Crazy cat peekin’ through a lace bandana,
Like a one-eyed Cheshire, like a diamond-eyed Jack,
A leaf of all colors plays a golden string fiddle,
To a Double E waterfall over my back
— Jerry Garcia and Robert Hunter
It had to happen eventually, that I’d get around to featuring China Cat Sunflower in one of these notes. After all, the joyful, bouncy, two chord journey through what can only be described as a lyrical acid trip has comprised a significant portion of the soundtrack of my life.
The challenge was always with finding the right contextualization: how to offer relevant reference to a series of bon mots — about copper-toned Bodhis dripping silver kimonos, or Comic Book colors on a violin river, crying Leonardo words from out a silk trombone. But admittedly, the task is no harder than that associated with previous lyrical references offered in this space, for instance Lennon’s “yellow matter custard, dripping from a dead dog’s eye”.
But now the moment has arrived, because China Cat Sunflower 2019 is on. Or off, depending upon your vantage point. At all points since last Sunday’s Trump tweet fest against China (regrettably issued after last week’s issue went to press, and, as such, absent from the copy itself), the entire global capital market have become one big US/China Trade Talks derivative. Risk-embracing assets began selling off as early as Sunday night, and bounced around in lock step with the tone/content of every subsequent rumor or 280-character proclamation. I’m not sure if this is the best way to roll – in terms of either policy or investor reaction, but it doesn’t really matter, because that’s what we’re looking at. Equities had their worst week of this amazing year. Global bonds enjoyed a bidding frenzy that threatens to move the Swedes and the Danes into the lofty company of Germany, Japan and (of course) Switzerland — as countries that demand capital allocators pay them interest for the privilege of purchasing/holding their 10-year debentures. Take a look at the Commodities action if you dare, but remember: you were forewarned.
Of course, no one has any idea as to how this all plays out, perhaps not even the principal actors themselves. But one thing we can state for certain is that as of 12:01, last Friday morning, US trade policy includes a 25% tariff on an incremental $200B of goods imported from China. The list of products impacted is a long one, and to tell you the truth, I didn’t review it in detail (OK; I didn’t review it at all). However, I am confident in stating that if any consumers out there are in the habit of purchasing either Cats or Sunflowers from China, they should expect some sticker shock on their next orders.
I’ll be straight up with y’all: I could’ve lived without the drama, even if, inadvertently, it added some credibility to last week’s themes about a pretty entrenched resistance at the approximate 2950 level on the SPX. Well, the technicals held, but not for technical reasons. Inexorable fundamentals flared up, and it is for this reason that the resistance walls could not be breached. But one way or another, the Gallant 500 has now formed a Triple E Top (i.e. as opposed to a Double E waterfall) at these thresholds.
On balance, though, I will join the chorus of those we believe that the market held in pretty strongly in the wake of these machinations. Consider, for instance, that what seemed like a bloodbath all bloody week only rose to the dignity of a 2% correction, and this off of all-time highs. It certainly felt like worse carnage than that, and it perhaps bears mention that if this here market cannot withstand a two-percent downdraft on a tape that is still evidencing greater than 50% annualized returns, we probably have deeper issues than the current hissy fit between Trump and Xi.
China Cat Investors gathered themselves a bit on Friday, ironically in the afternoon hours of Tariff Day One, on the strength of rather tepid but on balance encouraging warbling from the Prez and his trade cops. China have not imposed retaliatory measures – yet. Next week’s summit is still on, and – best of all – apparently Chairman Xi sent a very lovely note to 45, extending his warm but powerful grip of friendship. So perhaps all is not lost.
The betting line favors the execution of some sort of deal, and I’ll avoid being stubborn and go with the chalk. The benchmark CSI index is off a titch more than its opposite numbers in the U.S.; in fact it has relinquished an eye-popping 24% in just under a month, and for what it’s worth, that particular correction was not from all-time highs, as those realms were last seen, ironically, in 2007, in the run up to that glorious crescendo of the Beijing Olympic hosting session. At that time, the CSI reached nearly 6,000; it’s now resting at a beggarly-by-comparison 37 and change.
All of which, when viewed through a lace bandana, would seem to suggest that the United States has an economic advantage in this here trade throw down. But don’t try to make that suggestion out loud — unless you’re prepared to be clobbered with counterarguments about such matters as the significant domestic political advantage enjoyed by the Chinese leadership. They are, after all, in permanent power, and can do what they want. By contrast, our top elected officials must face the voters in 18 months – an angry mob that won’t tolerate much (or, in fact, any) economic inconvenience.
But I’m not so sure that the counterargument prevails. Yes, Xi and his crew have absolute power, and beyond all of that, their populous is conditioned to accept short-term hardship in pursuit of longer-term gain. However, if that was the whole story, I suspect China would be full-on embracing a final trade showdown with us. If they hit us with everything they’ve got, it’s a shoo-in that we would cave.
So why aren’t they proceeding accordingly? My theory, as mentioned in previous editions, is that Team Xi does not wield as much power in practice as it does on paper. From my distant, largely uninformed point of observation, China looks like an oligarchy – akin to that of those nasty Russians. According to published reports, there are barely a half dozen denizens of that country that can even presume to reside in the Bezos/Buffet wealth zip code, but I suspect that these numbers are highly inaccurate. In the 18-odd years since the country entered the World Trade Organization, selected high rollers have been minting it like there’s no tomorrow. I would posit that a true rendering of Chinese individual wealth would reveal more than one trillionaire, and any number of individuals who could buy out Bezos with money left over for a very nice celebration luncheon.
If I’m correct on this score, it follows that these Fat China Cats want to keep what they have made, and won’t have much patience for an aggressive trade war that will bite into their holding valuations. Moreover, if history is any guide, these folks have hedged their Xi-based bets by placing their own agents in very high-level positions in the military. And let’s face it: it’s the military that matters – not only in China but in the United States as well. When all else fails, it’s the missiles and the bombs that guarantee the obligations of the governments that run the show (after all, what is even a unit of the USD other than a promise from the U.S. Government to back any claims it makes or are made against it?).
This is the reason that I’m pretty convinced that we’ll paper something with our frenemies across the Pacific in a timely fashion. Both sides have bluster, but neither can really back up any of its more hawkish rhetoric with true resolve. The money interests simply won’t abide it.
Of course, it is also true that the papering of a deal would be a largely symbolic exercise. It won’t bind anyone to anything. It will not, cannot be enforced. Post-deal, I suspect it’ll all be business as usual.
Still and all, it’s crucial for everyone that some sort of accord, or, at minimum, détente, is reached, as the alternative is an all-out trade battle where everyone loses. If you check your history books, you will find that many of the most gruesome wars in the history of humanity have begun as trade disputes. So let’s not let this thing get out of hand, ‘kay?
In the meanwhile, I fully expect this whole saga to continue to overwhelm any and all events in the financial news cycle – for at least the next couple of weeks and perhaps beyond. I won’t be particularly enjoying the spectacle, but will seek to endure it with cheerful countenance. If T and X break out their big signing pens, we probably crash through 3,000 like a fist through tissue paper; if they walk away, it’s look out below. But either way, it might not be the worst thing to break out of the 3% range that has sleepily held thus far this quarter.
And there really isn’t much else to report at present. I’m happy to report that the Philadelphia Semiconductor Index (SOX), while taking an unavoidable pounding in the wake of the trade action, is still clinging to a triple digit annualized gain. But just to give you another indication of how important this cross-border commerce is, a friend of mine told me that many Chinese tech companies – including the much-maligned Huawei – have purchased two year’s-worth of chips and other component parts – in fear of being locked out of American markets for an extended period of time. If so, the promise of a Q3/Q4 demand surge – particularly if talks break down – is very much in doubt.
Also, on a completely unrelated note, I came across the following graph, reiterating the troubles plaguing my former home state: the one who just elected a liberal billionaire governor whose plan to save the state is to increase taxes and (of course) issue more debt:
But I now somehow find myself living in the State of Connecticut, which only ranks 4th on this list. They’re talking about raising taxes here as well, which is bound to work like a charm.
But I reckon that’s all I got – for now. Happy Mother’s Day to all of you China Cats out there. And if sunflowers are part of your celebration equation, here’s hoping that they will revert back to reservation pricing before too long.
TIMSHEL