No Longer ‘Made in China’?

Remember the “good old days” when everything was made in China?

Labour was cheap; we’d send a bunch of stuff over there, get it put together cheaply, then they’d send it back over here.

And in so doing we controlled "inflation" – back when it was the headline-writers’ favourite bogeyman.

How we long for those days now…

No Bluffing

The stock market hit what could mildly be called "an air pocket" on Monday after a couple dicey days last week following the rate cut (read: Smidgeon), which almost immediately ushered the highly anticipated "summer swoon of 2019." 

We were all wondering where that fake little monster was hiding.

And if it wasn’t the trade war, currency war or any set of their much-maligned offspring it would be something else the media had bubbled, toiled, and troubled up to grab our attention through the summer haze.

The now "old" news tweeted by Trump of threats to unleash yet another layer of tariffs on Chinese imports was joined by the perceived "counter - attack" from China, as the Chinese yuan fell below 7 to the dollar.

The added confirmation that the Chinese government retaliated by restricting imports of US agricultural products was just the icing on the cake.

Based on investor sentiment plunging, bond flows flooding over the transom faster than they can print them, and the spike in the VIX (see below), the market’s been painted red across financial desks (again) and the weak hands are making their feelings clear with their feet.

The Dirty Little Secret

But the crappiest part of our mishandling of China for decades has been the assumption of friendship – my view is that if we haven’t learned yet that they’ll steal anything not mailed down, then we haven't been paying much attention since the early 1980s.

Rest assured that China absolutely needs this to work itself out a whole lot more than America needs it too.

That said, little of that logic will make sense in the current convulsion of raging terror that the end of the world is once again coming.

Now, before our regular carb-loading of stats, let’s take a quick refresher about the need for corrections. There’s a short video below. Just click on the image:

The nasty end of the processes being aired out in front of us all is that Trump's tariffs are going to have their intended effect.

They’ll force China to lower its trade barriers and respect intellectual property rights.

Then the Chinese are going to have to be very worried that bad things are going to happen to their economy if they don't make a deal with Trump.

And in order for the Chinese to take Trump seriously, just about everyone needs to be worried that “The Donald” is out of control and the global economy is headed for a fall.

Think about it like this: If we aren't scared then there’s no way China will be.

Does it make a bit more sense now?

Long-term investors focused on the value of what is unfolding ahead will embrace the latest summer swoon in the same manner all other summers swoons have unfolded - as long-term values to patiently take advantage of.

Now, onto the US 10-year government bond:

And then, of course, we can't ignore the VIX. High readings here become their own solution eventually:

The chart above from Scott Grannis of the Calafia Beach Pundit blog shows the VIX fear waves over the years. 

Each peak has been labelled with previous monsters vanquished and long forgotten.  This one will be too, but man oh man, the next one will surely be uglier. And note the VIX (red line across the bottom has spiked to multi-year highs, and yet the market is merely back into the trade range.

It’s nearly perfect summer swoon psychology in chart form!

Investors are leaving "equity risk" in droves and buying safe bonds in wave after wave. This is creating a very sizable cushion under the market for long-term investors, as can be seen via the equity risk premium chart from Calafia (above).

So, welcome to the thickest faze of the summer haze.

And say goodbye to everything being made in China.