China/U.S. Trade: Finding A Signal Amidst The Noise

Jeff Miller profile picture
Jeff Miller
38.35K Followers

Summary

  • China/US trade issues remain the most important issue for stocks and economic growth.
  • Initial reactions emphasize imperfections, not actual prospects.
  • It is a case of Trading, Fast or Slow.
  • Investors should avoid getting caught up in the false narrative of artificially exaggerated market moves.
  • Expect these issues to continue for (at least) 90 days!

The celebration of the Trump/Xi dinner in Buenos Aires lasted about three hours. What went wrong? This reaction was not a complete surprise, but the size and rapidity were attention-grabbing.

The market reaction fits the description I suggested in May: Trading, Fast and Slow. A small piece of news leads to a cascade of trading - algorithms trained to watch for key words, humans making a short-term directional play, technicians noting the “violation of key support or resistance,” and the subsequent media explanations. This confers an undue legitimacy on noise - tidbits of news without any context.

Here is how it plays out on the China/US trade story. In each case, let’s try to separate trading “fast” reactions from trading “slow.”

Issue

Fast - Traders

Slow - Investors

G20 Meeting

Not specific enough.

Reasonable outline with some initial agreement.

90-day Deadline

Too many issues to resolve in 90 days. No firm schedule.

A deadline is needed to prod negotiators. Extensions are possible, even likely, and that is fine.

Posturing, tweets and comments

Demonstrates a lack of trust and commitment.

Business as usual - will continue for 90 days.

Arrest of Wanzhou

Tactical effort by the U.S. to gain leverage. Timing (same day as the dinner) undermines confidence.

A separate policy path related to Iran. Preceded dinner plans, so the trade impact might not have been considered. The timing was a coincidence of travel schedules.

Differing communications from US and China

Shows lack of real agreement and the poor prospects for an eventual deal.

Shows why a dinner meeting is not a way to draft policy. A joint communique requires advance work by staff.

Prospects for avoiding an all-out trade war

Slim

An encouraging first step.

Conclusion

This is a typical example of the trading community’s failure

This article was written by

Jeff Miller profile picture
38.35K Followers
Seeking Alpha mourns the passing of Jeff Miller, on May 7, 2021. During his time at Seeking Alpha, Jeff attracted a following of close to 40,000 readers and published more than 1,500 articles. He was a portfolio manager at Incline Investment Advisors, LLC. Jeff also was President of NewArc Investments, Inc., and served as a university professor.....................................................................................................................................Jeff is Portfolio Manager for Incline Investment Advisors, LLC.,manager of both individual and institutional investments. A registered investment advisor, he was formerly President of NewArc Investments, Inc. Jeff is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. Jeff began in the financial business as Research Director for a trading firm at the Chicago Board Options Exchange. He investigated anomalies in the standard option pricing models, taught classes for beginning options traders, and developed new forecasting techniques. In 1991 he established a general research consultancy, working with professional traders at all of the Chicago financial exchanges. In 1998 he started NewArc Investments, Inc. Jeff has a commitment to the specific needs of individual investors. It is not a one-size-fits all approach, but one that emphasizes the unique circumstances of each client. Jeff also serves on the board of a small technology company. He occasionally serves as an expert witness in legal cases involving financial markets and hedging.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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