‘Death by China’

It’s fair to say that investors haven’t got a clue right now. The market is as nervous as a cat on a hot tin roof.

Overnight, US stocks opened strongly, spent most of the session in retreat, and then staged an afternoon rally, only to sell-off again into the close. The NASDAQ finished up 0.16%, while the S&P 500 and Dow closed down 0.04% and 0.22% respectively.

There was a fair bit going on, which I’ll get to in a minute. But in the scheme of things it doesn’t really matter. While we have to consume information and put the pieces together on a daily basis, it’s important to keep the underlying trend in mind.

And the trend is down. A bear market is upon us. True, US stock markets continue to hold above support. While this is the case, you can’t definitely say it’s all over for the bulls. Who knows, we may get one more rally to finish off the year.

But it’s not looking good for the optimists. The market can’t stage a rally without sellers coming in to push prices back down. While the US economy is still in good shape, investors know the strong economic expansion is over. It’s just a question of whether the slowdown is mild and manageable, or whether it’s sharp and nasty.

The extent of the US/China trade war will go a long way towards answering that question. That’s why the news on this front keeps unsettling investors. Stocks were sold off overnight following a headline that said the US was set to condemn China over hacking and economic espionage.

While all the media attention has been on Russia lately, China is the real threat to US hegemony. Thanks to US multinationals moving their tech manufacturing bases to China over the past few decades, China is in a prime position to steal US technology.

The Trump administration is now calling China out. As logical as this is, a nervous market sees this as a reason to panic about trade relations and future sanctions.

I’ve said this before but I’ll say it again. If you want to understand where the Trump administration is coming from in this emerging trade war with China, you must watch the documentary Death by China by Trump’s trade adviser Peter Navarro.

So many supposed experts have no idea about this. They’d prefer to criticise Trump because of personal animosity, or simply because in their elite circles criticism of Trump is the done thing.

I’d prefer to focus on reality and how the world is, not how some egotistical and arrogant economist/journalist/investor wants things to be.

And if you watch that doco, you’ll realise that the Trump administration has a rather large bone to pick with China. That’s why this trade war isn’t going away.

But whatever way you cut it, it’s going to hurt markets, especially in the tech sector.

China knows the US is serious too. That’s why they’re making concessions. As The Wall Street Journal reports:

China agreed to reduce tariffs on U.S. autos to 15%, down from 40% currently, during a phone call with U.S. officials that opened the latest round of trade talks aimed at settling a trade dispute festering between the world’s two largest economic powers, according to a person familiar with the matter.

Chinese Vice Premier Liu He informed Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer of the move in a phone call late Monday, according to the person. It wasn’t clear when the change would take effect, but Washington is pushing Beijing to make concessions as soon as possible.’

China has more to lose than the US in this trade war. A centralised, authoritarian regime built on a mercantilist trade strategy is in a very fragile position compared to a capitalistic democracy.

There will be ‘truces’ now and then, but the US knows it is in a position of power, and will keep at it until it tilts the trade rules in its national interest.

The flow on effect to Australia

This will transmit economic pain, via China, to Australia. It’s why our market is in all sorts of trouble. Our largest trading partner is under the pump…as is our largest asset market. As Bloomberg reports:

Sydney’s property market slump has reached a new milestone, with values falling further than the late 1980s when Australia was on the cusp of entering its last recession. Average Sydney home values have fallen 10.1 percent since their 2017 peak, CoreLogic Inc.’s head of research Tim Lawless said Tuesday, citing data as of Dec. 7. That surpasses the top-to-bottom decline of 9.6 percent recorded between 1989 and 1991. The declines in Australia’s most populous city are accelerating as tighter mortgage lending standards crimp the amount people can borrow and as nervous buyers sit on the sidelines.

Falling house prices will no doubt impact consumer sentiment. And as houses can no longer be used as ATMs, expect to see things like holiday travel and new car sales decline.

This chart of new and used car retailer AP Eagers Ltd [ASXAPE] gives you an idea of what the market thinks of its future…

chart of new and used car retailer A.P Eagers [ASXAPE] gives you an idea of what the market thinks of its future 12-12-18

Source: Bigcharts

[Click to open in a new window]

However, keep in mind that rising interest rates are not the reason for the price falls. That means the economic impact is not as bad as it would otherwise be. Rising interest rates take liquidity out of the system and disposable income out of household’s pockets.

Having said that, the fact the price falls in Sydney are so large, despite official rates remaining flat, just goes to show you how badly the boom got out of control.

You can thank the RBA, the banks, and bank regulator APRA for allowing it all to happen.

While destabilising prices booms are fine (in their eyes), destabilising price busts are not. Expect to see interest rate cuts in the first quarter of next year.


To finish off today, remember how I mentioned that US attorney John Huber was set to give evidence into his year-long investigation into the Clinton Foundation on 5 December? And that coincidentally, the state funeral of George Bush Sr on the same day saw the testimony postponed?

Well, Huber is scheduled to reappear on 13 December, Thursday night our time. Let’s see whether any other coincidental occurrences delay the testimony again…

I’ll have more on this tomorrow, as well as the potential market implications.

Stay tuned…


Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

Learn more about Greg Canavan's Investment Advisory Service.

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