The Trade War between the US and China keeps evolving, and the longer it lives, the wider it spreads. The human rights protesting in Hong Kong was seemingly something the Chinese government did not anticipate and has been playing a big role. Tensions are even being felt between the National Basketball Association and China, as politics are spreading throughout commerce and social issues. The NBA is in the midst of a Chinese tour of preseason games which got caught in the crossfire and almost stopped before it started. The game between the Lakers and the Nets took place, but there was no postgame press conference. In fact, the players were banned from speaking to the media at all. That didn’t stop the rest of the world from talking.
Stating the obvious, China is a huge market for everything. It has a population of a billion-four. That is four times bigger than the United States. The Chinese people really like basketball. The NBA is very popular in China. Nearly 500 Million people watched NBA basketball last year. That is a much larger number than the American population as a whole. This was a significant test for many parties involved. Freedom of speech was tested. Loyalty of country versus sports fanaticism is also at play. The priority of business dealings over political and social beliefs is under pressure. Beliefs are strong on both sides. That is unlikely to change. In fact, they probably get stronger.
Freedom of speech is not embraced in China the way it is in the United States. Even though we’re finding more and more difficulty with differences of opinions in America, freedom of speech was and still is the 1st Amendment of the Constitution. Our Founding Fathers deemed it essential to our young republic. Of the 27 Amendments to the Constitution, freedom of speech is number 1. The Chinese government doesn’t agree, but did acknowledge the American right in our country. Freedom of speech and human rights are issues that China is on the wrong side of according to the western world. Both have been exposed quite a bit in recent weeks. China knows it’s vulnerable here in the global court of public opinion.
Back to trade. The Stock Market sold-off fairly violently earlier in the week with rumors that the Chinese trade delegation cut their visit short. Then, losses were erased when it was reported that they were not only not leaving early, but had a visit to the White House on the agenda. President Trump said trade talks between US and Chinese officials on Thursday went very well, reducing fears about a potential lack of progress before another meeting today. Stocks rallied further. There are no details, only rumors, about the discussions as I type. There is next to no likelihood of a deal on intellectual property or government subsidies. It is most likely going to be about commodity purchases. Many are also looking out for a currency agreement, which could lead the US administration to delay or eliminate a tariff rate hike scheduled for October 15. China is really hurting economically, as these tariffs weigh heavy. It has also been felt in America. With Hong Kong and the NBA being thorns in the side of President Xi, and the coming election and impeachment inquiry in President Trump’s, they both need a win. Both sides need a deal desperately. Trump needs a good deal though. A weak deal will most likely backfire on him ahead of next year’s election.
Breaking this thing down: this is a temporary truce. It’s being called a “partial deal.” What does partial mean, you might wonder? You’re not alone. None of the action items in this so-called partial deal are really structural in nature. The scheduled tariff increase in October seems to have been delayed. The White House is rumored to be contemplating the removal of the tariffs scheduled for December as well. President Trump described negotiations as “very, very good.” Those in the know believe this partial deal includes what they’re calling “early harvest” agreements on areas like currencies and intellectual property. However, the deal appears to be a repackaging of previous China concessions. China also appears unwilling to implement more major changes to its economy, such as eliminating subsidies to state-owned firms and allowing data flow across its borders. These were the final 10% of the deal that was 90% done last Spring. They’re the most important. This preliminary agreement paves the way for a larger agreement when the two Presidents meet in November. A grand deal just seems very unlikely still. But the Stock Market gets excited about anything related to positive tones on trade.
Treasury Secretary Steve Mnuchin said something interesting when asked what to make of the Stock Market rally in anticipation of a deal. He said, the Stock Market is always right. We disagree. Though the Stock Market is often right, as it anticipates events and prices them in real-time, we think the Bond Market is more accurate in speaking truth. The Bond Market sniffs out everything. If the Stock Market is always right, what statement is it making by trading sideways for 22 months with no material progress? The Stock Market seems to be pricing in a lot of the potential good, but ignoring the potential bad. It feels very vulnerable to us with so many growing risks out there. The Risk/Reward balance feels out of balance. That’s what the Bond Market is telling us. It has our attention.
On a personal note, 24 hours after a life-altering event, being woken up to flames in our neighborhood, I find myself reflecting on how fortunate my family is that the damage was limited. There were no deaths, no injuries and every home was saved. The firefighters and first responders were just AWESOME. A potential fire had always been in the back of mind since buying my house in 2007. Our family had an emergency plan in place. With such little time to act in the waking hours, we followed that plan. Shelley and the girls took the animals with sparse possessions and jumped into the car and drove to the Safeway parking lot, where so many residents congregated. I went through the house rapidly with some thoroughness to get our passports and other important items. There wasn’t much time to think. I met my family a few minutes later. Anticipation is the key to success. My girls learned it real-time: how one responds to adversity means everything to an outcome. This is what we do professionally. We establish well thought-out plans. We execute them and refine them along the way. We learn. We adjust. It’s very intentional. We prepare for anything that comes our way. Some things are quite predictable. Others are not at all. We are Financial First Responders. That’s who we are. That’s what we do. We keep priorities with discipline and purpose, at times, under extremely difficult circumstances. Life throws curveballs. Life doesn’t always turn out the way you thought. We’re in the business of life. We’re in this together.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
