President Trump and Xi Jinping saved face with the signing of the trade deal yesterday – But, its likely all theater. Here’s why….There’s no oversight or enforcement of the obligations of both sides and to be honest it doesn’t really matter. The market wanted the “boogie man” out of the closet and this will do for now. The below excerpt from the BofA research team brings this to light.
The more interesting part of the deal is China’s agreement to dramatically increase imports from the US. China is tasked with increasing agricultural, manufacturing, energy and services by more than 50% this year with another sharp increase in 2021. We remain skeptical that China can hit these targets. The deal claims that the “purchases will be made at market prices based on commercial considerations and that market conditions…may dictate the timing of purchases.” It is hard to reconcile these very aggressive quotas with the idea of buying at market prices.
What happens if China falls short of the targets? The enforcement mechanism allows both sides to judge for themselves whether they are meeting the spirit of the agreement. In the current deal, rather than set up an independent arbiter-like the WTO or a set of impartial judges-each side sets up its own group to monitor implementation. If conflicts are not resolved within 90 days each side has the right to take “proportionate” actions, including abandoning the deal.
On top of all of this, it has also been suggested that there’s a high probability of China falling short of its promised purchases of U.S. goods in the first year of the deal. However, without a 3rd party overseeing compliance, only the Trump Administration and China will know who’s living up to the deal and who isn’t – and you and I will likely never hear about it until after the election. Politics baby!
So there you have it….Stocks wanted a deal, they got one, and they’ll likely continue to trade up for a little while. BUT in the world of Macro – growth is slowing on a rate of change basis and that includes the consumer. On the surface everything looks just fine right now, I know, but this is slowly unraveling. If inflation begins to run “hot”, the next “boogie” man could come in the form of a “hawkish” Fed – WHICH WOULD BE A HUGE POLICY MISTAKE BY POWELL. Front running all of this, we know we’re headed into Economic Scenario 4 (G/I slowing) in Q2 2020, BUT not before Scenario 3 finishes playing out (stagflation). The market will continue to be met with slower growth for the first half of this year – and only the Fed can save that via further rate cuts and repo operations. Truthfully, I don’t know how this all plays out, but it always ends poorly – in the meantime enjoy those 401K returns and we’ll continue to try to risk manage the trends and ranges of the markets.
Consumer Confidence remains at all-time highs
CEO confidence is treading at 11-year low
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