I can't help but think that the pending trade deal with China, which has been long on sizzle, will be extremely short on substance. We have been getting the sizzle day after day since the beginning of the year, as if it were a scene from the movie Groundhog Day. Bill Murry keeps waking up each morning to see Larry Kudlow on television, telling us things are going very well and we are making good progress. Hmmm…
It happened again this morning -
Source: Seeking Alpha
To be fair, it isn't always Larry. Sometimes, Steve Mnuchin carries the trade baton for the Trump administration. I will give them both credit, considering that every time they repeat the claims of progress, they produce a "hopium"-fueled boost to stock prices, which is their primary objective. If it keeps working, why not keep doing it?
The enthusiasm these prognostications have produced has led to one of the strongest market rallies on record since last December's low. The S&P 500 has risen 24% since that time. We must go back to the beginning of the bull market in 2009 to see such an explosive move over fewer than four months. Prior to that, we must go back to 1999. Rallies like this don't happen often, which begs the question, is today more like 2009 or 1999?
When Larry and Steve don't have time to prognosticate, any one of several Fed governors are more than happy to fill the void with jawboning commentary designed to cajole markets higher. Sometimes, we get a multi-board-member approach, as we had today, when Larry was followed by Eric and Charles with more easy-money platitudes.
Source: Seeking Alpha
Realize that beyond trade talk and Fed speak, there isn't anything concrete behind the rally. To the contrary, we have seen earnings expectations and economic growth projections deteriorate continuously. So, there really needs to be some substance behind a trade deal with China that validates the enthusiasm we have seen in share prices to date. I've got concerns.
It appears that we have tempered our demands that China rein in subsidies for its state-owned industrial companies, which was a primary focus of negotiations, to speed up the chances of finalizing a deal in the next month. Perhaps, there will be some progress on improving intellectual property protections and ending forced technology transfers, but I don't expect to see a lot of details. Enforcement is another issue which I don't expect to see spelled out.
The Chinese will probably agree to buy a whole lot of soybeans, natural gas and other stuff from the U.S. over a certain number of years, but we will have to determine how much of that was going to be purchased anyway. Additionally, our gain will be someone else's loss, which does nothing to lift the rate of global growth. I suspect the headline will be more impressive than the incremental number.
Then, there is the issue of tariffs. Will President Trump drop tariffs that range from 10% to 25% on $250 billion of Chinese goods if the Chinese only agree to meet the U.S. halfway on critical issues? I think that if tariffs remain, it will disappoint investors.
The bottom line is that President Xi is not going to agree to anything that makes him look weak and, in turn, President Trump look strong. Any agreement will also probably involve a larger role for the Chinese government in its economy, which runs counter to U.S. objectives.
The market has been on a tear in expectation of a monumental trade agreement between the U.S. and China. My expectation is that a deal will be announced, but it won't live up to the hype from Trump administration officials or the expectations of investors. It may be a classic case of buy the rumor and sell the news.
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