In The Harsh Light of Market History
And so the flow of stock market-focused red ink continues.
But the recent return of volatility is neither new nor abnormal. It’s a trade range that serves a very important purpose. And like the ride we took in 2014-2015, this one could last for a bit.
I don't think it’s the end of the world, by the way, Far from it. Rather it’s the natural progression of an upward market. And we’re now at a resting point; like a recharging station, if you will.
However, that can cause traders to get itchy, just like we’ve seen of late. The weak hands will leave their seats and walk up the dock back to land. It’s the same of for every trade range we enter.
Clever long-term investors stay the course and look beyond it.
The good news is that I suspect we will continue to edge toward the green zone over the next week or two:
The times we visit the green zone are both relatively rare and very beneficial for those who can remain patient.
Equally, the bond world continues to canter back and forth in the 2.8% range (give or take).
Just keep in mind that the world did just fine with much higher interest rates than we’re seeing right now. And the ghosts of inflation past are just that; ghosts. But they can still scare people for short windows of time until something else catches the crowd’s attention:
The Return of the Past
Hey, just in case you think Trump is being too tough on trade, you might want to have a closer look at the process.
Now, I’m not being political. Presidents come and go. And only in the harsh light of history does their true value become "known."
And not a single one of us could withstand the tinkering and dissecting of our own pasts without some embarrassing items coming to fore.
When Dr Ed Talks…
“Made in China 2025: Many policy wonks have questioned the Trump administration’s recent broad, sweeping approach to tariffs on aluminium and steel. Gary Cohn, the former National Economic Council director, resigned from the administration over this issue. However, he supported stricter trade policies specifically targeted at China, a long-suspected manipulator of global trade. The USTR’s investigation memo specifically calls out China’s Made in China 2025 industrial plan.
“China’s overriding goal for Made in China 2025 is to become a leader in advanced-technology industries, including in defensive ones like aerospace. At the cornerstone of this initiative, the USTR contends, are the unfair ‘acts, policies, and practices of the Government of China directed at the transfer of U.S. and other foreign technologies and intellectual property.’
“Tariff on theft: China requires US companies to establish joint ventures with Chinese partners in order to gain access to certain Chinese markets, a mechanism that naturally encourages intellectual property theft. To penalize China’s ‘theft of American intellectual property,’ Trump and his trade advisers are readying actions, including tariffs, on at least $30 billion of annual Chinese imports, reported the 3/15 NYT.
“That equals the cost that ‘Chinese policies aimed at acquiring American technology impose on American companies annually,’ Lighthizer’s office estimates. Separately, an 8/15/17 NYT op-ed co-authored by Dennis C. Blair and Keith Alexander, both former national intelligence directors, pinned the value of Chinese annual intellectual property theft at up to $600 billion.
“Section 301 requires that the US consult with external trade partners before imposing punitive measures, according to an article in the 3/2 issue of Forbes. Recently, the US has asked the Chinese government to propose a plan that would reduce its' $300 billion-plus trade surplus with the US by $100 billion.
“WTO ineffective: China wants the US to handle the dispute through the World Trade Organization (WTO), reports Forbes, which makes sense given that the WTO has been largely ineffective at enforcing actions against China’s state-led regime. ‘The Chinese are protectionists dressed in free market clothing,” US Secretary of Commerce Wilbur Ross has said’.”
“That last comment meshes well with an abundance of history. It's just that previous administrations chose to overlook their brazen abuses.
“Keep this in mind: With the creation of the WTO, it was expected that members would embrace open-market policies, strictly adhere to agreed rules, and observe in good faith the organization’s fundamental principles, stated the 2017 USTR Report to Congress on China’s WTO Compliance dated January 2018.
“Importantly, WTO agreements do include a dispute mechanism. But “this mechanism is not designed to address a situation in which a WTO member has opted for a state-led trade regime that prevails over market forces and pursues policies guided by mercantilism rather than global economic cooperation.”
“According to this most recent report, China repeatedly has acted in conflict with its WTO obligations and has failed to embrace the WTO’s ideals. It's summation:
“No amount of enforcement activities by other WTO members would be sufficient to remedy such behaviour.”
Pretty strong language, eh?
And to fix it takes some pretty strong actions.
The Lesson?
Sometimes, business is not pretty. Even in the NAFTA talks, which will put the US in a much better standing given that we are no longer in the economy of 25 plus years ago, it is being reported that Canada is making changes aggressively to keep NAFTA intact.
Concessions have been the buzzword, and when done you will find it improves a significant number of elements for the US economy.
In the larger picture, having this all play out in detail in the press does a few things:
a) makes for some great scare tactics
b) pressures the markets short-term when antics and hype get too loud
c) opens the door to a significant number of misunderstood actions
d) confuses reality with hard-nose negotiation tactics, and
e) more often than not, sets the stage for opportunity - but sadly only for the patient investor.
That last point, of course, is the toughest one to abide by and hence the more valuable over the long run.