Yesterday Evening’s Log Entry

7/24/19 Wednesday Evening

While the Dow closed down on poor numbers from Boeing and Caterpillar today, the S&P, the Nasdaq and the Russell 2000 (in particular) rallied strongly.

Clearly, traders are optimistic on Draghi tomorrow (ECB to ease) and on big tech earnings announcements after the bell — and, not to mention, the Fed next week. 

To further support the bull case, commentary out of China has been far less combative this week than it was last. In fact, even before the U.S. officially allows Huawei back in, Beijing has cleared the way for certain Chinese enterprises to purchase U.S. ag products; which is indeed a goodwill gesture on their part.

So, yes, traders are justified in their optimism over next week’s trade talks; at a minimum we shouldn’t expect any fireworks in light of China essentially offering up what Trump wants right now (ag purchases), although we must conclude that – despite national security concerns – the U.S. team has privately offered the Chinese team assurance that Huawei’s good for the time being.

The elephant in the room – i.e., the problem with all of this – is that the U.S. has made it clear that an actual resolution to the conflict is no way on the near-term horizon. The tit-for-tat tariffs, as they stand today, are there to stay for several months to come, as the bigger issues – where large chasms have formed – are being re-hammered out. Meaning, the uprooting of supply chains and the tariff hit to U.S. importers – and the attendant uncertainties – are (at this point) to continue to weigh on macro conditions well into the foreseeable future. Again, however, in the meantime traders are nevertheless emboldened by the friendlier trade tone of late and uber-accommodative central banks.

The bazillion dollar question now being, can macro conditions hold up, and can Trump refrain from sparking trade conflicts with the likes of Vietnam, India and the European Union while the bigger issues with China are being, albeit slowly, addressed?

While an all-out trade war with the EU would absolutely be the straw that breaks the global economy’s back, I think we should pay very close attention to Trump’s intentions with regard to Vietnam.

Here’s from Zero Hedge’s Sunday article titled Trump’s Next Trade War Target: Vietnam

“Some economists predict that, for instance, if the US moves to impose a 25% tariff on Vietnam’s exports, as it has done with China for reasons of national security, the move would cause Hanoi’s exports to fall by a quarter and shave off more than 1% from GDP.

That could be in the offing, analysts reckon, in light of Trump’s scathing comment last month that Hanoi was “almost the single worst abuser of everybody” in regard to trade and that “Vietnam takes advantage of us even worse than China.”

That critique was aimed at Vietnam’s high and rising trade surplus with the US, which hit a record US$40 billion last year, up slightly from 2017 and in spite of a concerted Vietnamese effort to buy more from the US.”

I don’t believe that the market is remotely discounting the implications of a U.S/Vietnam trade war. I.e., traders haven’t even begun to think through the reality (the consequences) that Vietnam is booming because global manufacturers (many from the U.S.) have sought to escape the hit from U.S. tariffs on Chinese-produced goods by moving production there – and the prospects for Trump slapping 25% tariffs on Vietnamese-produced goods. 

I could say this is like jumping from one proverbial frying pan, say, into another, but considering the costs associated with uprooting from China and relocating to Vietnam, only to have the same tariff regime follow closely behind, I must say — for the producers who make that hop — that it is absolutely akin to jumping from the proverbial frying pan right into the proverbial fire. 

So, again, I ask – even while the world’s central banks stand ready to inject – can still-decent, but presently waning, macro conditions hold up for months on-end against that kind of uncertainty? Well, I ask a very good question!


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