Market Remains Resolute

The market opened under a fair amount of pressure for the second consecutive session on Monday. Conventional wisdom points to trade war worries. Nonetheless, just like last Friday’s session, major indices climbed off the canvas and closed at or very close to the high point of the day.

The Russell 2000 closed at the high of the session, establishing another all-time record. 

The Russell 2000 is the equity index most reflective of the U.S. economy, which continues to fire on all cylinders. That action dovetails perfectly with the latest polling from Gallup on “Satisfaction With the way Things Are Going in the United States.”  The 38% level is the highest in 12 years.

The market has become bifurcated with blue-chip names held back, mostly because of global economic growth and trade concerns. The NASDAQ, driven by technology, and the aforementioned Russell, continue to edge higher. 

The next couple of weeks will be huge as investors gear up for another round of earnings, where expectations are high for a resolution on trade.

When to Fight & How to Win a Trade War

The debate over fighting a trade war is a moot point these days, as President Trump is keeping one of his biggest campaign promises. He is taking the fight directly to America’s trading partners. With that in mind, I find nonstop coverage of the “trade war” by mainstream media to be disingenuous. 

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For instance, the reports that tariffs, which haven’t even gone into effect yet, are already slowing the global economy. The source for this reasoning is the World Bank. The problem with these kinds of warnings is they are mostly covering for a slowing economic growth, which has already been modeled for by the World Bank.

In fact, our trading partners, including China, have serious issues from aging populations to massive debt.  Of course, our European friends are in desperate trouble. So, if any media references the World Bank or the International Monetary Fund (IMF) as sources. that suddenly, the “trade war” is slowing and the economy, is disingenuous.

Fighting from Position of Strength

President Trump has issued a new warning to China of an additional $200.0 billion in tariffs.  The new levies would add 10% on top of any existing tariffs already in place.   I know the globalists and Trump haters are going to rail, but this is a logical move in a battle that has been joined.

Last year, America imported $505 billion in goods from China, while China only imported $130 billion in goods from the United States.  So, there is no way China can retaliate dollar for dollar even if U.S. service exports were added (China imported $54 billion in services from the United States in 2016).

The administration is intent on using all its leverage and fight from a position of strength.

This is the perfect, and perhaps the last time America will have the opportunity to get better trade deals. Despite what the media has been promoting, the United States economy is not only better positioned than others, including China, but our stock market also underscores that strength. 

Overnight, the China Shanghai Index was off almost 4%, and it is off more than 18% since January 24.  The index is down more than 30% over the past three years.

                                                                                                                                                                                                             *from peak 6.12.2015

There are a number of issues weighing on China’s stock market. More than likely, it’s the rapidly expanding debt obligations.  According to a report from Bloomberg economists, the country’s total debt to the Gross Domestic Product (GDP) is set to source to 323%.

This is happening as China’s foreign reserves are at a seven-month low and down almost $1.0 trillion from the June 2014 peak of $3.99 trillion.

Overnight, the People’s Bank of China injected $31.0 billion into its economy making it more than $60 billion this month, the most since December 2016.

Public Relations War

I understand China’s citizens have no voice to push back on their government, but money has ways of fleeing, and that has already been a significant problem for China’s government.  In fact, government run media is trying to calm the waters:

People’s Daily

June 19, 2018

“The steady development of China’s economy has not changed”

"The steady development of China's economy has not changed." Du Fei said that at present, China's sound economic fundamentals have not changed, and the economy has the characteristics of strong resilience and large maneuvering space, and has great potential for maintaining stable growth. A solid foundation and a forward move in the dynamic balance and development is still the main theme of China's economic development.

Summation

I still believe there will be a resolution to the trade disputes because our partners, whether they’re a “friend” or “foe,” cannot afford to give up access to the American consumer.

In addition to the economic risk, it is just not a smart move for China, Canada, Mexico and the EU to want to escalate this situation just to save face.

I don’t think America needs trade surpluses, but that misses the point.  We are losing in trade, with deficits so large, it’s the kind of transfer of wealth that can’t be excused because we got cheaper televisions and steel in return.

I think the administration can win this, so I ask everyone not to panic.

Meanwhile, keep focusing on real developments and real momentum.