Are we having a commercial dispute with China, or are we in an existential crisis in which we are trying to turn the clock back to when we tried to contain the Chinese Communists?
Do we want to sell the Chinese more semiconductors, more iPhones, more pork and more elevators and planes? Or do we want to cordon them off and get them to give up their global ambitions?
We don't know the answers to these questions. That's what makes this moment so tough. We can't get a sense as to whether this is a moment when an endangered James Bond asks Goldfinger, "Do you expect me to talk," and Goldfinger shoots back, "No, Mr. Bond, I expect you to die."
Those who are conversant in commerce in the White House expect China to talk. Tuesday morning Larry Kudlow, the president's chief economic adviser, said he expects that there could be productive talks in September after the 10% tariffs on the last imports are put in place.
Those in the White House who are conversant in history want the Chinese to bend and stop stealing our intellectual property, open their markets, get rid of the bogus joint ventures, and then -- and only then -- can there be a real deal.
In actuality, I think there is a middle ground and a possible deal to be reached, but the Chinese have to give in on more than just trade.
I hear endlessly that what's happened is irreparable.
I don't believe that for a minute.
Why?
Because of the respective states of our two economies. The Chinese used to have all these state-owned enterprises that existed to employ as many people as possible. Because they were state sponsored, profit and losses didn't matter, the companies could then dump whatever goods they made to the United States.
Now 50% of Chinese industry is privately owned and we know that these companies are really hurting. There's a slowdown in capital equipment spending and they are feeling the pain of jobs departing to other countries to avoid the tariffs.
The president's staging of tariffs is a nightmare for China, because U.S. companies that can switch domains are switching domains, in some cases to the U.S., but in most cases it's ABC, Anywhere But China. Both camps need the exodus to continue.
We must never forget that Communist China's government has tried to stimulate internal consumption. And you have to applaud the Communists for creating jobs for about 400 million people in the last couple of decades.
But a lot of those jobs have been created on the backs of American working people, because China is still an export-driven economy.
In other words, a deal makes sense for them, even if they are playing the long game. They have a lot to lose if we shut the door on their $558 billion in exports to the U.S.
Now contrast our country's situation: We used to have great manufacturing in this country, but as we became a high-cost producer, the jobs went away. The president is trying to bring those jobs back, but it's difficult. There's a lack of skills on the part of our workforce, which something that can be rectified. But there's also the endless dumping from all over the globe, something that can't be rectified without tariffs and lower interest rates that would make the dollar more competitive. We just aren't a very successful exporter, which his why we only sell $174 billion in goods to them.
You have to ask yourself, who would you rather be: The U.S., with incredibly low inflation, tremendous job growth and plentiful natural resources, with internal consumption as the driving force for the economy? Or the Chinese, without plentiful resources, a currency with an inflationary bias, and a workforce that is challenged by the great job exodus?
I think I would rather be the U.S. Moreover, given the state of our economy, we do not need to do a deal. While that would be destructive for many of the industrials and technology companies that have businesses in China, I believe that we can get a commercial deal if we want to, but if we can't because the Chinese won't bend, we are strong enough right now to take the pain. If we don't take it now, I don't know when we can.
I think Monday's hideous decline stemmed from three things:
First, panic. It was a freak out over the obvious, which is a designation by the Treasury Department that the Chinese are currency manipulators. There isn't a policy maker on Earth who would disagree with that. It's part of the fiction that China's gotten away with for years, something our own country has simply let happen. Many hedge funds are up huge, and didn't want to have exposure to this market. Cash was king yesterday.
Second, a concern that the plummeting in treasury yields means almost certain recession. Money managers are hide-bound. When they see yields collapse, they don't look around the world and say, "No kidding, look at our high rates vs. the rest of the world." They say, "We must have a crumbling economy." They don't think to say that if you borrow money in Germany, buy dollars with euros, and then buy U.S. bonds, that yields will go down.
Unfortunately, a strong dollar is the bane of our existence, which is why, in a deflationary environment like we have, the dollar stays stronger than it should, which hurts our sales.
Third: Earnings are about to be eviscerated by any company that sells overseas, especially companies like Apple (AAPL) or Nike (NKE) . Look, it is true that our export oriented companies will get hurt with the tariff war. Someone has to eat these costs. Earnings growth could be muted for many companies.
But it is also true that WATCH -- my acronym for Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) and Home Depot (HD) , haven't had to raise prices much to deal with the tariffs. Moreover WATCH has some of the best sales they have ever had. That's right -- ever had.
That and strong employment make it hard for the Fed to cut rates more aggressively, even as it would help our exporters.
But let's go back to the commerce vs. containment dilemma. If we are just going to get a good commercial deal our companies' earnings will soar. If we don't get a deal, it will be more of the same, which is pretty darned good. Meanwhile, low rates make so many stocks more attractive than they should be otherwise. That's how Emerson (EMR) , with big industrial exposure to China, can report a suboptimal quarter this morning and not see its stock go down. That's how an Apple can hang in, no doubt abetted by the issuance of its credit card that no one's talking about, but will be a huge windfall. And, of course, Amazon, Alphabet (GOOGL) and Facebook (FB) have no China while Microsoft (MSFT) isn't going to be impacted, because China's not that much of a factor with its current growth engine, Azure.
OK, let's put it altogether. Because of our strong economy with virtually no inflation, we have the upper hand in the Chinese talks and, I believe, we could get a deal soon if we thought the Chinese were going to change their ways, not just their buying patterns. Alternatively, as important as the Chinese market is for some of our companies, it's not important for most of our companies.
So why not load the boat up with stocks here? We just had a huge rough patch that knocked stocks down about 6%-7%, depending on the index. But the market's worst enemy is what is left: 11% for the Dow, 14% for the S&P 500, and 18% for the Nasdaq. Those are huge gains. Tuesday's bounce was a good one. When companies reported good numbers, like Zoetis (ZTS) , the animal health company, Take-Two Interactive (TTWO) , the gaming company and Shake Shack (SHAK) , the burger joint, their stocks shot up. That wouldn't have happened Monday. For much of the day the market looked like it was going roll over, but it couldn't.
But there's plenty of signs that those three prongs of panic -- currency, yields and earnings -- haven't been resolved. I would think, therefore, there's more wood to chop, before we can advance. But that buyers of stocks that are down more than 10%-20% from their highs, with good numbers, will now be rewarded. It's just not as bad out there than many think it to be.
Apple, Alphabet, Amazon, Facebook, Home Depot and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club.
