It’s the Economy, Stupid

Weekly Report - 09/04/2018

It’s the Economy, Stupid


That statement was attributed to the first Clinton presidential campaign in 1996. It conveyed the idea that economics was the overriding concern of the people whose votes he sought. It is curiously apropos of conditions today. As the economics of trade disputations appear to be consuming the concentration and capital of the trading crowd.

The week that was

The world’s stock markets have been in tailspin for longer than 2 months, These drops are large enough, and happen regularly enough to create deep fear in traders’ and force them to withdraw their capital from equity markets. That is why prices fall: Sellers outnumber buyers. That is all there is to understanding why prices fall or rise. It is one of the few truths of economics. It is the market manifestation of the oft sighted law of supply and demand. The question of course is not why prices fall, rather, why are traders withdrawing their capital form these markets? As we like to repeat, there is no one reason for anything in the markets. They are too big with too many traders thinking too many different thoughts for there to be one explanatory variable as to “why the markets did…” anything at any given moment. But, when an event of serious enough proportions presents itself on the stage, well then we can indeed judge its impact and see its effect on the trading screens. That event is the trade dispute between the US and China. It is based on the premise that the US and its administration have about had it with China’s manipulative and unfair practice of making demands on producers who operate in China. Most galling is that the Chinese demand that manufacturers who establish factories in China must turn over their technology to the Chinese (51%) partner in order to be permitted to operate. Outrageous as this stricture is, the capitulation to it is more surprising. In order to indulge the universal corporate fantasy of penetrating and seizing market share in China every firm who indulged that fantasy has been coerced into complying with this excessive stricture. The Trump administration has said “enough”. A key insight to this dispute is the relative ammunition left on both sides. So far $143b have been stated by both sides for implementation. Only the steel and aluminum tariffs have been implemented to date. The US imports $550b of Chinese manufactures. The Chinese import $130b from the US. In other words the Chinese have expended all of the tariffs they can impose on US goods, whereas the US can impose tariffs on an additional $407b of Chinese goods…


The week ahead

We think the Chinese will surrender to the US demands to balance the playing field and cease manipulating firms that operate in China. Too much is at stake for the Chinese and they are indeed punching way over their weight in this dispute. There is also the upcoming US Korean summit in May in which the Chinese have perhaps the most important role as they are Kim’s principal patron. The situation is tense and destabilising as week 14 in the markets showed us. But as of the beginning of week 15, Asia stood up positively, on the first day of trading and the Europeans have opened their wallets too. We will see if the US follows suit. Should it indeed do so, then what we are looking for is to see if the Asians follow on with their second day of buying. This should stabilise traders’ fears. Not necessarily so, but likely so. We are of the opinion that the bull market is not yet over in equities as interest rates, while rising, are still too low to draw serious investors from the equity side to the debt (bond) side of the capital markets. We will look for rising prices in the equity indices as well as rising volumes. Once this cycle continues more or less regularly, in moderation of course after the recent battering, but recognizable nonetheless, we predict renewed buying in equity land.


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