Summary: Kate Rogers wrote a piece for CNBC.com today asking Jim Chanos, Kyle Bass, and myself how to think about today’s announcement by Bob Lighthizer’s office that certain items were being removed from the new China tariff list and others would be delayed until mid-December. Jim and Kyle argued that Trump blinked. I think that it is a positive sign that Trump may be listening to the right people. Markets liked the news. I view it as an opportunity to sell shares and increase cash. You can read Kate’s piece by clicking here.
This morning, the U.S. Trade Representative office announced that certain items were being removed from the new China tariff list due to take place on September 1 and others would be delayed until mid-December. The mid-December date was a sort of Christmas present so that retailers could stock their shelves before the Christmas buying season without passing on a price increase to consumers. It turned out to be a Christmas present to electronics companies like Apple (+4.2%) and retailers like Walmart (+2.1%). Ho, ho, ho!
Still better news was that Steve Mnuchin and Bob Lighthizer had a call with Vice Premier Liu He and plan to have another in 2 weeks. My view all along has been that the more time the two sides spend talking with each other the more likely we are to see a deal that is good for both sides.
As you will see in Kate’s article, some people worried that today’s announcement might be seen as Trump blinking in his macho stare down with Xi Jinping, which would harden the Chinese position and result in a worse deal for the US. I have argued from the beginning that viewing the trade dispute as a Mexican standoff, where one guy wins and the other loses, is a mistake.
In fact, it may be just the opposite. The much discussed Chinese re-trade that took place in May, where the Chinese team allegedly backed away from language that the US team thought had already been agreed, was forced by pressure from Party hard-liners who thought Xi looked like he was caving into US demands. Visible cooperation from the US could actually give him more internal support to strike a deal. As I advised our trade team, the most important valuable thing you can give to Xi Jinping in the talks is face, visible recognition that China has a seat at the adult table in global matters. It costs nothing to give, and can be traded for tangible items of great value.
Of course, there are political aspects to the US announcement as well. The US announcement indicated that the administration would be putting together a list of items to be included in the tariff exemptions and delays. With just over a year until the next election, a slot on that list would be worth a truckload of campaign donations.
So, what does all this mean for investors? I think it’s good news but it’s not a fundamental change in the trade war. The stock market got excited by the news today and pushed up the prices of advantaged companies. I just want to remind investors that the duration of the stock market–the number of years into the future that investors would have to collect the market’s free discounted free cash flows in order for their sum to add up to 50% of today’s market value–is roughly 40 years. (You can think of this point as the fulcrum of the present value of free cash flows, roughly the point where a playground teeter-totter would achieve balance.) A temporary news headline that will raise or lower profits next quarter or next year is just a rounding error in what the market is actually worth. Prices are very high today. The risk of major negative global events is high too. When prices jump on good news, as they did today, I recommend using it as an opportunity to sell stock and raise cash.
JR
