The Real Trade War

It was another wild ride for the stock market, which saw all the major indices bolt out of the gate on a report of benign inflation from the Consumer Price Index (CPI) report, coupled with a super-strong report from the preeminent source on small business. This combination echoed the narrative of the jobs report last Friday, which essentially says we’re in a Goldilocks economy.

However, the four-hundred-point downward reversal in the Dow Jones Industrial Average (as a result of headlines and questions) says the stock market is afraid of the big bad wolf. That is a trade war that would upset the status quo so enjoyed by the elites.

Forget tariffs, this is about something much more pervasive and in-your-face, and that’s the brazen theft of American know-how.

China’s intellectual property theft, which could be as much as $600 billion annually by one estimate, and the Trump administration is ready to get justice.  Stopping the Broadcom/Qualcomm deal was just the beginning.

Ironically, the news put pressure on technology more than any other sector as they are both the biggest victims of this theft, but also the access to China even with the payoffs and rip-offs.

China Theft and Intellectual Know-How

Three Areas of China’s IT & Counterfeiting Theft:

• The high-end estimate for counterfeit and pirated tangible goods imported and exported is $41 billion.

• The estimated value of pirated U.S. software is $18 billion.

• The high-end cost of trade secret theft to U.S. firms’ estimate is $540 billion, amounting to 3% of GDP.

Office of the Director of National Intelligence’s

http://www.ipcommission.org/report/IP_Commission_Report_Update_2017.pdf

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Although China’s intellectual theft is well-known, the country is galloping ahead with its own technical abilities and could soon be a force without cheating. Competition is good, although it would be a shame to see China move to par with America and Silicon Valley from so many years of nonstop theft. 

This table is from one of many intriguing articles underscoring China’s rapidly improving abilities.

Data AI Technology Patents Granted

Click here to view the table.

Source: Author estimates using IPC code in Appendix 1 and PATSTAT database.

Note: USPTO: United States Patent and Trademark Office; SIPO: State Intellectual Property Office of The People's Republic of China; JPO: Japan Patent Office; PCT: Patent Cooperation Treaty; EPO: European Patent Office.

https://voxeu.org/article/trends-artificial-intelligence-technology-invention

Small Business Optimism

Yesterday, The National Federation of Independent Business (NFIB) released its February report, and it’s a barnburner. Optimism is at its second highest level ever, only trailing the 108.0 reading in 1983 and earnings at highest point since 1987.

Click here to view the optimism index chart.

Click here to view the small business earnings chart.

Fewer Small Business Hurdles

Taxes as the ‘single most important problem’ declined to its lowest voting level since 2006. The quality of labor continues to be a huge problem that will require a combination of public and private efforts to bring up to snuff. 

Outlook

• The biggest move came in ‘expecting real sales higher,’ +3 percentage points to 28%
• The biggest overall confidence in ‘expect economy to improve,’ +2 percentage points to 43%

Click here to view small business outlook chart.

“Small business owners are telling us loud and clear that they’re optimistic, ready to hire, and prepared to raise wages – it’s one of the strongest readings I’ve seen in the 45-year history of the Index…the fact that several components saw significant increases tells us that small businesses are flourishing in a way we haven’t seen in over a decade.”       -NFIB Chief Economist Bill Dunkelberg

My Conclusion: Small business is the heartbeat of America, and it’s showing signs of a strong overall Gross Domestic Product (GDP) and jobs growth in 2018.

Today’s Session

Stocks opened higher but drifted from the highest pre-open levels.  Economic data out this morning was disappointing on headlines, although nothing so shocking it should change overall economic narratives.

Retail sales were lower, but that mostly reflects gas prices and pulling back from peak-auto numbers.  The brightest spot is the rebound in building materials and continued strength in clothing, despite higher prices for apparel.

Food services (restaurants and bars) also echoed a return to casual dining by families feeling freer and richer than they did a year ago.

Producer Prices were slightly hotter than anticipated, +0.2 versus consensus of +0.1, but the CPI report underscores the fact these costs are not being passed along, just yet.