Savvy Money is Betting Both Sides of the US-China Trade Dispute

Savvy Money is Betting Both Sides of the US-China Trade Dispute

$SPY, $SPX

Hedge-fund billionaire Ray Dalio advised savvy investors to bet on “both horses in the race” amid rising trade tensions between the US and China.

He argued that investors still have a historic opportunity to buy into China as it opens up its markets to foreign investments.

Would you have not wanted to invest with the Dutch in the Dutch empire? Would you have not wanted to invest in the industrial revolution and the British empire? Would you not want to invest in the United States and the United States empire? I think it’s comparable,” said the founder of the world’s largest hedge fund, Bridgewater Associates.

Now a look at the stock market shows the US-China trade dispute, at least from the outside perspective of investors, may not be going as well as President Trump declares.

People are asking the Big Q: What would bring it to an end?

The is a theory in The Street that argues that there are 2 Key drivers to a firm resolution, they are:

  • A 10% pullback in the S&P 500 stock index, that as been tried over the past week, did not make it quite to 10%.
  • The other is who will emerge as President Trump’s Democratic opponent in the Y 2020 election, and we are not likely to know that for months, as none of the Dems vying are Presidential, will a dark horse emerge from out of the shadows?

“We are concerned that, in order for a settlement to arrive, we would need two catalysts: first, Trump needs to have a clearer vision of which Democratic candidate he will face and thus a settlement is unlikely to be forthcoming until at least 2020 or second, the stock market falls (and probably a fall of 10% or more is needed to prompt a settlement),” Credit Swiss wrote to clients early Wednesday.

The S&P 500 SPX, +0.08% dropped over 1% since the publication of the research note, so there’s movement on the 1st end.

Vice President Joe Biden has done better in opinion polls of late, but until the first Democratic party primary election it is too early to lock him as a rival. I know him, he will not be the candidate, he is Sleepy Joe awake enough to raise money he will never have to spend or ever give back. His recent face lift does not fool me.

There are Key trade meeting scheduled in Washington, DC for September the imposition of additional 10% tariffs on $300-B of Chinese goods is set for 1 September, and President Trump is not kidding, and China’s economy is on the verge of collapse, it is painful over there.

China’s response has been suspend purchases of US agricultural products, which really does not have impact on President Trump’s popularity in those Key agrarian states as the Administration has American farmers backs, and China’s tariffs on the $50-B of US imports that have yet to be targeted is weak.

Chinese consumers might respond by buying fewer products from big American companies like Nike NKE, -0.02%, Starbucks SBUX, +0.25% and AppleAAPL, +1.04%, which is what happened to Korean products after a missile dispute, but not likely. Those brands are embedded in their pop culture.

China can also take measures to shore up its economy. A mix of currency depreciation, credit growth, and real estate and infrastructure investment could form Chinese stimulus, but they don’t expect a big sell-off in the RMB Yuan that would cause mass capital flight from the Mainland as happened in 2015 .

Historically, Credit Suisse says, China has offset about 85% to 100% of the impact of tariffs, and to do so again, including the new 10% tariffs, the dollar would have to appreciate to 7.30 RMB Yuan, not likely either.

Description of US tariffsImplied RMBActual RMB at dateDepreciationTariff offset
25% on $50-B of goods6.456.44-2.3%97%
25% on $50-B + 10% on $200-B6.696.64-5.3%85%
25% on $50-B + 25% on $200-B7.056.83-7.9%65.9%
25% on $250-B + 10% on $300-B7.297.05-10.8%67%

We here at HeffX-LTN have advised buying stocks on weakness throughout this rally, aka Buy the Dip.

Long-term warning signals include the yield curve’s implying of a 33% chance of a recession, but in reality there is no recession in sight, the sharp decline in profits as measured in GDP accounts, and that free cash flow has fallen below buybacks and dividends, which some times has occurred ahead of market Tops.

It is a big stretch to see this recent action as the beginning of a Bear Market and with a trade settlement looming, and Wednesday’s Key reversal the market has stabilized.

HeffX-LTNs overall technical outlook for the SPX is Neutral with a Very Bullish bias.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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