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Remarkable Week

It was a remarkable week that saw investors fret over the notion Jay Powell & Co might not cut rates, just because.   I think there is a serious movement to usurp the power of the Fed and put it in the hands of the Executive Branch or Congress to control their vaunted money printing machine.   I’m cool with rate hikes based on the economy, but not the out-loud-guessing Powell espoused last year, which sent the market into a tailspin.

I’ve become more intrigued with the notion the Fed not only doesn’t have to trigger recessions as they have in the past, but it should work to help the country avoid them.  Certainly, while economic data is coming in at levels given up on by the mavens years ago, there is more room for growth.  Why can’t wages grow at four percent a year? 

China Trade Deal

Everyone has gotten comfortable with the notion a US-China trade deal was done and just a matter of cleaning up a few details.  I was in that camp as well, and still think a deal happens, which is why I applaud the tweets from President Trump on Sunday.

Not only was China dragging its feet and beginning to ask to alter things tentatively agreed upon, I think they were emboldened by comments from former Vice President Joe Biden who expressed little concern about China being a threat to America.

Tweets

Donald J. Trump

‏....of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

Donald J. Trump

‏For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billion Dollars....

Is Big Business Really Looking Out for Consumers?

Big business and Wall Street screaming about these tweets are once again showing they care more about business bottom lines than American jobs and know-how.  Sure, they mask this by saying they are looking out for consumers, but the fact of the matter is, there is no business that will not have to eat the lion share of higher costs.

Moreover, unfair trade and theft of intellectual property shouldn’t take a back seat to corporate profits.  This is why capitalism is losing in the hearts and mind of the general public.  They should be happy to put skin in the game and not become allies of China leadership that has openly violated rules and expressed determination to rule the world by hook or by crook.

According to the Economic Policy Institute, a left-leaning think tank that does good work (I often have different opinion on the conclusion of their work) or financial relationship with China is anything but fair or free trading.

“The China toll deepens”

Growth in the bilateral trade deficit between 2001 and 2017 cost 3.4 million U.S. jobs, with losses in every state and congressional district

https://www.epi.org/publication/the-china-toll-deepens-growth-in-the-bilateral-trade-deficit-between-2001-and-2017-cost-3-4-million-u-s-jobs-with-losses-in-every-state-and-congressional-district/

If Americans knew and agreed the current makeup of our trade relationship with China cost jobs in every single congressional district, I suspect there would be great support for tough action.

Conclusion

I still believe a trade deal gets done.  The stakes are too high for both countries, but more so for China, which could reach its goals; albeit, with a longer time line, without its economy being completely derailed.  That said, China must be weighing holding out until the presidential election, as it did through the midterms hoping a change in the White House keeps the status quo.

Certainly, hearing democratic front runner Joe Biden say China is no threat must have elicited cheers throughout Beijing.

Positioning

We sent alerts suggesting subscribers take profits on five positions last week, the most in any single week in years, because we expect the rally to become more selective.  So, everyone should have a fair amount of cash to take advantage of this huge selloff at the start of trading.  

I think a big market dip on non-financial news is a gift for investors. If you are not a current subscriber to Hotline service, click here to get started.

Communication Services	Consumer Discretionary	Consumer Staples
1	4	1
Energy	Financials	Healthcare
1	1	1
Industrial	Materials	Real Estate
2	3	0
Technology	Utilities	Cash
2	0	4

Today’s Session

To put today’s equity losses in perspective, and get a feeling for who is winning and losing and why, the Trump administration believes it has the upper hand.

In the United States, the S&P 500 and NASDAQ finished last week at an all-time high.

Year to Date

• S&P 500 +16.4%
• Dow Jones Industrial Average +12.8%
• NASDAQ Composite +21.1%
• Russell 2000 +17.4%

This has been a strong year for China’s main stock markets, but it’s been tough sledding since 2015. 

Overnight, the Shanghai Stock Exchange lost 5.6%, but it is still up 16.5% for 2019. The Shenzhen Exchange is off 7.5%, but it is still up for the year.  Both indices peaked on April 19, up more than 32% for the year.

Shenzhen is home to many Chinese technology companies, and it is seen with pride from all factions, including Xi Jingling, whose father worked on reforms to transform Guangdong into a first-class province with Shenzhen as its centerpiece.

Shenzhen Stock Exchange

As of now, China still plans to send its senior trade delegation to the United States this week, and the government has worked hard to limit viewing of Trump’s tweets in the country.  It’s harder to hide or mask the damage in the stock market, however.  Some believe the ultimatum from Trump makes it harder for Xi to save face.  By the same token, a plunging stock market could be a much larger and more expensive embarrassment.

Technical Support

On closing basis, the key support point is 26,078 for the Dow Jones Industrial Average.  Keep that in mind, as we are all tempted to buy this dip.

 

Comments

China is the enemy of the world, and Russia's Putin knows it along with Trump. China must be crushed never to rise again, period. Robert Fay on 5/6/2019 11:06:01 AM

Thank you Charles for calling these PUKES OUT.. they are no different then the Trump Haters + Is Big Business Really Looking Out for Consumers? Big business and Wall Street screaming about these tweets are once again showing they care more about business bottom lines than American jobs and know-how. Sure, they mask this by saying they are looking out for consumers, but the fact of the matter is, there is no business that will not have to eat the lion share of higher costs. fred wiese on 5/6/2019 2:06:47 PM

What about all of the farms that the Midwest farmers lost because of tariffs? Who paid for all of the government kickbacks to the farmers due to tariffs in 2018? We did. Tariffs are a bad idea and never have worked in the history of time. They are a tax on the USA. The market is a roller coaster ride due to Trump. A little stability please. AND- stop the lies POTUS. Rich on 5/6/2019 9:43:45 PM

Good blog, Charles. I completely agree with your comments about the Fed. I could not believe it when they were raising interest rates frantically before the last recession. We were sitting on one of the worst bubbles in history with no doc housing so it was obviously not the time to aggressively raise rates. I also agree with your comments on China. That has been an obvious problem for 50 years, but our politicians never recognize or work a problem until it overtakes us. China has developed both a military and an educational system that are running way ahead of us. I think the only way we can catch up is for them to screw up internally which is a good possibility in a communist country. Our lack of foresight almost made us kiss our rears goodbye with Japan in the 40's. China is a lot further ahead as well as many times larger than Japan, and we won't be able to catch them the way we are going now if they don't implode. Don Riggs on 5/7/2019 1:44:41 AM

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