I’m out of this market folks because I feel that today confirmed my darkest suspicions about the trade war with China.
If you really study up on the economics of China being accepted into the WTO in 2001 and what happened to the U.S. economy since, it’s clear that no deal will ever be reached with China. This is so much bigger than trade. This is Democracy versus Communism and we are in a new Cold War.
The very definition of Communism is that the government owns the means of production so of course China subsidizes it’s corporations! To make China agree to not subsidize its corporations means that China would have to cease being a Communist country! President Xi recently made himself President for life! In other words, the people of China had the right to vote taken away from them and their President has turned into a Dictator. Does that sound like a country on the verge of becoming a Democracy? Who wants to bet that the Trump Administration will be able to convince China to abandon Communism? The whole exercise of trying to convince the Chinese government to not own the means of production of its own industries feels like a scene out of Dumb and Dumber where Trump’s negotiators are told no by the Chinese but they continue to believe that there’s a chance.
No deal is going to be worked with China. In fact, I see a much darker reality quickly approaching.
The next move by the Chinese will be to order the Chinese military to raid the offices of U.S. multinationals operating within their country. The Chinese military will seize equipment, computers, and will put workers of the companies into detention. U.S. negotiators will frantically try and negotiate their release as the brutal Chinese government will claim that these multinational corporations were spying on China.
China is already attacking U.S. websites around the world. Bots from China attacked GuerillaStockTrading so bad last year that it took the website offline with a denial of service attack. Since last year, I’ve employed new cyber-security techniques to repel such attacks from China. Any U.S. based website that publishes news that China doesn’t like, and that hasn’t put up a firewall around their web properties to block traffic from China, can and likely will be taken offline.
The news hit this morning that President Trump would not meet this month with
President Dictator Xi Jinping of China. That was a sell signal to traders who dumped stocks because it’s clear now that the U.S. will not make a trade deal with China before tariffs increase on March 2, 2019. When tariffs go up to 25%, Cold War 2.0 with China will escalate and things will get even worse.
We are testing 2680 support on the daily chart of the S&P 500. Notice today’s reversal happened right off 200 day moving average resistance. The MACD histogram bars slowly shrinking suggest that upward momentum is fading.
Meanwhile, the Baltic Dry Index has completely collapsed and is in a free fall.
The dry bulk rates have been plunged down to such an extent that Norden’s head of dry cargo, Christian Vinther Christensen said that the market has “pretty much collapsed”.
People that don’t understand economics very well will say, “It’s all about the Fed”.
Today’s market drop on news that President Trump and Dictator Xi were not meeting and Kudlow’s comments that both sides were world’s apart still PROVES that market direction is not ALL about the Federal Reserve.
I will show you from an economics perspective why it’s not ALL about the Fed but about Cold War 2.0 with China too.
There’s been a drastic slowdown in the rate at which commodities are being shipped to China (Baltic Dry Index chart above) which suggests slowing demand for raw materials in the world’s second largest economy and the China Butterfly Effect kicks in. The China Butterfly Effect is a relatively new phenomenon in economics caused by China’s unfair practices and ultimately the world’s increasing dependency on China manufacturing (i.e. Made in China).
In a ripple effect, slow growth in China, in turn, leads to slower growth in so called commodity countries like Australia, Brazil and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore and soybeans to China.
Weak demand for Chinese exports from Europe and the U.S., in turn leads to weak import demand from China for commodities and other natural resources. In this way, chronic trade imbalances between China and other countries around the world would make it very difficult for a robust global economic recovery. From this butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the U.S. and Europe, did not have the full effects anticipated. Indeed, this short-run Keynesian approach, did nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.