China/US Trade – Finding a Signal Amidst the Noise

The celebration of the Trump/Xi dinner in Buenos Aries lasted about three hours. What went wrong? This reaction was not a complete surprise, but the size and rapidity were attention-grabbing.

The market reaction fits the description I suggested in May: Trading, Fast and Slow. A small piece of news leads to a cascade of trading – algorithms trained to watch for key words, humans making a short-term directional play, technicians noting the “violation of key support or resistance,” and the subsequent media explanations. This confers an undue legitimacy on noise – tidbits of news without any context.

Here is how it plays out on the China/US trade story. In each case let’s try to separate trading “fast” reactions from trading “slow.”

Issue

Fast – Traders

Slow – Investors

G20 Meeting

Not specific enough.

Reasonable outline with some initial agreement.

90-Day Deadline

Too many issues to resolve in 90 days. No firm schedule.

A deadline is needed to prod negotiators. Extensions are possible, even likely, and that is fine.

Posturing, tweets and comments

Demonstrates lack of trust and commitment.

Business as usual – will continue for 90 days.

Arrest of Wanzhou

Tactical effort by U.S. to gain leverage. Timing (same day as the dinner) undermines confidence.

A separate policy path related to Iran. Preceded dinner plans, so trade impact might not have been considered. Timing was a coincidence of travel schedules.

Differing communications from US and China

Shows lack of real agreement and the poor prospects for an eventual deal.

Shows why a dinner meeting is not a way to draft policy. A joint communique requires advance work by staff.

Prospects for avoiding an all-out trade war.

Slim.

An encouraging first step.

 

Conclusion

This is a typical example of the trading community’s failure to understand politics, negotiation, and compromise. I have highlighted this before on issues like Greece and the asserted collapse of Europe and concerning various US policy debates.

Here is what we should expect:

  • Decades of history will not be reversed in a few months. Be happy for some progress.
  • The outcome will be a compromise. It will not be a complete success for either side, but each will trumpet what they have accomplished.
  • Nothing big will happen until the last minute. This is the way that partisans demonstrate they have accomplished as much as possible.
  • Eventual relief on the most important reciprocal tariffs.
  • Some progress on the intellectual property issues.
  • Some immediate relief on existing boycotts, e.g. soybeans.

I expect significant improvement from current expectations for two reasons:

  1. It is in the interest of all. Political processes gravitate toward these outcomes.
  2. Trump supporters are feeling pain and will exert increasing pressure for a deal.

Long-term investors should emphasize legitimate signs of progress or failure, avoiding the false drama of the daily “explanations.”

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