By Jeff Miller :
The celebration of the Trump/Xi dinner in Buenos Aires lasted about three hours. What went wrong? This reaction was not a complete surprise, but the size and rapidity were attention-grabbing.
The market reaction fits the description I suggested in May: Trading, Fast and Slow . A small piece of news leads to a cascade of trading - algorithms trained to watch for key words, humans making a short-term directional play, technicians noting the "violation of key support or resistance," and the subsequent media explanations. This confers an undue legitimacy on noise - tidbits of news without any context.
Here is how it plays out on the China/US trade story. In each case, let's try to separate trading "fast" reactions from trading "slow."
Fast - Traders
Slow - Investors
Not specific enough.
Reasonable outline with some initial agreement.
Too many issues to resolve in 90 days. No firm schedule.
A deadline is needed to prod negotiators. Extensions are possible, even likely, and that is fine.
Posturing, tweets and comments
Demonstrates a lack of trust and commitment.
Business as usual - will continue for 90 days.
Arrest of Wanzhou
Tactical effort by the U.S. to gain leverage. Timing (same day as the dinner) undermines confidence.
A separate policy path related to Iran. Preceded dinner plans, so the trade impact might not have been considered. The timing was a coincidence of travel schedules.
Differing communications from US and China
Shows lack of real agreement and the poor prospects for an eventual deal.
Shows why a dinner meeting is not a way to draft policy. A joint communique requires advance work by staff.
Prospects for avoiding an all-out trade war
An encouraging first step.
This is a typical example of the trading community's failure to understand politics, negotiation and compromise. I have highlighted this before on issues like Greece and the asserted collapse of Europe and concerning various US policy debates.
Here is what we should expect:
- Decades of history will not be reversed in a few months. Be happy for some progress.
- The outcome will be a compromise. It will not be a complete success for either side, but each will trumpet what they have accomplished.
- Nothing big will happen until the last minute. This is the way that partisans demonstrate they have accomplished as much as possible.
- Eventual relief on the most important reciprocal tariffs.
- Some progress on the intellectual property issues.
- Some immediate relief on existing boycotts, e.g., soybeans.
I expect significant improvement from current expectations for two reasons:
- It is in the interest of all. Political processes gravitate toward these outcomes.
- Trump supporters are feeling the pain and will exert increasing pressure for a deal.
Long-term investors should emphasize legitimate signs of progress or failure, avoiding the false drama of the daily "explanations."
See also Silver - All Quiet Before A Storm? on seekingalpha.com