plus, he flaunted new tariffs against the French, right in front of the French leader, saying that tariffs will double on cheese, wine and fancy goods because of the insistence of France that it can tax American tech companies, companies the president admitted he didn't even like, but certainly reserved to do the taxing.
That sent the futures cascading to levels that made it clear that Friday and Monday dip buyers were mistaken.
So what happens now? I think that we have to remember that not everything hinges on trade. Let me give you some examples of how a lack of a trade deal actually helps more stocks than it hurts right now.
First, remember, we are a service economy that runs on employment and we are pretty darned close to full employment. Second, we have secular trends, trends like digitization and excellent medical and pharmaceutical companies that do not get hurt by higher tariffs. Third, when tariffs go up, bond prices advance, because it means economic growth should be slowing and that causes higher yielding stocks to rally. Fourth, the immense power of our major retailers to squeeze even all-powerful China on prices keeps prices down and the federal reserve in check from raising short-rates. If anything, the Fed stands ready to lower rates, even as the Fed acolytes keep up their long-standing tradition about getting everything wrong about the direction of the Fed funds.
Finally, the averages are no longer industrial enough to be impacted longer-term by trade. Ironically, China has been so great at destroying our industries that it has created a world in which we don't have enough industrial stocks to keep the averages down. So when the president threatens to make no deal, it hurts China more than us.
So why do we not shrug it off entirely? Tech. Tech's too big. We have immense tech companies with tons of business in China including the largest of all, Apple (AAPL) . The idea of Apple somehow crashing because of China has been a major theme for more than 150 points of the stock.
It bleeds into so many other stocks that Apple has become the faux Achilles heel, faux until China really does something, which it hasn't yet.
So what happens is the negatives surface first and they bring down everything. Then the stocks that do well from the sectors I just described, bounce back. But tech? It's endlessly negative and that's the real issue we face right now. Discounts can lead to great opportunities. These will be like that. Just be aware that the market is slow to figure out the positives and fast to identify the negatives, which is why we have days like today, and could have a lot more like them.
