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Definitely Sell In May This Year (Macro Macchiato 06/05/19)

May 6, 2019

Here’s the TrumpTweet in full:

 

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars.... ....of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

 

Let’s gloss over for now the economic logic of tariffs being responsible for great economic results in the US. It would appear that the Presidential outburst was prompted by a briefing from his chief trade negotiator Robert Lighthizer. According to Reuters, “a less than rosy update from United States Trade Representative Robert Lighthizer, including details that China was pulling back from some commitments it made previously, prompted Trump's decision and jab on Twitter at Beijing.”

 

The negotiations were scheduled to end in March. They have not been suspended, so we might take their continuation as a sign of commitment on both sides. Both sides released statements overnight saying that the talks were “sincere” and “productive”.  The American Chief of Staff says that the talks will be completed in two weeks’ time, whatever the outcome, and that the US is still prepared to walk away.  Chinese stock markets opened six per cent lower today. We might expect Wall Street to open lower as well: the S&P Futures Index was down over two per cent at one point this morning. European stock markets also opened down.

 

The tweeter-in-chief has reportedly upset the Chinese side considerably when the goal of a deal is within reach.  Apparently, the trade in goods part of the deal has been agreed, as has an amendment to Chinese joint-venture rules that insist on a Chinese majority partner. There are reports that the US side has dropped its insistence that China halt intellectual property theft and cybercrime – a demand that even China, with its sophisticated surveillance state, could not accede to apart from stepping down state sponsored commercial espionage.

 

An example from my own experience suffices to show the difficulty of implementing this demand. A Chinese national enters a UK department store on the day a new ladies’ collection is released.  She takes perhaps 12 to 15 outfits into the changing rooms. Store surveillance notice that she is using her smartphone to photograph herself in the outfits.  Police are called.  The woman claims the pictures are to show her friends waiting in the store. The store detectives want to arrest her for industrial espionage and to take her smartphone from her as evidence. The police advise her to buy the clothes and leave to demonstrate her good faith. She pays for all the outfits in cash (the store manager personally counts the money) and leaves the store. She gives the shopping bags to the first beggar she sees and takes a cab to her hotel. The images are already on the computer system of her cousin’s textile factory in China.

 

Back in Beijing, the talks are focused on further issues yet to be decided including how the agreement will be enforced without a third party arbitrator. Mr Trump has upped the ante hoping to push the Chinese to further compromise. We must await the Chinese reaction to see how the saga will unfold.

 

 

The Take Away

 

There’s an assumption that the US-China trade talks will have a global economic impact. To some extent that’s true. The world is heavily invested in both countries’ stocks, bonds and real estate markets. Falling paper prices will make investors feel poorer, wherever they are, and will slow down both consumer spending and government spending in countries exposed to one or other of the two economic superpowers, i.e. everywhere. If the talks fail, shipping will feel the pinch just as much as all other parts of the interconnected global supply chain. There are two conclusions we can draw today. First, Donald Trump’s deal-making skills are going to be tested as never before; if he saves face he will have the Chinese to thank. Second, investors have further proof that it’s wise to Sell in May and Stay Away; Come Back on St Leger Day.

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