by Doug Kass
“I will eat my hat if this means anything substantive”… as “neither side is fully ready for war, but neither side will budge.” – Michael Every, Rabobank’s Head of Asia financial markets
- Xi is the “Wolf of Wall Street”
- The weekend agreement may backfire
- We may have three months of uncertainty that freezes business decision making – U.S. economic growth may slow and not reaccelerate
- An explosive market advance based on this weekend’s U.S./China trade news may provide one of the best shorting opportunities since September, 2018
- He said, Xi said
- Last night I moved (with futures +48 handles) from a small net long exposure to a small net short exposure
- I plan to expand my short book on any further near term market strength
A “pump and dump” scheme is a well known securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price or to otherwise benefit from the declaration.
Over this weekend, the trade war between China and the U.S. temporarily ended with a truce in which the U.S. agreed to keep the rate on existing tariffs for an additional $200 billion of goods at 10% for another three months in return for greater purchases of American goods. (In addition, China’s policy towards Taiwan and a nuclear free North Korea was also agreed by Xi and Trump).
President Trump has heralded the deal as “incredible,” but like the pump and dumpers in the brokerage boiler shops in Boca Raton, Florida and Long Island of years ago, the agreement had little substance in the face of the forceful and powerful deal headwinds and China interests – which principally involve the very structure of China’s economy, the nation’s reputation and the Chinese party’s authority.
While the worst-case G-20 meeting scenario (never a very likely outcome) is off the table, I couldn’t disagree more with the market’s Pavlovian response (with S&P futures +48 handles as I write this missive on a plane to Los Angeles yesterday). Indeed, of the hopes for good news heading into the weekend, the proposed agreement was on the lowest rung of positives. (Remember that Trump, many months ago, had rejected a Chinese deal to buy more U.S. “stuff.”)
I see the “agreement” as nothing more than a Chinese “Trump and Dump” scheme (though the meeting was anything but a “cold call”) – full of sound and fury signifying nothing – which failed to make tangible progress regarding the core and deep rooted structural divides that separate business practices and other fundamental differences. (Including, but not restricted to intellectual property rights, forced technology transfers and public sector subsidies for strategic industries).
The deal was a “nothing burger.”
It still leaves us with 10% tariffs which are not helpful and fails to solve the underlying problems. Effectively, all the agreement did was to punt the ball for another three months.
No All Clear Signal
Indeed the “agreement” might cause more uncertainty and a slowdown in U.S. economic activity and capital spending
China has effectively executed a “Trump and Dump” scheme that will likely artificially raise the short term trajectory of stock prices as poorly positioned market participants reposition – only to recognize, in the fullness of time, that the buyers of stocks on the news have likely been duped.
This agreement comes at a time that the Chinese and American markets are on the precipice of Bear Markets. It’s soothing message, which to some, may result in buying a continued ramp in U.S. equities , may be nothing more than providing an opportunity for China to resume aggressive means to reaccelerate domestic economic growth (like reducing margin requirements last evening).
He Said, Xi Said!
Not surprisingly, there was no joint statement following Saturday’s dinner. China didn’t reference the 90 day deadline nor did the U.S. highlight the One China policy. Rather, the agreement itself has already been interpreted differently by both parties – based on the official responses from the two countries.
For the U.S. there is a real risk that the three month hiatus or cooling off period may have the absolute contrary results – it could serve to spur more business uncertainty – delaying purchases and capital expenditures. This comes at a critical time in which signposts of growth domestically and overseas are worrisome and during a continuing pivot of monetary restraint.
Bottom Line
“You only think I guessed wrong! … You fool! You fell victim to one of the classic blunders – the most famous of which is “never get involved in a land war in Asia” – but only slightly less well-known is this: Never go in against a Sicilian when death is on the line!” – Vizzini,The Princess Bride
China has executed the perfect “Trump and Dump” scheme. The President didn’t receive a phone call from someone just as devious as Stratton Oakmont’s Jordan Belfort – he sat over dinner with him!
Trump has bought (and has apparently persuaded others overnight) into Dollar Time Group and the Aquanatural Company at the top without any knowledge of the company with the hope of riches, the need to show a “deal” (Its been a bad few weeks with Jamal Khashoggi, Michael Cohen, a weakening of the U.S. economy, the downtrend in markets, etc.) and the desire to be more popular.
And so might investors have been duped who buy the post trade agreement euphoria (S&P futures are +48 handles at 6:30 pm on Sunday night ) – with the quixotic ease of a phony deal and “quick buck” anticipated.
The divergence in world views between China and the U.S. were not addressed on Saturday. That schism is fundamental, structural and the rift will likely be long lasting – measured in years not weekends.
It is also my view that this weekend’s trade agreement may serve to further slow down domestic economic growth as businesses grow more uncertain of the ultimate outcome and recognize that this trade dispute will be measured in years and not in weekends.
As I wrote last week:
“I have written much about trade over the last few weeks – most recently this week’s “Is Trump Manipulating the Market With His Frequent China-Trade Comments? #MUVGA!”
What follows is a great quote made in 1972 by Chinese Premier Zhou Enlai — it’s something to keep in mind when listening to opinions on the subject of China/U.S. trade.
When he was asked about the impact of the French Revolution (of 1789), he replied “It is too early to tell.”
That quote is from sixty years ago.
Unlike many, I believe the Chinese can outlast us in a trade war.
China is a patient civilization. The country takes the long view of history (often measured in hundreds of years) — as expressed in the witty and Oscar Wildean response above by Enlai.
While Americans are focused on 2020, the Chinese are focused on 2120!
The hardliners in the White House and the dopes on Wall Street don’t have a sense of history.”
I see nothing in this weekend’s agreement to alter the view that the dispute will be long lasting (with similar characteristics of the beginning of the 1948 “Cold War) and is likely to be more far reaching than trade. (See Spence’s two recent speeches at The Hudson Institute and at APEC, here and here
With both leaders facing their own problems, Xi got Trump to kick the can down the road for another 90 days without extracting much in return. Our President heralded the agreement as a victory (and he will likely voice that in tweets today about the market’s spectacular response) though he exacted only a temporary respite from what will likely be years of negotiations and rifts.
In the next few weeks (or even days), we may very well witness the best shorting opportunity since the end of January and September.
China has executed a perfect “Trump and Dump” scheme, buying more time (at little expense).
Don’t be duped, too.
Position: Short SPY