In the final quarter of 2018, the conflict between the US and its trading partners, especially China, became the #1 explanation for Wall Street tanking. Personally, I don’t think it takes much explaining for why markets should correct after a record bull run. But the trade war with China began showing visibly painful consequences. Big business had good reason for concern—and therefore, so did investors.
It’s no surprise, then, to see any China-related news result in a notable boost or drag on mainstream equities. We saw that yesterday, when China’s vice premier, Liu He, showed up at the lower-level talks currently under way. Trump himself is saying that progress is being made.
The talking heads on financial media today are speculating that some sort of positive announcement will be made next week, after a meeting between Trump and Chinese Vice President Wang Qishan in Davos, Switzerland. Mr. Market is happy.
However, knowledgeable experts like China Beige Book CEO Leland Miller are saying that a truly substantive agreement is unlikely. A 90-day truce in the trade war is not enough time to work out a deal that would be more than lip service on the key issues of tariffs, market access, and intellectual property. A new trade treaty in today’s world would be some phonebook-sized monstrosity like the newly re-named NAFTA.
And even if China does agree to do something about the theft of intellectual property, that doesn’t mean it could actually stop it—or that it would do more than pretend to try.
It’s important to keep clear in one’s mind the difference between the hype in the headlines and the reality on the ground.
Buying stocks because one hopes things will get better is even worse. Optimism is not a business plan.
That said, I do think the trade war will be resolved this year. I wouldn’t count on it being over by the end of the 90-day ceasefire, but I do expect progress to be announced before then. Some sort of agreement in theory is even possible. Both sides are under pressure to get this done and talk is cheap, so why not?
Of course, serious analysts like Miller would quickly pick apart any deal that lacked substance. Even the talking heads are concerned that a deal couldn’t be enforced if it did include promises of a crackdown on the theft of intellectual property.
But that might not matter to Mr. Market. Any kind of deal at all that appears to have concessions would enable both Trump and Xi to declare victory. Whether anything really changes or not, that would allow them to move on to other priorities. A pretend solution to an issue stirred up for political purposes is enough for a return to normalcy.
The problems are real, but the solutions need not be for markets to return to irrational exuberance.
Based on market trends over the last few quarters, I think this is the most likely outcome.
If I’m right about this, the likely results include:
- The party resumes on Wall Street, and the stumbling bull gets one last hurrah.
- Commodities as a class surge, as prices have been suppressed in advance of actual demand destruction.
- Precious metals initially retreat, as fear fades from Western minds.
- Precious metals then rebound and head higher, as Eastern minds gain confidence in their prosperity start buying gold again.
What if I’m wrong?
Well then:
- The you-know-what hits the fan.
- Wall Street tanks again.
- Precious metals take off with gusto.
Either way, 2019 should end well for gold bulls. And as frequent readers know, I think that gold bulls should be raging silver bulls.
That’s how I’m playing it.
