Trump's China Tariff Tweets

Doug Nolan


Twenty-four hours that confounded - as well as clarified. Chairman Powell has, again, been widely criticized for his messaging. With the markets and President Trump breathing down his neck, he’s been in a no-win situation. Data have not supported commencing an aggressive easing cycle, while markets raced far ahead of the FOMC. Especially with dissention mounting within the Committee, Powell had to attempt a modest reset of market expectations. This wasn’t going to be uneventful.

July 31 – CNBC (Patti Domm): “Stocks cratered, the dollar hit a more than two-year high and bond yields ripped higher after Fed Chairman Jerome Powell suggested that policymakers were not embarking on a new cycle of rate cutting… ‘Let me be clear: What I said was it’s not the beginning of a long series of rate cuts… I didn’t say it’s just one or anything like that. When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that. Not seeing us in that place. You would do that if you saw real economic weakness and you thought that the federal funds rate needed to be cut a lot. That’s not what we’re seeing.’”

Reuters’ Ann Saphir: “You called it a mid-cycle adjustment to policy and, I mean, what should we take this to mean? And what message do you mean to send with this move today about future rate moves?

Powell: “The sense of that… refers back to other times when the FOMC has cut rates in the middle of a cycle. And I’m contrasting it there with the beginning, for example, the beginning of a lengthy cutting cycle.”

Saphir: “So we’re not at the beginning of a lengthy cutting cycle?”

Powell: “That is not what we’re seeing now. That’s not our perspective now or outlook.”

Powell responding to a question from Bloomberg’s Mike McKee: “What we’ve been monitoring since the beginning of the year is effectively downside risks to that outlook. From weakening global growth, and we see that everywhere. Weak manufacturing, weak global growth now particularly in the European Union and China. In addition, we see trade policy developments, which at times have been disruptive and then have been less so. And also inflation running below target. So, we see those as threats to what is clearly a favorable outlook.”

Markets were less than thrilled to hear “what is clearly a favorable outlook.” Powell also stated, “overall the US economy has shown resilience”

Marketplace’s Nancy M. Genzer: “So when we have our next recession, the Fed will have less room. It will happen. The Fed will have less room to maneuver cutting interest rates since you’re cutting now, how big of a problem will that be? …You won’t be able to cut as much if rates are low, and you will have less ammo in that sense.”

Powell: “You’re assuming that we would never raise rates again, that once we’ve cut these rates they can never go back up again. As just as a matter of principle, I don’t think that’s right. In other long cycles, long US business cycles have sometimes involved this kind of event where the Fed will stop hiking. In fact, we’ll cut and then we’ll go back to hiking.”

It’s been a long time since a Federal Reserve Chairman spoke with such candor – and markets were utterly confounded. After fondly receiving “insurance cut” and “ounce of prevention,” equities were immediately repulsed by the notion of “mid-cycle adjustment.” And how could Powell broach the subject of the Fed contemplating ever raising rates again? Does Powell not understand what the markets expect of him? Where is the clear message? What happened to the beloved “an ounce of prevention is worth a pound of cure?”

The problem is equities have been demanding a pound of prevention. The Fed is in uncharted waters on so many levels. To be sure, never have markets so determined financial conditions domestically as well as globally. This is a far cry from the old days when the Fed would subtly adjust overnight lending rates to, on the margin, influence bank lending. Subtlety no longer suffices, as speculative global markets have come to demand a regular fix of policy “shock and awe.”

The course of monetary policy would be much clearer if only the FOMC could accomplish one accurate prediction (one good model!): Will risk markets be dominated by a “risk on” or “risk off” speculative dynamic? If “risk on” continues to dominate, the FOMC would not move forward with an aggressive easing cycle. “Risk off,” conversely, would put immediate and intense pressure on the Fed to drive rates lower (and expand its balance sheet). Enamored by the Fed’s newfound “insurance” approach, the equities market fully expects the Fed to completely disregard the “risk on” scenario. At least some members of the FOMC, apparently including the Chairman himself, are understandably uncomfortable with the markets commanding Fed policy.

The S&P500 dropped a quick 1.7% on Powell’s comments. The implied rate on December Fed funds future rose a not earth-shaking 5.5 bps in Wednesday trading to 1.84% (anticipating another 30 bps of cuts by year-end). Equities were in a bit of a tantrum. Bonds – they remained cool as a cucumber. Interestingly, ten-year Treasury yields declined four basis points on Fed Wednesday to 2.02% - the low since December 2016. Long-bond yields declined six bps to 2.53%.

Equities may have been confounded by Powell, but some clarity was apparent in bond trading. Treasury yields are moving on factors outside of FOMC policy. And, clearly, global yields are fixated on something other than central bank policies. Additional clarity was created less than 24 hours later. Presidential tweets:

“Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to...”

“...buy agricultural product from the U.S. in large quantities, but did not do so. Additionally, my friend President Xi said he would stop the sale of Fentanyl to the United States – this never happened, and many Americans continue to die! Trade talks are continuing, and...”

“...during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%...”

“...We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”

Markets were not buying Mr. Brightside. Stocks had rallied strongly Thursday pre-tweet. Having fully recovered from the Powell swoon, the S&P500 was trading to within less than half a percent of all-time highs. Then the S&P sank a quick 2.1% (Nasdaq100 2.7%) on the Trump Tariff Tweets. Why such an emphatic reaction? Wasn’t the President simply replicating the strategy that had Mexican authorities responding feverishly to ensure the tariff threat didn’t become reality?

I view the markets’ responses to the President’s threat of additional Chinese tariffs as providing important analytical clarity. Let there be no doubt: Chinese developments have become the critical factor for global markets. And the issue is not the possibility of 10% tariffs on an additional $300 billion of Chinese imports. The critical issue is Chinese financial and economic fragilities, and the very real possibility that an escalating trade war pushes a vulnerable China over the edge.

Ten-year Treasury yields sank 12 bps Thursday to 1.87%. After the 5.5 bps Powell Wednesday afternoon increase, the implied rate for December Fed fund futures sank 17 bps to end the week at 1.665%. Ten-year Treasuries ended the week down 23 bps to 1.84%, the low going back to November 7, 2016 (when Fed funds were at 0.40%). Long-bond yields dropped 22 bps to 2.38%. From before Trump’s Tariff Tweets to Friday’s close, the safe haven Japanese yen gained 2.3% against the dollar (high vs. dollar since scary January 3rd). The Swiss franc rallied 1.6%. From Thursday’s lows, Gold surged $40 to the high going all the way back to May 2013.

August 2 – Reuters (Virginia Furness): “The 30-year German government bond yield turned negative for the first time ever on Friday, leaving the euro zone member’s entire yield curve in negative territory as investors scrambled for safer assets… An early rally in German government bonds which saw the yield on its 10-year note fall below -0.50 bps for the first time ever accelerated as trading wore on.”

German bund yields ended the week down 12 bps to a record low negative 0.50%, with French yields sinking 12 bps to negative 0.24%. Spanish (0.25%) and Portuguese (0.29%) yields dropped to record lows. Swiss 10-year yields closed the week at a record low negative 0.89%. Ten-year yields were also negative in Denmark (-0.45%), Netherlands (-0.39%), Austria (-0.28%), Finland (-0.25%), Sweden (-0.21%), Slovakia (-0.18%), Belgium (-0.17%) and Slovenia (-0.03%). Bloomberg’s tally of negative-yielding debt ended the week at a record high $13.988 TN.

There were analysts quick to suggest it was no coincidence that Trump’s China Tariff Tweet followed closely on the heels of the snub from Chairman Powell. The President could dismember two fowl with one stone: ratchet up the pressure on Chinese trade negotiators, while signaling to Powell that there’s an easy way and a hard way that will end at the same destination: monetary policy will now be dictated from the Oval Office.

I’ll repeat the same view that I’ve posited since early in the administration. The President is playing a dangerous game with the Chinese. And I can confidently predict for years to come the Fed will be castigated for not more aggressively adopting monetary stimulus. Yet, if not for the dovish U-turn, all the talk of an “insurance cut” and the resulting risk market rally, I don’t think the President tweets Thursday on additional Chinese tariffs. Tariffs, deficits, speculative Bubbles and the like: The Fed and Central Banks as Enablers.

August 2 – Politico (Adam Behsudi and Ben White): “President Donald Trump’s decision this week to ratchet up the trade war with Beijing by slapping more tariffs on Chinese goods came after aides thought they had talked him out of it weeks ago, according to two people close to the discussions. But the president’s annoyance with China finally boiled over this week after Treasury Secretary Stephen Mnuchin and U.S. Trade Representative Robert Lighthizer returned from trade talks in Shanghai and reported that Chinese officials offered no new proposals for ending an impasse that’s persisted since May… Trump’s Twitter announcement… drew a quick reaction from China on Friday… ‘China will not accept any form of pressure, intimidation or deception,’ Chinese Foreign Ministry spokesperson Hua Chunying said… China‘s Ministry of Commerce released a statement that said Beijing would impose countermeasures. ‘The U.S. has to bear all the consequences,’ the statement said. ‘China believes there will be no winners of this trade war and does not want to fight. But we are not afraid to fight and will fight if necessary.’”

The administration is hellbent on cornering the wounded animal. China’s historic financial and economic Bubbles are in trouble. Beijing has been working intensively to stabilize its money market and corporate lending markets. More generally, China’s overheated Credit system has become deranged. Financial conditions have recently tightened dramatically for small banks and financial institutions, while real estate finance remains in a runaway speculative Bubble blow-off. System Credit is on track to approach a record $4.0 TN this year, as Credit quality rapidly deteriorates.

July 28 – Financial Times (Don Weinland): “China’s biggest bank has stepped in to become the largest shareholder of a troubled Hong Kong-listed lender, the latest sign that the state is increasing its financial support for struggling banks across the country. Industrial and Commercial Bank of China said… that one of its subsidiaries would invest up to Rmb3bn ($436m) in Bank of Jinzhou, taking a stake of about 10.82%. Investors have grown concerned over the health of the Chinese banking system in recent weeks following the government takeover of Baoshang Bank, the first such incident in nearly two decades.”

July 29 – Bloomberg: “Chinese authorities, which shocked the market with a regional bank seizure in May, adopted a different approach for helping another troubled lender -- a sign regulators are treading carefully as they try to resolve the sector’s problems. Three Chinese state-owned financial heavyweights, including Industrial & Commercial Bank of China Ltd., agreed to buy at least 17% of… Bank of Jinzhou Co. on Sunday. The acquisition by ICBC comes at about a 40% discount to the last closing price of the northeastern Liaoning-based lender, whose stock has been halted since April and which saw its dollar bonds tumble last week amid reports of liquidity strains. The move underscores regulators’ efforts to restore confidence in smaller lenders, a key source of credit to small and medium-sized companies, while reducing the moral hazard of a government backstop that makes all investors whole.”

ICBC’s stock immediately dropped 2% on news of its stake in troubled Bank of Jinzhou. Understandably, Beijing was compelled to quickly and decisively “resolve” the Bank of Jinzhou issue; to quash a panic beginning to catch fire in the “small” bank sector. But festering bad loan and capital adequacy issues will limit the degree to which the major Chinese banks can absorb problems from thousands of smaller institutions.

President Trump sees the opportunity to use China’s weakened economy to extract trade concessions. As it drifts closer to a systemic crisis of confidence, Chinese finance is the more pressing issue. Remember how such circumstances tend to unfold: very slowly then suddenly quite quickly.

Beijing is blaming the U.S. for Hong Kong unrest. China moved forward with military drills in the Taiwan Strait after the U.S. agreed to sell $2 billion of military hardware to Taiwan. The U.S. has assumed an increasingly aggressive posture to counter the Chinese military in the South China Sea. There is the Huawei issue, along with the U.S.’s use of unilateral economic sanctions (i.e. Iran, Venezuela). On numerous fronts, China believes the Trump administration is determined to inhibit China’s advancement and infringe upon its sovereignty.

If they believed a trade deal would resolve the U.S. administration’s chief concerns, Beijing would likely be more willing to compromise. But at this point I take them at their word: “China will not accept any form of pressure, intimidation or deception.” There is a clear and present risk of problematic escalation.

The offshore renminbi dropped 1.37% this week to 6.976 (vs. dollar), just below the lowest level (6.9805) versus the dollar since November 2018 (and near January ‘17’s multiyear low 6.9895). The onshore renminbi declined 0.88% this week to 6.9405, the low against the dollar since last November. Expect to hear more discussion of ramifications of a renminbi break of the key psychological 7.0 level. How much speculative leverage has accumulated in Chinese Credit?

Global finance has never been as vulnerable to a systemic “risk off” market dislocation.

Thursday afternoon from Bloomberg (Harkiran Dhillon): “Oil plunged almost 8% for the steepest one-day drop in more than four years after U.S. President Donald Trump escalated the trade war with China…” Elsewhere, Copper dropped a quick 3.5% to a two-year low. Iron Ore fell 7.4%, Palladium 7.9%, Zinc 4.0%, Lead 3.0%, Tin 2.0% and Aluminum 1.6%. In the soft commodities, cotton sank 7.0% post Trump tweet. Soybeans dropped 3.7% for the week and Corn fell 3.5%.

Global market operators will this weekend ponder a few pressing questions: Does President Trump appreciate he risks opening a Pandora’s Box of “risk off” global market dynamics?

And will unsettled markets compel him to back off his tariff threat? He’s not willing to gamble his reelection on China tariffs, is he? Two months back I titled a CBB, “So Much for the Trump Put.” Markets were in a forgiving mood. A subservient Mexico convinced the markets it was a “no harm no foul” successful Presidential ploy. Markets now must regret Mexico having rolled over so easily. China is no subservient rollover.

China is instead the vulnerable marginal global source of Credit and economic growth. Beijing has been working diligently to stabilize their fragile financial and economic systems. It no doubt presents the administration an irresistible opportunity to partake in barefaced hardball.

But at this point pushing China closer to the crisis point basically unleashes global “risk off,” with myriad repercussions.

Where are the weakest links in the event of a deteriorating China predicament? Asian currencies were under pressure this week. Australia’s dollar fell 1.6%. On the margin, weak European economies are particularly vulnerable. Germany’s DAX dropped 4.4% this week, and France’s CAC40 sank 4.5%.

The Hang Seng China Financials index sank 4.8% this week. European bank stocks (STOXX 600) dropped 5.7%. And corroborating the view of a highly intertwined global financial Bubble, U.S. bank stocks fell a noteworthy 5.0%.

I would be remiss for not further highlighting gold’s $22 weekly rise to multi-year highs. China doesn’t have the quantity of U.S. imports to match the Trump Tariffs. But they have ample powerful levers to pull. With my view that China is confronting serious financial and economic crisis, I ponder how an aggravated Beijing might react. When the forces of crisis can no longer be held at bay, might they calculate they would weather a global crisis in relatively better standing than their archrival? Could they interject Taiwan into the equation? There is ample justification for gold’s runup – experimental activist monetary policy, a world of debt, a historic global securities Bubble, and a troubling geopolitical backdrop.

Emerging market assets are running on empty

Stocks and bonds are rallying but growth forecasts are being cut all over the world

Jonathan Wheatley


© Reuters


There is bad news and good news for emerging market investors this year. The bad is that EM growth is tanking; the good is that there is money to be made while it tanks. The question is, for how long can something that is clearly bad for emerging economies be of benefit to those who invest in them?

Prices of EM local currency bonds, for example, have risen almost 8 per cent this year, according to the benchmark JPMorgan index. Most of that gain has come over the past six weeks, as trade tensions between the US and China have eased and expectations have risen for interest-rate cuts by the US Federal Reserve and a host of EM central banks.

Yet this has happened at the same time as a string of downward revisions in forecasts for global and EM growth this year. From a consensus of about 5 per cent at the start of 2019, many economists have cut their outlook for EM growth this year to as little as 3.5 per cent.

As with the “Greenspan put” and now the “Communist party put”, investors appear confident that policymakers will respond to a worsening economic environment by cutting interest rates and otherwise increasing the flow of cheap money — and thus fuelling a global hunt for yield once again.

But as a decade of experience since the global financial crisis has shown, cheap money tends to stoke asset prices while not doing much for productive investment.

“It might be that we are in an environment where financial conditions are very favourable but there is no real productive outlet for that money,” says Michel Nies, an EM economist at Citi. “So dovish conditions do not have the impact on growth that they had in the past, or the impact comes in channels that have downside, like credit-fuelled consumption or fiscal profligacy.”

According to the website Central Bank News, 30 central banks have cut interest rates so far this year, of which just three were in developed economies (if you count Iceland as developed, despite its imminent inclusion in the FTSE Russell and MSCI equity indices for “frontier” markets). Plenty more are expected to follow.

“It feels like EM central banks are being asked to please form an orderly queue,” says Paul Greer, portfolio manager at Fidelity International.

Many policymakers, such as those in Colombia and Brazil, began cutting rates early last year, long before the Fed flipped from a hawkish to a dovish stance. Inflation has been falling in much of the emerging world for a good six to nine months, with month-on-month deflation cropping up this year in Thailand, Malaysia, South Korea, Peru and others.

This marks a reversal from previous conditions when many policymakers were aggressively raising rates to keep inflation expectations in check. Mexico, for example, raised its policy rate from 3 per cent in 2016 to 8.25 per cent last year. Since then, annual inflation has fallen from 5 per cent to less than 4 per cent today and is expected to keep dropping.

This and other examples make a powerful case for being long local currency bonds, says Mr Greer. But he is less optimistic about EM currencies, even though he still regards them as cheap. They have had a good run recently but “we are mindful that this is not a classic EM currency rally”, he says. “Currencies are very sensitive to global growth and global trade and those are both going south.”

Which brings us back to the opening question. Despite the recent rally, local currency assets — currencies, stocks and local currency bonds — are all below their peaks of early 2018, before the unexpected strength of the US dollar triggered a broad sell-off across EMs. This year, their rally went into reverse in the second quarter, though they are once again at or close to year-to-date highs.

“The fizz of EM assets in the second half of last year has begun to fade but they have been supported by the shift in expectations for the Fed,” says William Jackson, chief EM economist at Capital Economics. “But as the global economy continues to weaken, it could cause risk appetite to worsen and make the second half tougher for EM assets.”

This raises the bigger question of what, if anything, will deliver a rebound in EM growth. It is possible that cheaper credit will boost confidence, consumer spending and even investment. This is clearly what policymakers are hoping for.

Mr Jackson is not optimistic. “We are seeing some pick-up in those countries that have fared poorly but it’s likely to be pretty slow,” he said. “We’re looking at growth of 1 to 1.5 per cent in places like Mexico, Russia and Brazil, which would have been extremely disappointing five years ago. But there isn’t anything you can clearly see that would drive a more significant rebound.”

Central banks make record $15.7bn gold purchases

Institutions diversify reserves away from the dollar in the first half as trade tensions simmer

Harry Dempsey


Gold fever: central banks are raising the temperature © NewsCast


Central banks purchased a record $15.7bn of gold in the first six months of the year in an effort to diversify their reserves away from the US dollar as global trade tensions continue to simmer.

Data released by the World Gold Council on Thursday showed central banks, led by Poland, China and Russia, bought 374 tonnes of gold — the largest acquisition of the precious metal on record by public institutions in the first half of a year. Central banks accounted for nearly one-sixth of total gold demand in the period.

The pattern advances on last year’s activity in which central banks hoovered up more gold than at any time since the end of the gold standard (where a country could link the value of its currency to the precious metal) in 1971.

The shift in attitude towards gold since the financial crisis was highlighted by a European Central Bank decision last week to cease an agreement to limit sales of gold, as the region’s institutions are no longer selling it in large volumes and are instead now net purchasers.

Overall, year-on-year demand for bullion increased 8 per cent to 1,123 tonnes in the second quarter, boosted by central bank purchases and investors piling into gold-backed exchange traded funds.

Dovish comments from central banks, geopolitical instability and rising gold prices encouraged investors to top up, with ETF gold holdings up 67.2 tonnes in the second quarter to a six-year peak of 2,548 tonnes.

Demand was further supported by a recovery in India’s jewellery market in Q2, with year-on-year demand rising 12 per cent to 168.6 tonnes. However, as the June price rose above $1,400 a troy ounce for the first time in six years, demand for gold in the jewellery and retail investment markets softened.

“June was a big month for gold,” said Alistair Hewitt, head of market intelligence at the WGC. “While the Fed’s dovish turn was the key driver for this, it also builds on a strong first half of the year, which saw gold demand hit a three-year high, underpinned by extremely strong central bank buying.”

The US Federal Reserve announced on Wednesday its first interest rate cut for more than a decade, which it justified on the grounds of below-target inflation. The quarter-point reduction had been widely expected.

UK-listed funds accounted for three-quarters of exchange-traded gold products bought by value. This was driven by a desire to hedge against uncertainty over the outcome of the UK’s Conservative party leadership election, concern about a disorderly exit from the European Union and a sharp plunge in the value of the pound.

German investors also piled into gold-backed ETFs, said the WGC, amid worries about the manufacturing sector’s vulnerability to the trade war between the US and China.

The WGC expects looser monetary policy and geopolitical uncertainty — ranging from the China-US trade war, to Iran and Brexit — to keep pressure on central banks to build gold reserves and on investors to seek out gold-backed ETFs, although higher prices could hit consumer demand.

Europe’s 5G Wake-Up Call

Whereas the battle over 4G mobile networks was essentially commercial, the ongoing 5G debate is about geopolitics, technological leadership, and national security. And Europe, in particular, must develop a much stronger common approach in order to make itself less vulnerable to security risks.

Daniel Gros

gros124_GettyImages_EUflagdatabytes


BRUSSELS – How times change. Not so long ago, the next big thing in telecommunications was 4G mobile networks, which promised massive data transfers and cheap voice calls. Now comes 5G, which will potentially spur all sorts of new digital innovations, thanks to its greater speed (200 times faster than 4G), faster data transfers from wireless broadband networks, and, most important, the ability to connect cyber-physical objects in the context of the Internet of things. Moreover, 5G is expected to enable the much more rapid reaction times required for driverless cars, advanced factory automation, smart cities, e-health, and many other applications.

But there is another key difference. Whereas the battle over 4G was essentially commercial, focusing on job creation and profits, the ongoing 5G debate is about geopolitics, technological leadership, and national security. Here, Europe must develop a much stronger common approach to the new 5G technology to make itself less vulnerable to security risks.

Most of the current 5G controversy centers on whether US and European mobile operators should buy equipment from the Chinese telecoms giant Huawei. The US government previously banned the firm from its telecoms market because of espionage concerns (although it has yet to produce evidence of this publicly), and strongly urged its European allies to do the same.

Both the US and European positions toward Huawei seem to be at odds with their commercial interests. By banning the Chinese company, US President Donald Trump is favoring existing European (and South Korean) equipment suppliers, even as he complains about America’s trade deficit with Europe. (More recently, Trump has indicated a possible softening of his stance toward Huawei.)

Although European governments have differing views, most do not want to exclude Huawei. Each national government regards lower equipment prices for its national telecoms operator as more important than supporting European champions in 5G technology (such as Nokia and Ericsson).

In any case, US and European security concerns should extend well beyond Huawei and the Chinese government. The new 5G networks present a unique security challenge, because their main functions depend on software, not hardware. This makes 5G much faster than legacy wireless networks, but also leaves it vulnerable to potentially malicious attacks.

Today’s information-technology systems are highly complex: current smartphone chips have more than eight billion transistors, and operating systems have more than 50 million lines of code.

Moreover, many of these systems contain components supplied by hardware and software vendors from around the world. In practice, this creates multiple possible entry points for malicious attacks and data leaks, using “backdoors” that can be exploited to gain control of a device. And if backdoors cannot be detected and monitored, then entire 5G networks are potentially vulnerable, too.

The key national-security risk, then, is that a vendor for all or part of a 5G network (or its national government) could vacuum up all the traffic passing through, or even disrupt the operation of the entire network with a digital kill switch. Extensive security reviews of Huawei equipment have failed to uncover any such backdoors. That is not surprising: Huawei (or any other company) would be out of business if it were caught doing this even once. But it is also logically impossible to prove the absence of malicious code.

Although Europe has its own suppliers of 5G equipment and could simply shut Chinese vendors like Huawei out of the market, such a move is unnecessary. In many European countries, Huawei provides just one part of the mobile network. Moreover, having multiple vendors provides some protection against a kill-switch risk to the entire system.

Diversity also constitutes a liability, because each European Union member state performs its own, often quite different, security check on Huawei equipment, with many of them having only limited resources and experience to do so. The security of the future 5G networks could be much better ensured if an EU agency carried out a common check on all equipment suppliers.

More generally, Europe’s potential 5G vulnerability stems mainly from the desire of each member state to keep its own mobile network under national control. For example, the allocation of 5G frequencies has been conducted entirely at the national level, according to widely different rules and conditions. This of course makes the emergence of “European champions” in the telecoms industry less likely.

In addition, the defense of (national) networks against cyberattacks is also managed at the national level. The EU Agency for Cybersecurity (ENISA), which still has fewer than 200 staff even after a recent budget increase, plays only a weak coordinating role.

Yet telecommunications networks within the EU are highly integrated across national borders. Future cyberattacks may well target more than one member state, and a blackout in one country would severely affect others. Europe thus urgently needs a powerful, integrated cybersecurity agency. Over the longer term, the entire regulatory framework for telecommunications networks, including spectrum auctions, should be centralized at the EU level. This would finally create the “single digital market” that has so far eluded Europe.

European leaders would be wrong to regard a Chinese supplier of 5G network equipment as the biggest threat to the continent’s cybersecurity and to its ability to develop telecoms champions. Europe’s real vulnerabilities are its still-fragmented telecoms market and its lack of a common cyber-defense system. The looming introduction of 5G should be a wake-up call to policymakers across the continent. One can only hope they heed it.


Daniel Gros is Director of the Centre for European Policy Studies.

Interest Rates Just Keep Falling. Economic Orthodoxy Is Falling With Them.

Investors expect even lower growth and inflation; this isn’t the way it’s supposed to work.

By Neil Irwin
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Traders at the New York Stock Exchange. Recent movements in bond markets suggest that very low inflation is likely to be the norm indefinitely, despite the low jobless rate.CreditBryan R. Smith/Agence France-Presse — Getty Images


 
American borrowing costs keep plunging, and that is signaling something important: Some of the basic assumptions of the most influential economic technocrats in the land are, for the time being at least, off base.
 
Ten-year United States Treasury bonds are yielding only 1.95 percent, down from around 2.4 percent in May and 3.2 percent as recently as November. Global investors are essentially flinging money at any creditworthy entity that might wish to borrow. Rates on home mortgages, corporate bonds and the debt of countries around the world have been falling as well.
 
This is terrific news if you are a homeowner thinking of refinancing your mortgage or a chief financial officer about to roll over some of your company’s bonds. It is terrible news if you want to see faster global economic growth in the years ahead. Lower long-term rates imply that investors expect even lower growth and inflation than had seemed probable just weeks ago.
 



But there is a bigger lesson in falling long-term interest rates — especially coming at this point in the economic cycle, amid this mixture of tax and spending policies coming from Washington.
 
Consider some of the assumptions that are embedded in the economic models of the two government agencies most respected for their independence and technical expertise: the Congressional Budget Office and the Federal Reserve.
 
When the C.B.O. projects how legislation will affect the economy, it assumes that when the government borrows more, higher deficits will cause interest rates to rise, crowding out investment by the private sector.
 
Generations of college economics students have been taught that this is simply how things work, and the reason that countries should avoid running large budget deficits. But the logic just isn’t holding up right now.
 
For example, in the spring of 2018, when the C.B.O. modeled tax cuts and spending increases that had been agreed to the preceding winter, it forecast that higher deficits would result in higher interest rates: 3.7 percent on 10-year Treasury bonds in 2019.
 
That is 1.75 percentage points higher than actually was the case on Wednesday.
 
In 2015, the budget deficit was 2.4 percent of G.D.P., a number that is on track to rise to 4.2 percent this year. Yet the 10-year bond yield is now comfortably below its average level in 2015, which was 2.14 percent.
 
Low interest rates worldwide are probably a factor. Global investors find Treasury bonds appealing because they offer better returns than equivalent securities in Europe or Japan, even after the recent drop in rates. The implication is that higher deficits haven’t come with the costs that economic orthodoxy predicted.
 
Meanwhile, the Federal Reserve has raised interest rates — albeit in fits and starts — since the end of 2015 based on its own form of economic orthodoxy. It’s the idea that as unemployment falls, eventually it will cause an outburst of inflation — so part of the job of a central bank is to raise interest rates pre-emptively to slow the economy in time to prevent unemployment from falling too far.
 
At the meeting in December 2015 where Fed officials first raised rates, for example, their consensus projection was that the longer-term level of the unemployment rate was 4.9 percent and that they would need to raise interest rates to 3.5 percent by now to keep the economy in balance and forestall inflation.
 
The actual results have undermined those assumptions. The unemployment rate has fallen to 3.6 percent. But the inflation rate has remained persistently below the 2 percent the Fed aims for. If anything, the growth rate of workers’ wages has been slowing in recent months. That’s important because higher wage growth is, in the traditional theory, the mechanism by which a tight labor market fuels overall inflation.
 
Moreover, the movements in bond markets the last few weeks suggest that very low inflation is likely to be the norm indefinitely, despite the low jobless rate. Prices of inflation-protected bonds versus regular bonds imply that consumer prices will rise only 1.66 percent a year over the coming decade.
 
And rather than raise rates to 3.5 percent, as Fed officials in 2015 envisioned, they have raised their main interest rate target to only about 2.4 percent — and now are poised to cut it in the near future as the world economy starts to creak.
 
Global factors are a major driver of the disconnect. The United States economy has been relatively strong in recent years compared with Europe and Japan, but the slow growth in much of the world has acted on a brake on how much the Fed can raise rates and how much inflation can emerge.
 
When rates in the United States rise too high relative to other major economies, the dollar strengthens on global currency markets, which then weakens American export industries. Tighter money in the United States can send ripples to emerging markets where many companies borrow in dollars — meaning that when the Fed raises rates, it can slow the entire global economy, and worsen already powerful deflationary forces.
 
There have been moments over the last few years when the old economic rules were reasserting themselves — when it seemed that high deficit spending really was starting to push interest rates higher, and when low unemployment was starting to fuel a cycle of higher wages and prices.
 
They have turned out to be false dawns. A set of rules that seemed to describe how the world works as recently as 2007 seems to have given way to something different. We now have a complex set of challenges, including an aging work force, that can’t be easily turned around.
 
The first step, though, is for all those in a position to influence economic policy to ask deep questions about whether what they learned in a college economics classroom all those years ago might no longer be so.
 

Neil Irwin is a senior economics correspondent for The Upshot. He is the author of “How to Win in a Winner-Take-All-World,” a guide to navigating a career in the modern economy.


In the War Against Chinese Tech, the U.S. May Go It Alone

Washington has incentive to follow through on some of its demands, but it has little reason to blow up its entire alliance network.

By Phillip Orchard

 

Summary
The United States has been on a crusade to block Chinese tech firms out of the development of 5G networks. Its allies, big and small, are reluctant to fall in line as they weigh the potential political and military costs of bucking Washington’s demands against the dollars-and-cents cost of excluding tech companies like Huawei. Ultimately, few countries are likely to adopt a blanket ban on Chinese tech. But it may not matter if the U.S. proves willing and capable of crippling Chinese tech firms unilaterally.

For much of the past half a decade, the U.S. has warned that trouble awaits countries that build their fifth-generation, or 5G, mobile networks with Chinese technology. Fearing that the proliferation of Chinese telecommunications infrastructure would give Beijing unprecedented cyberespionage and network sabotage capabilities, the Trump administration has since tightened the noose, moving gradually to ban Chinese software and equipment – and even foreign tech made or designed in China – from U.S. networks. It wants friends and allies across the globe, on whose telecommunications networks the U.S. military relies, to follow suit. Using Chinese tech was always risky, but the U.S. has threatened to raise the stakes, saying countries that use it could face a future without U.S. military and intelligence cooperation.

This kind of absolutist approach by the U.S. speaks both to just how alarmed it is by China’s creeping telecommunications dominance and how little credence it gives to claims that such threats are manageable. Yet, widespread reluctance to comply with U.S. pressure has raised the question of whether the U.S. is really willing to walk away from the multilateral network of friends and allies it has been cultivating since World War II, with profound potential implications for the global system. But the U.S. won’t have to make this call any time soon. It’s not yet settled whether a blanket ban on Chinese 5G-related tech is really necessary. And U.S. moves to take matters into its own hands and stop Huawei’s rise may well put the whole issue to rest.
 
Why Other Countries Aren’t Falling in Line
Thus far, the U.S. campaign has found at best mixed success. Only Australia and, to a lesser extent, New Zealand, Japan, Taiwan and Vietnam have come anywhere close to a blanket ban on Chinese telecommunications tech. Elsewhere, responses have ranged generally from “We’re exploring other options, but don’t force us to take an overtly anti-China position” (see: Singapore, South Korea) to “Partial restrictions and careful vetting will be sufficient” (Europe) to “We’ll use as much Huawei tech as we darn well please, so stop nagging us about it” (Malaysian Prime Minister Mahathir Mohammad). Skeptics include the U.K. and Canada – fellow members of the crucial Five Eyes intelligence-sharing network (none of whom, inexplicably, are home to a major Huawei competitor); countries hosting or pursuing major U.S. military bases like Germany, South Korea and Poland; and nominal allies familiar with Chinese aggression like the Philippines. Even the African Union, whose Huawei-wired headquarters reportedly leaked a torrent of data to servers in China every night for five years, recently signed a new cooperation agreement with Huawei.

This reluctance is rooted, above all, in matters of dollars and cents. The physical requirements of 5G make rollouts breathtakingly expensive. It’s not just about upgrading existing cell towers. 5G will operate primarily on high frequency spectrum, which will unleash blistering data processing speeds with exponentially higher traffic capacity, but only at very short range. To ensure network stability and minimize latency, then, it will require a vast and dense network of base stations and antennas, plus millions of miles of new fiber-optic cable. Little of what 5G promises – driverless cars, automation, artificial intelligence, “smart cities,” “the internet of things” and so forth – can be realized without major capital expenditures.

Huawei and ZTE can make the leap to 5G less painful. Just three competitors – Finland’s Nokia, Sweden’s Ericsson and South Korea’s Samsung – are currently capable of delivering a similarly comprehensive suite of network equipment. (The United States’ Cisco and other smaller players will be competitive in narrow segments of 5G systems.) None have Huawei’s ability to achieve economies of scale and its levels of state backing, so it can often undercut its rivals by 20-30 percent. (It’s not a matter of sacrificing quality, either; some Huawei tech is considered the best in the business.) Moreover, the initial phases of 5G rollouts in all but a few countries will be built largely on existing 4G infrastructure – which, in many countries, is already built with Huawei tech. Ripping out all the existing Huawei equipment before upgrading would make the process even more expensive. Vodafone UK, for example, says it would need to replace some 6,000 base stations, costing hundreds of millions of pounds. It would also add costly delays, putting domestic industries behind the curve in developing profitable 5G applications. Germany’s Deutsche Telekom, the largest telecommunications operator in Europe, said a blanket ban on Huawei would set back its 5G roll outs by at least two years.

Poorer and less densely populated countries will benefit the most from Huawei's cost advantages, of course, but even highly urbanized countries – those best-equipped to develop and reap the economic benefits of 5G applications, and with perhaps the most to lose from delays – aren’t immune. The race to roll out 5G networks is not a winner-take-all contest, despite how it is often portrayed. Still, there are certainly first-mover advantages in the development of new 5G applications, influence over international standards and securing new patents. Even outside the tech world, a firm in any sector – from heavy industry to manufacturing to transportation to healthcare – primed to harness 5G’s power could reap cost and quality advantages over foreign competitors effectively stuck in what might feel like the digital stone age. Add to this the costs associated with potential Chinese economic retaliation and other forms of coercion, and it’s easy to understand why countries insist on exploring protective measures before deciding whether to assume the costs of an all-out ban.
 
Is a Blanket Ban Really Necessary?
Skeptical governments have relied on four main arguments to explain their reluctance to fully ban Chinese telecommunications firms. Two are falling on deaf ears; two may ultimately gain traction.

The first is that the U.S. has not provided any evidence that Huawei has installed “back doors” into its existing overseas networks or knowingly facilitated state-sponsored cyberespionage. (The U.K.’s Huawei Cyber Security Centre Oversight Board did find defects in Huawei source code and concluded that the firm failed to address security issues in the past, but this doesn’t prove that the company has acted with malicious intent.) Absent evidence, they say, the U.S. is acting primarily on suspicion rooted in its own strategic and trade-related tensions with China – ones that other countries may not share. If the U.S. was really worried about cybersecurity, they say, it wouldn’t have abandoned an Obama-era push to include cybersecurity measures in international 5G technical standards. Nor would the Trump administration be so quick to ease pressure on Huawei and ZTE in the interest of reaching a trade deal with China.

The second argument is that, with proper vetting and oversight, security vulnerabilities in Chinese tech can be detected, obviating the need for a costly ban. To enhance this argument, Huawei has opened up its source code to inspection at security labs it’s established in Brussels, Bonn and the U.K.

To Washington, these two arguments miss the mark. This is, in part, because back doors are largely indistinguishable from common coding errors in network software or firmware, making it nearly impossible to obtain smoking gun evidence of malicious intent. The sheer scale of 5G architecture will also make vetting too slow and expensive, considering the frequency of software and firmware updates involved, to be done thoroughly and regularly. (Modern software testing processes aren’t particularly good at detecting carefully designed back doors, anyway.) Moreover, the full spectrum of potential vulnerabilities with 5G won’t become known for years to come, until its myriad potential applications are developed and until, as expected, tens of billions of “smart devices” are linked into the system. By then, countries may have effectively locked themselves into partnerships with the Chinese. The costs of reversing course would be prohibitive.

To the U.S., then, it’s perfectly rational to want to deprive an adversary of capabilities that might prove dangerous – and to kneecap a company that might act on that government’s behalf. Lack of trust and competing strategic interests have everything to do with it. After all, in the 2000s the U.S. compelled its own tech firms to facilitate government surveillance in the service of national security. It would be naive to expect China to behave any differently, even if you ignored Beijing’s history of coercive activities abroad, the abundance of China-linked cyberattacks, the autocratic nature of the Chinese regime and its national security law requiring firms like Huawei to cooperate.

The other two arguments hint at a possible way for the U.S. and its allies to meet in the middle. One is that, if Chinese tech is limited to the periphery of 5G networks, any damage Beijing could do could be tightly contained. 5G networks consist of a tightly protected “core,” where servers and software execute the most sensitive and crucial functions, and the radio access network equipment (towers, masts, small cells inside buildings and along streets, and so forth) on the “edge” that connect wireless devices to the core.



 
If China could slip back doors into the core, where encryption keys are stored and authentication functions take place, it could gain unprecedented snooping power and even the ability to shut down key parts of a network altogether. As the dependency of critical infrastructure (including power grids and hospitals) on 5G networks increases, so too would Beijing’s capabilities to conduct crippling sabotage attacks. By comparison, if a Chinese firm slips a backdoor into edge components like, say, the base station or antennas outside your house or the operating system of the phone in your pocket, it could potentially monitor unencrypted data and encrypted metadata or infect user devices with malware, posing a small-scale espionage problem (especially if you happen to be a high-level intelligence target). But it’s doubtful that edge equipment could be used to conduct mass espionage or to bring down large parts of the network.

At this point, governments in France, Germany and the U.K. all plan to ban cheaper Chinese tech from the core but not the edge. Since the edge is where the bulk of new capital investment will be required – and where most Huawei equipment is located in Western 4G networks – this ostensibly makes it possible to harness Chinese cost advantages without incurring Chinese risks. But others, including the U.S. and Australia, say the decentralized nature of 5G networks will erode the distinctions between the core and the edge over time, with edge devices taking on more and more “smart” computing power and sensitive functions. To them, the only sure solution is a blanket ban. Skeptics of this argument say components in an even more decentralized core will still be distinct and protected from edge components.

The final argument is basically that supplier-inserted back doors are just one of a dizzying array of cyber threats facing 5G, and fixating on who makes the equipment addresses the problem too narrowly to justify the cost of a blanket ban. Indeed, this approach could make some cybersecurity challenges harder to address. Any network equipment, whether manufactured in Shenzhen, Silicon Valley or Sarawak, will inevitably be laced with exploitable security flaws, and the biggest threats will still be familiar ones like spearfishing and malware-infected software inadvertently downloaded by users. It’s certainly easier for a malicious actor to hack a system if it built in a backdoor itself. But ultimately, the best way to prevent espionage is widespread adoption of sound end-to-end encryption practices and use of other tools like virtual private networks. And the best protection against network sabotage is system redundancy. This means additional spending on backup network infrastructure from multiple suppliers. Cutting out one of the few major telecommunications suppliers available (and the cheapest one, to boot) would make redundancy harder.

The debate is clearly far from settled. But if the U.S. can be persuaded that the distinction between the edge and core will hold, and if protective measures like end-to-end encryption can be adopted widely enough (no small feat, considering that billions of connected devices will need to be configured to operate on secure channels), the U.S. may be willing to compromise and adopt a more tailored approach to Chinese tech.
 
Is the U.S. Bluffing?
There’s another, largely unspoken reason countries are resisting U.S. pressure on the issue: They think the U.S. might be bluffing on its threats to sharply curb military and intelligence cooperation. Consider the potential costs. The U.S. currently has troops in dozens of countries. Its warships stop in dozens more. Its critical logistics networks crisscross the globe. Its intelligence-sharing agreements allow it to act nimbly and entrench its partnerships. It would be one thing if there were enough strategically located countries shunning Huawei that the U.S. could keep its global operations humming. But there are not. So, to make good on its threats, the U.S. would have to dramatically scale back its global military footprint and deprive itself of access to vital intelligence flows, potentially putting the global balance of power in flux. It defies imagination to see how the risks of 5G outweigh these costs.



 
To be sure, the proliferation of Chinese 5G tech could indeed pose extraordinary new challenges to U.S. intelligence and military operations abroad, especially if its arguments about the network security risks prove valid – and particularly when operating in or with countries that allow Chinese access to the network core or fail to adopt prudent network security practices. The battlefield implications could likewise be dramatic; China could realistically shut down military communications, disrupt critical supply lines, collect and exploit signals intelligence, and so forth. The U.S. will need to become ever more judicious about how and where it sets up logistics networks, with whom it shares sensitive information, and how much it can afford to rely on next-generation weapons systems that depend on unhindered connectivity. It will probably need to develop more sophisticated and secure communications systems and consider helping partner governments bear the expense of ensuring network diversity and redundancy.

To an extent, the nature of these challenges isn't new. The U.S. has long been a global superpower well practiced in handling adversaries keen to steal U.S. secrets, frustrate its best-laid plans and exploit asymmetric capabilities to blunt inherent U.S. advantages. And it’ll certainly be able to exploit these same capabilities itself. (A leaked National Security Agency document from 2014 claimed the agency had penetrated Huawei networks so thoroughly that it didn’t know what to do with all the data it collected.)

The scale and complexity of the new risks are too much for the U.S. to ignore. Yet if it can’t pressure the world to shun Chinese tech or make peace with available security measures, it won't blow up its alliance network. Washington will instead try to make the whole debate moot by taking matters into its own hands. The U.S. already started this process in earnest in May, when it announced a ban on exports of U.S.-made component parts and software to Huawei, ZTE and other Chinese firms. Last week, to restart negotiations with Beijing on a trade deal, Trump signaled a willingness to relax the ban, though exactly how much remains unclear. But it remains an enormously powerful measure that the U.S. will likely return to eventually. U.S. firms no longer dominate as many sectors of the telecommunications industry as they once did, but they do dominate some of the fundamental building blocks such as semiconductors and mobile chips. This means any foreign firm in Huawei’s supply chain whose products contain these components also has to comply with the ban, lest it be sanctioned by the U.S. (Huawei's own research and development into semiconductors and microchips is widely believed to be inadequate for its needs.) Whether a ban would kill the company, or just weaken the quality of some of its tech and force it to scale back its product offerings, is impossible to say. U.S. pressure has already damaged Huawei’s reputation and revenue streams. At minimum, even the continued threat of a ban will make some countries think twice about partnering with a company that may not be able to continue to innovate.

There’s also a risk that the move would backfire by eventually accelerating China’s pursuit to develop indigenous components and ushering in an era of Chinese tech parity. Yet the U.S. has enormous incentives to follow through. A ban wouldn’t just hit the Chinese telecommunications sector; it would also hamper China’s broader drive to dominate high-tech industries, its breakneck military modernization, and its sprawling diplomatic ambitions. The U.S.-China strategic rivalry isn’t going away anytime soon, and the U.S. has an opportunity to cement its alliance structure and strike at multiple dimensions of Chinese power with a single blow. In other words, this is one of the few cases in which the U.S. may be better off acting alone.

Prepare Yourself For A Wild Market

 
by: Avi Gilburt
Summary
 
- Market has turned down from our long term target/resistance.

- The superficial analysis is being paraded before investors yet again.

- I think we will see much lower levels ahead.

     
For those that have been following my analysis of the stock market, you would know that I have highlighted the 3011-45SPX region as a major resistance and target for many years. Recently, we have struck that target, and thus far, it has caused us to turn down.
 
As I wrote in my last Seeking Alpha public article going into the Fed meeting this past week:
So, as we are now at what I think is a major inflection point in the market, with the Fed likely acting as the impending catalyst, I would suggest you watch how market participants “behave” after the Fed announcement – as well as the ensuing day or two thereafter – for our next bigger market directional cue, rather than the substance of the event as analyzed by all the “analysts.”
Yet, to my subscribers at The Market Pinball Wizard, I noted that I still expected we would be topping out within this resistance region, based upon our Fibonacci Pinball method of Elliott Wave analysis:
I still have to abide by what has kept us on the correct side of this market the great majority of the time over the years we have been providing analysis to our members.  
While there will always be times I am wrong in my primary expectations, the weight of evidence is still not suggesting that this is one of those times.
 
While most of you are quite certain that the Fed “caused” the turn down, I have a hard time understanding your theory on this position. You see, not only did the Fed do exactly what the market expected with a .25% rate cut, it provided us with an additional unexpected gift by ending Quantitative Tightening early. So, the Fed gave the market even more than it expected.
 
Should we not have rallied instead of dropped? In fact, the very next day the market rallied right back to the point at which it declined after the Fed announcement.
 
So, was the rate cut good for the market this past week? Was the rate cut in 2007 good for the market too? Based upon the history of stock market reactions to rate cuts, should we even go so far as to assume that rate cuts are bad for the market?
Again, I am quite certain many of you will respond in the comments section below with your after-the-fact reasoning as to why the market turned down when it should have turned up on the better than expected Fed policy. But, I certainly hope that the intellectually honest amongst you are appropriately questioning what really happened.
 
This brings me to another perspective about the decline we experienced this past week. On Thursday, the market rallied quite strongly, and had everyone assume that we were certainly going back to higher highs as the buy-the-dippers were back in full force. In fact, we completely erased the decline that occurred right after the Fed announcement.
 
But, I posted an alert to our members of The Market Pinball Wizard noting:
For anyone who remembers trading during the 2008-09 financial crisis, one of the things you may remember is that corrective rallies were ridiculously strong. For now, I have to view this as a corrective rally. In the cash SPX index, the a=c off the lows comes in around the 3020SPX region.
 
On the chart accompanying that update, I noted the upper end resistance between 3011-3020, with the high being struck at 3013 before we turned down in earnest.
 
Now, for those of you who think that a Trump tweet about additional tariffs was the “cause” of the market decline, I have a question for you. Did these exact same tweets about prior tariffs “cause” the market to rally 9% in 2018 – because the market did rally 9% in 2018 during these tariff escalations!?
 
How can the similar substance of tariff tweets “cause” the market to decline today, yet “cause” the market to rally in 2018? Were tariff tweets good in 2018 and bad in 2019?
 
Again, I am quite certain many of you will offer your after-the-fact reasoning as to why the tariff tweets are bad now, yet were good in 2018. But, again, the intellectually honest amongst you are likely questioning this issue. It simply begs for such questioning.
 
Personally, I cannot tell you how many times I have seen markets approach a resistance point, consolidate near that resistance point, and then see a turn upon the announcement of some news. While the substance of the news will sometimes support the directional turn to the market, and other times it will not, it is always assumed that the news event caused the move due to the proximity of the announcement to the market turn.
Yet, when the substance of the event should have caused the market to move in the other direction than it did, it is simply shrugged off because the turn occurred at the time of the news announcement. So, of course, it must have caused that turn no matter what the substance of the news.
 
There is an old saying that correlation is not akin to causation. And, if you are tracking the markets, I would strongly suggest you learn what that means. It will save your hide many times and avoid you getting whipsawed by clinging to market fallacies. And, we had two instances this past week which put that on display – again, assuming you are being intellectually honest.
 
For those of you that still have the strong desire to form reasoning to explain this phenomena, I am again quite certain we will see many posts below with logic that is akin to scratching your right ear with your left hand by going over the top of your head.
 
In fact, I have even heard the “logic” that the tariffs should be good for the market because it will force the Fed to cut rates even more which would support a stock market continued rally.
 
Sigh. As Ben Franklin would say, “so convenient a thing is it to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do.”
 
I have personally given up on this type of convoluted reasoning long ago. And, if you would take the time to read the studies of those who have analyzed the facts rather than take the path of the convolutions, you would give up as well.
 
In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news.
 
Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.
So, while news events can and certainly do act as a catalyst for a market move, the substance of that news will not always be instructive as to the directional move, as evidenced by Mr. Walkers 40+ year study.
 
And, just because you see a market move in an expected direction based upon a recent news event, it does not necessarily mean it was the true cause of the move. In order to believe it was a true cause for that move, you have to force yourself to ignore all the others times the market moved in the opposite direction relative to the substance of the “causative” news. Analyzing markets in this manner is quite common, yet it is quite superficial and inaccurate.
 
If you are being honest with yourself, this type of superficial analysis has likely led many of you to scratching your heads when you see a market move after a news event in the exact opposite manner in which you would have normally expected.
 
At the end of the day, believing that “the fate of markets is inextricably intertwined with the ebb and flow of geopolitics” is simply placing your head in the sand when markets so often do not react as expected, and only lifting your head when they do. In fact, this perspective has led most to miss the 2016-2018 and remain bearish during one of the most bullish periods of market history.
 
But, I have seriously digressed, and have to get back to our more important perspective on where we believe price is heading.
 
Based upon my analysis, as long as we remain below the 2970-3001 region, I am expecting some wild market action. In fact, whipsaw will likely be the name of the game, as the market makes its way down to lower levels over the coming weeks/months. Major support resides between 2600-2766, and
 
I think we will test that support over the coming weeks/months. So, strap yourself in, as it is likely going to be a wild ride.