Given all of the news, commentary and rhetoric around the China trade deal over the past 48 hours, I am now more convinced that my following narrative captures the current state of affairs than I was when I penned it Monday evening. The only question remaining; how much of a hit will the market need to take to permanently pound home the economic reality of tariffs and, thus, inspire a complete change of tactic going forward?

“Given Lighthizer’s lack of understanding, or disregard for, the economic reality of tariffs (to quote the man himself “I’m not an economist, I’m an attorney”), and the President’s penchant for them as, at a minimum, a powerful negotiating tool (to quote the man himself “I’m a tariff man”) it is becoming abundantly clear to me that the odds of the market ascending sustainably into all-time high territory are nil without first a sharp selloff that retraces a good chunk of this year’s gains. I.e., that’s apparently what it’s going to take to convince the powers that be that – as history has proven over and over again – protectionism is poison to economies.

Ideally, the China trade saga will deliver that needed selloff. If not; if a deal is struck that either leaves tariffs in place and the market doesn’t sell off in response, or if the market rallies hard on a clean deal where tit-for-tat tariffs are removed (yet the Administration believes tariff threats did the trick), the feedback loop will be perverse, and the Administration will mistakenly believe that the market has given it the green light to play hardball with the EU. Slapping additional tariffs on the EU will then precipitate the needed selloff.

The problem with the latter is that the attendant selloff is likely to be worse, and last longer, than would have occurred in the former, as the no-selloff China experience would inspire an early-stage disbelief that’ll have the Administration slower to rethink, and remove, the tariff tactic. Plus, all indications are that the EU is not in nearly as conciliatory a mood as was China at the onset of its skirmish with the U.S.. I.e., the next tariff war is likely to be dirtier and bloodier than the present one.

If general conditions can hold up in the meantime, said selloff will present a whale of a buying opportunity. If not, it’ll usher in the next bear market. Thus, the sooner the selloff the better…”