WASHINGTON. Mrs. Market Maven and I were on holiday in Ireland last week, our first visit there in over 20 years. And whenever we take time off, Mr. Market always manages to stage an epic temper tantrum. Last week was no exception. President Trump and his trade negotiators collided with the Great Trade Wall of China, confronting absolute Chinese intransigence on the trade front. Negotiations went nowhere. And Wall Street, for the most part got whacked. Save for a bit of optimism that carried stocks higher on Friday. The bulls needn’t have wasted that ammunition.
Today, Monday, market action is even worse. Last week’s universally “expected” trade deal unraveled completely. Turns out the Chinese essentially blue-penciled out every single critical clause in an allegedly agreed-upon a new trade agreement. This “final” agreement that wasn’t would have put a decisive end to China’s ongoing manufacturing and tech thievery. That’s an advantage that country has enjoyed for decades, and clearly they have no intention of giving it up. US negotiators, according to numerous sources, were gob-smacked by these last-minute wholesale changes. Negotiations quickly came to a screeching halt.
The Great Trade Wall of China blocks the road to ending the US-China trade war
A report, publicly available via the Schwab trading site, details the main issue that scuttled this week’s “sure thing” trade talks.
“… there is more risk to investors for a deal falling through now than there was a few months ago. First quarter economic growth in both the United States and China exceeded expectations and may have emboldened both sides to hold out on key concessions. Also, the talks have been challenged by efforts to create enforcement mechanisms, since China wants an immediate lifting of all tariffs rather than only after a period of good faith, according to The Wall Street Journal.”
A thoroughly frustrated President Trump finally unloaded on the Chinese by imposing tariffs on practically everything that escaped Round 1 and jacking up the current tariffs as well. Predictably, over the weekend, the Chinese indignantly retaliated, threatening major tariffs and tariff increases on US goods – particularly agricultural goods, which they know will cause problems for the President in America’s breadbasket. The Chinese government said their own new tariffs will be imposed on June 1 if The Donald doesn’t back off and give the Chi-coms everything they think they’re entitled to. Which means everything. Which is what they’ve been used to getting from American presidents for decades. The Great Trade Wall of China is getting reinforced with a vengeance.
How Communists “negotiate”
Problem is, the Chinese government is not used to dealing with a President who doesn’t cave on a “deal” when threatened. Communists always negotiate for a total win. And by holding out forever, they get exactly what they want. That’s because Communist governments are not really subject to a fickle electorate. Democracies are. That’s why the Commies always win. They never care who their actions hurt, including their own people.
Alternatively, Communist governments like the People’s Republic of China will make a few “concessions,” sign the agreement, and then proceed to violate it right and left as if they’d never signed it in the first place. (See Vietnam War.) And the US just watches and issues empty threats. Heads, they win. Tails, we lose. Never fails.
ZeroHedge weighs in
ZeroHedge fills in a few more blanks.
“Following some soothing words from both the US and Chinese sides on Friday that while talks to avert a tariff hikes had failed, they were ‘constructive’ and there was grounds for ‘cautious optimism’ for the future, the standoff between the U.S. and China abruptly escalated over the weekend when China’s vice premier Liu He said that China is planning how to retaliate and listed three core concerns that must be addressed, and on which it wouldn’t make concessions, ahead of any deal including:
- the complete removal of all trade-war related tariffs,
- set targets for Chinese purchases of goods in line with real demand and
- ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations.
“Commenting on this list, the Editor in Chief of the Global Times, Hu Xijin, who has become a real-time translator for Chinese unspoken intentions on twitter, explained that ‘from perspective of China’s politics, there is little room for compromises. They will insist. This political logic won’t be changed no matter how much additional tariffs the US will impose.'”
Trump gets little backing at home
Trump is actually trying to bring this time and money-wasting crap to an end. But the Chinese government, apparently relying on fake news reports in the media and gossip from their Democrat friends, figures Trump is finished. They calculate he’ll be out of office in January 2021. So they’ll just stall in the meantime and wait for the Social-Democrat patsy that will succeed Trump. Then play their usual winning game. Which the new Social-Democrat prez will declare a “victory” for the US. All the while, the Chinese will continue reinforcing their Great Trade Wall.
But too bad for them. In his usual, elegant New York manner, Trump just told them to “fuhgeddabouddit.” Now, it’s game on. For real. This turnabout suddenly forced Mr. Market to reward bearish “risk-off” investors and punish the current (but rapidly diminishing) legion of “risk-on” Wall Street bulls. It’s a nasty about-face, and the bears were right to start anticipating this outcome last week.
The result today: A massive and still-ongoing crash. Within minutes of Monday’s opening bell, the Dow Jones Industrials took a header and declined a massive 540 points or so before attempting to recover. As we write this, approaching 11:30 a.m. ET, the Dow seems to have decided recovering wasn’t worth the effort. That average is heading even lower toward a nearly 640 point decline at the moment. Who knows where this will go for the rest of the day? We could get another reversal like Friday. But this decline is nasty, and we don’t think optimism will prevail today. The Great Trade Wall is winning this round.
Dow Jones Industrial Average villains: Boeing, Caterpillar and Apple
Today’s big villains, as one might expect, are a pair of industrial giants. Namely, Boeing (trading symbol: BA) and Caterpillar (CAT). Both heavily depend on exports and China is a very big customer.
Making matters worse for the Dow, the Supreme Court just ruled against Apple (AAPL) in a long-pending class-action lawsuit filed by App Store customers (i.e., trial lawyers). The suit complains that Apple’s commission structure is unfair and has cost consumers millions of dollars for the better part of a decade.
Today’s ruling simply allows the lawsuit or lawsuits to proceed and thus doesn’t involve damages. But potential damages stemming from the actual suit could be significant. Add this Sword of Damocles to the US-China trade war where Apple is (inadvertently) a central player and you have an Apple stock dump-athon currently underway. Over 25,000,000 shares have already traded, mostly on the downside. And AAPL shares are currently down nearly 5 percent on the day, or minus $10 per share, standing at $187.19 per share. For now.
Both the Dow and the broader-based S&P 500 are off approximately 2.5 percent as we write today’s report. The tech-heavy NASDAQ is faring considerably worse, off roughly 3.12 percent at the moment. That’s because Apple isn’t alone in facing a catastrophic supply chain mess due to its hugely symbiotic relationship with the Chi-coms. That’s something the company shares with a host of other US tech companies that also face damage resulting from a worsening trade war.
(UPDATE: At 1:10 p.m. ET, the Dow is down 711 points [-2.7 percent] and sinking; the S&P 500 is down 78.03 points [also -2.7 percent]; and the NASDAQ is off a massive 282 points [-3.5 percent]. Where’s the fallout shelter?)
How to save what’s left of our portfolios
What to do? We’ve pared a few of our positions at modest losses, including most of our position in the broad-based Chinese ETF, symbol GXC. We’re holding our position in Alibaba (BABA), given its mostly domestic market in China, although that stock is down sharply this morning. (We have no use for the Chinese government. But there’s a trade here somewhere.)
Additionally, we’ve pared positions in a few world market ETFs, as foreign stocks, for the most part, seem to be declining quicker than our own.
We’re also keeping an eye on the bond market. Even as they threaten those retaliatory tariffs against US goods, China is muttering about dumping at least part of their massive holdings in US government bonds. We’re holding off on wholescale dumping of positions, at least for now. But we might peel off a few more positions on any snapback rally. Assuming we get one.
It could be a bleak week for investors
It’s just plain ugly. Unless the worm turns fairly soon, it’s a good bet that the Chinese will impose almost any kind of suffering on their own people to wait the US out. It’s the way the Commies always roll. And if their people complain. Well, Commies know how to deal with that as well. It’s a luxury the US simply doesn’t have. They have their Great Trade Wall. But we’re still having a tough time building our own Southwest border wall. What a country.
Communist governments have nothing but contempt for Western capitalist democracies even though the latter have proven to be a better, albeit sloppier, economic model. The US is still here even as socialist utopia after socialist utopia has collapsed over the past 100+ years.
If Trump figures out how to win against these totalitarians, it would amount to a major miracle by an order of magnitude.
But sadly, at the moment, the better bet is on the Commies and their Great Trade Wall. They only care about themselves and don’t have to worry about elections. They can incarcerate any of their own citizens that bitch about this. Or worse. And that’s a big time advantage in “trade negotiations” like these.
This whole China trade mess may be our clearest signal yet that in 2019, the old “Sell in May and go away” adage may prove to be the best advice ever. At least for home traders who handle their own investments. Rest assured, we’re ready to increase our own cash positions here, and have already begun to do so. The Communist Chinese are not about to tear down that Great Trade Wall any time soon.
– Headline image: Taming the Dragon. Cartoon by Ben Garrison. Used with permission.