Dow’s down triple-digits as I type. Here’s the headline:

“Dow falls 100 points amid concern China may stop buying U.S. debt”

Let me help you put that headline into perspective.
China sells us lots and lots of stuff. And while I know that fact bothers many of our readers, it doesn’t bother me in any way shape or form — for multiple reasons — but we don’t need to go there today. For today’s purposes, that fact (that China sells us lots of stuff) should put you at relative ease. Reason being, China will have to do something with all of those U.S. dollars you and I keep sending them. And, frankly, I wouldn’t be buying U.S. treasury debt right now either!


Think about it, while rates have ticked up lately, they remain historically low. The economy, the world economy in fact, is in very good shape and, hence, there are a lot more compelling things to invest in out there. Plus, the U.S. just cut its revenue with the new tax law and is about to embark (we presume) on an aggressive infrastructure spending campaign. Of course the money’s gotta come from somewhere; that would be from borrowing by the way. Which means more U.S. treasuries for sale at a time when interest rate sensitive bonds are anything but attractive. I.e., rates are presumably going to have to rise to attract the borrowers who’ll fund the Administration’s ambitions.


As for China’s leaked comment regarding its potential distaste for treasuries, while, again, I wouldn’t buy treasuries here, I expect (in fact I know) China indeed will. Perhaps not at the pace they did, say, yesterday, but to outright stop (which would be highly improbable, if not impossible) would be to see the yuan rapidly increase in value. They indeed have taken some measures of late to support the currency, but a rapid rise would play real havoc with their export engine. Besides, and again, they have to do something with those dollars, and the purchase of U.S. treasuries is the natural consequence of their large trade (or current account) surplus. Those purchases of U.S. treasuries are accounted for in what’s called the capital account; in which we have a large surplus! Funny how you never hear about the U.S.’s very large capital account surplus with China… Hmm….


I’m guessing its more about politics: Rumor has it that the Trump Administration is about to go hard — in a bad way — at trade with China. As of now, the plan is for the President to announce a whole new round of protectionist measures aimed at China at the coming State of the Union speech. Today’s China news “leak” (wink wink) is I strongly suspect an attempt to get in front of the speech, and inspire a re-think among the U.S. powers that be.


In our year-end letter we made no bones about the fact that the risk to our favored sectors would be an increase in U.S. protectionism. As we stated, while the macro setup remains quite good, U.S. maneuvers such as sparking a trade war with China or, worse yet!, scrapping NAFTA could indeed put our bullish thesis to the test.


We’re thinking (hoping) that since the President has credited himself directly for the present state of the U.S. economy, as well as the stock market, destructive protectionist measures will remain more rhetoric than realty.