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

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Includes: BIBL, BXUB, BXUC, CHGX, CHN, CN, CRF, CXSE, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, EQWS, ESGL, FCA, FEX, FLCH, FWDD, FXI, FXP, GSEW, GXC, HUSV, IVV, IWL, IWM, JHML, JKD, KGRN, MCHI, OMFS, OTPIX, PGJ, PMOM, PPLC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TDF, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USMC, USSD, USWD, UWM, VFINX, VOO, VTWO, VV, WCHN, XPP, YANG, YAO, YINN, YXI, ZF
by: Jeff Miller
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 to understand politics, negotiation and compromise. I have highlighted this before on issues like Greece and the asserted collapse of Europe and concerning various US policy debates.

Here is what we should expect:

  • Decades of history will not be reversed in a few months. Be happy for some progress.
  • The outcome will be a compromise. It will not be a complete success for either side, but each will trumpet what they have accomplished.
  • Nothing big will happen until the last minute. This is the way that partisans demonstrate they have accomplished as much as possible.
  • Eventual relief on the most important reciprocal tariffs.
  • Some progress on the intellectual property issues.
  • Some immediate relief on existing boycotts, e.g., soybeans.

I expect significant improvement from current expectations for two reasons:

  1. It is in the interest of all. Political processes gravitate toward these outcomes.
  2. Trump supporters are feeling the pain and will exert increasing pressure for a deal.

Long-term investors should emphasize legitimate signs of progress or failure, avoiding the false drama of the daily “explanations.”

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.