After the US-China Trade War
Trade truce or not, a protracted Cold War-like conflict between the United States and China has already begun. That should worry the US, which, unlike China, is devoid of a long-term strategic framework.
Stephen S. Roach
NEW HAVEN – For the last two years, the conflict between the United States and China has dominated the economic and financial-market debate – with good reason. After threats and accusations that long predate US President Donald Trump’s election, rhetoric has given way to action.
Over the past 17 months, the world’s two largest economies have become embroiled in the most serious tariff war since the early 1930s. And the weaponization of US trade policy to target perceived company-specific threats such as Huawei has broadened the front in this battle.
I am as guilty as anyone of fixating on every twist and turn of this epic struggle between the world’s two economic heavyweights. From the start, it has been a political conflict fought with economic weapons and is likely to remain so for the foreseeable future. What that means, of course, is that the economic and financial-market outlook basically hinges on the political dynamic between the United States and China.
In that vein, the so-called phase one “skinny” trade deal announced with great fanfare on October 11 may be an important political signal. While the deal, if ever consummated, will have next to no material economic impact, it provides a strong hint that Trump has finally had enough of this trade war. Consumed by domestic political concerns – especially impeachment and the looming 2020 election – it is in Trump’s interest to declare victory and attempt to capitalize on it to counter his problems at home.
China, for its part, would also like nothing more than to end the trade war. Politics is obviously very different in a one-party state, but the Chinese leadership is not about to capitulate on its core principles of sovereignty and its aspirational mid-century goals of rejuvenation, growth, and development.
At the same time, there can be no mistaking downward pressures on the economy. But with Chinese policymakers determined to stay the course of their three-year deleveraging campaign – an important self-inflicted source of the current slowdown – they should be all the more eager to address the trade-related pressures brought about by the conflict with the US.
Consequently, the political calculus of both countries is coming into closer alignment, with each looking for some face-saving truce. There is always a risk that other complications will arise — recent events in Hong Kong and revelations of developments in China’s Xinjiang Province come to mind. But, at least for the time being, the politics of the trade war are now pointing more toward de-escalation rather than a renewed ratcheting up of tensions.
If that is the case, and if a phase one accord is reached, it behooves us to ponder what the world will look like after the trade war. Several possibilities are at the top of my list: deglobalization, decoupling, and trade diversión.
Deglobalization is unlikely. Like the first wave of globalization that ended ignominiously between World War I and the Great Depression, the current wave has generated a mounting backlash. Populism is rearing its ugly head around the world, and tensions over income and wealth inequality – aggravated by fears that technological innovations such as artificial intelligence will undermine job security – are dominating the political discourse.
Yet the climactic event that underscored the demise of the first wave of globalization was a 60% collapse in world trade in the early 1930s. Notwithstanding the current political dysfunction, the odds of a similar outcome today are extremely low.
Global decoupling is also unlikely. Reflecting the explosive growth in global value chains (GVCs) over the past 25 years, the world is woven together more tightly than ever before. That has transformed global competition away from the country-specific paradigm of the past to a far more fragmented competition between widely distributed platforms of inputs, components, design, and assembly functions.
A recent IMF study found that GVCs accounted for fully 73% of the rapid growth in global trade that occurred over the 20-year period from 1993 to 2013. Enabled by irreversible trends of plunging transportation costs and technological breakthroughs in logistics and sourcing, the GVC linkages that have come to underpin global economic integration are at little risk of decoupling.
Trade diversion is another matter altogether. As I have long argued, bilateral trade conflicts – even a bilateral decoupling – can do nothing to resolve multilateral imbalances. Putting pressure on one of many trading partners – precisely what the US is doing when it squeezes China in an effort to reduce its merchandise trade deficits with 102 countries – is likely to backfire.
That’s because America’s multilateral trade deficit reflects a profound shortfall of domestic saving that will only get worse as the federal budget deficit now veers out of control. Without addressing this chronic saving problem, targeting China will mean pushing the Chinese piece of the multilateral deficit on to America’s other trading partners. Such diversion will shift trade to higher-cost foreign sourcing – the functional equivalent of a tax hike on US consumers.
Trade truce or not, a protracted economic struggle between the US and China has already begun. A cease-fire in the current battle is nothing more than a politically expedient pause in what is likely to be an enduring Cold War-like conflict.
That should worry the US, which is devoid of a long-term strategic framework. China is not.
That is certainly the message from Sun Tzu in The Art of War: “When your strategy is deep and far-reaching … you can win before you even fight.”
Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.
Technical Analysis is the theory that price relates all news, fundamental and correlative future expectations into current and recent price activity. It is the theory that price is the ultimate indicator and that charts paint a very clear picture for those individuals that are capable of understanding the message that is being presented.
In this research article, we are going to highlight the technical analysis components that we believe are painting a very clear picture that an “early warning” signal is flashing very brightly in the US and Global markets right now.
Cross market analysis and methods of rationalizing true price rotation, valuation and trend become the foundation of most technical analysis.
Studies, technical indicators, advanced price theory and all the rest of the tools we use are ways for us to better understand what price is actually showing us. Today, we are going to focus on Gold, High Yield Corporate Bonds, and the Transportation Index because combined they are telling us something big is close to happening.
Before you continue, take a second and join my free trend trade signals email list.
Gold is a safe-haven instrument that measures uncertainty, fear, greed and the future expectations related to a secure global market economy.
When a crisis, economic or other uncertainty fears are minimized, Gold tends to move lower or consolidate into a lower price range.
When fears, economic uncertainty or any type of crisis event is causing concerns for global investors, Gold then begins to move higher as a measure of protection from risk and fear of any type of crisis event.
Price Of Gold – Bull Flag Within a Bull Market
Gold has recently rallied well above the $1400 level and formed a large Bullish Flag pattern.
The recent rally above $1400 confirmed the new Bullish Price Trend for Gold which indicates global investors are becoming more fearful of a crisis event or some other type of economic uncertainty.
We believe the next move high in Gold will push prices above the $1625 level, then above the $1745 level.
If that happens, we’ll know the fear of some type of crisis event is very real and that the Bullish major trend in Gold may continue for many years to come.
We just posted a much more detailed report on the new 7-year bull market starting for gold and mining stocks, which if you have not yet seen take a look at the charts.
As much as we like to think that Gold leads the market in terms of measuring fear and uncertainty, Corporate Bonds also share a role in the understanding and future expectations related to economic capacity.
If Corporate Bonds begin to sell-off before a major downside market trend begins, it represents a fear that future earnings and the ability to support/service corporate debt levels may be at risk. The way I explain this to people is that it is like a ship “battening down the hatches” and securing the cargo before entering a major storm.
A Corporate Bond sell-off indicates that global investors believe the economy is grinding to a halt and that earnings going to decline – thus putting debt at risk of failure in the future and this is why investors sell their bonds, and they they typically move before the stock indexes do. Think of high yield bonds as a leading indicator by a few days.
High Yield Corporate Bonds – Potential Major Breakdown
This HYG chart highlights the support channel in Corporate Bonds that appears to be at risk of being broken.
If a breakdown in price happens, this downside rotation in HYG would be a very clear warning that the US and global stock markets may be entering a serious price correction period.
If Bonds were to move dramatically lower while Gold rallied, we can only interpret this as fear has really begun to hit the markets and traders are panicking.
Transportation Index – Economic Leading Indicator
Lastly, take a look at this Transportation Index chart and pay very close attention to the Head-n-Shoulders pattern setup on the right side of the chart. You’ll see a similar Head-n-Shoulders pattern in May 2019 – just before a moderate downside price rotation.
As we move into the end of this year with liquidity diminishing and volatility starting to increase, the potential for a dramatic price sell-off becomes even greater. The lack of real market depth and liquidity, as well as this “early warning” set up in the charts, suggests a market breakdown event may be happening right before our eyes. It also may not happen, which is fine also.
As technical traders we do not require price to move in any one direction, we simply follow price and bet on the direction it’s moving. But if we do get a breakdown here it could be really exciting especially if you have a trade or two on the right side of the market.
The cross-market Technical Analysis and the chart patterns are suggesting that a peak has set up and that future expectations are much weaker than they were 14 to 18+ months ago.
We recently published this article highlighting some of our proprietary Indicators and Indexes suggesting this recent rally in the US stock market may have been a “euphoric zombie-land rally” with no real support behind it.
Dec 2, 2019: IS THE CURRENT RALLY A TRUE VALUATION RALLY OR EUPHORIA?
If our analysis is correct, and we get the drop in stocks, it could be a very big downside move.
We believe these charts confirm that price and Technical Analysis are screaming an “Early Warning” signal that price weakness is setting up in the US and global markets.
We believe the continued lack of liquidity throughout the Christmas holiday season may prompt a very big breakdown price move at any time in the near future.
When any one of these charts begins a price move to confirm these predicted setups, it won’t take long for the bigger major trends to follow-through.
In this research article, we are going to highlight the technical analysis components that we believe are painting a very clear picture that an “early warning” signal is flashing very brightly in the US and Global markets right now.
Cross market analysis and methods of rationalizing true price rotation, valuation and trend become the foundation of most technical analysis.
Studies, technical indicators, advanced price theory and all the rest of the tools we use are ways for us to better understand what price is actually showing us. Today, we are going to focus on Gold, High Yield Corporate Bonds, and the Transportation Index because combined they are telling us something big is close to happening.
Before you continue, take a second and join my free trend trade signals email list.
Gold is a safe-haven instrument that measures uncertainty, fear, greed and the future expectations related to a secure global market economy.
When a crisis, economic or other uncertainty fears are minimized, Gold tends to move lower or consolidate into a lower price range.
When fears, economic uncertainty or any type of crisis event is causing concerns for global investors, Gold then begins to move higher as a measure of protection from risk and fear of any type of crisis event.
Price Of Gold – Bull Flag Within a Bull Market
Gold has recently rallied well above the $1400 level and formed a large Bullish Flag pattern.
The recent rally above $1400 confirmed the new Bullish Price Trend for Gold which indicates global investors are becoming more fearful of a crisis event or some other type of economic uncertainty.
We believe the next move high in Gold will push prices above the $1625 level, then above the $1745 level.
If that happens, we’ll know the fear of some type of crisis event is very real and that the Bullish major trend in Gold may continue for many years to come.
We just posted a much more detailed report on the new 7-year bull market starting for gold and mining stocks, which if you have not yet seen take a look at the charts.
As much as we like to think that Gold leads the market in terms of measuring fear and uncertainty, Corporate Bonds also share a role in the understanding and future expectations related to economic capacity.
If Corporate Bonds begin to sell-off before a major downside market trend begins, it represents a fear that future earnings and the ability to support/service corporate debt levels may be at risk. The way I explain this to people is that it is like a ship “battening down the hatches” and securing the cargo before entering a major storm.
A Corporate Bond sell-off indicates that global investors believe the economy is grinding to a halt and that earnings going to decline – thus putting debt at risk of failure in the future and this is why investors sell their bonds, and they they typically move before the stock indexes do. Think of high yield bonds as a leading indicator by a few days.
High Yield Corporate Bonds – Potential Major Breakdown
This HYG chart highlights the support channel in Corporate Bonds that appears to be at risk of being broken.
If a breakdown in price happens, this downside rotation in HYG would be a very clear warning that the US and global stock markets may be entering a serious price correction period.
If Bonds were to move dramatically lower while Gold rallied, we can only interpret this as fear has really begun to hit the markets and traders are panicking.
Transportation Index – Economic Leading Indicator
Lastly, take a look at this Transportation Index chart and pay very close attention to the Head-n-Shoulders pattern setup on the right side of the chart. You’ll see a similar Head-n-Shoulders pattern in May 2019 – just before a moderate downside price rotation.
As we move into the end of this year with liquidity diminishing and volatility starting to increase, the potential for a dramatic price sell-off becomes even greater. The lack of real market depth and liquidity, as well as this “early warning” set up in the charts, suggests a market breakdown event may be happening right before our eyes. It also may not happen, which is fine also.
As technical traders we do not require price to move in any one direction, we simply follow price and bet on the direction it’s moving. But if we do get a breakdown here it could be really exciting especially if you have a trade or two on the right side of the market.
The cross-market Technical Analysis and the chart patterns are suggesting that a peak has set up and that future expectations are much weaker than they were 14 to 18+ months ago.
We recently published this article highlighting some of our proprietary Indicators and Indexes suggesting this recent rally in the US stock market may have been a “euphoric zombie-land rally” with no real support behind it.
Dec 2, 2019: IS THE CURRENT RALLY A TRUE VALUATION RALLY OR EUPHORIA?
If our analysis is correct, and we get the drop in stocks, it could be a very big downside move.
We believe these charts confirm that price and Technical Analysis are screaming an “Early Warning” signal that price weakness is setting up in the US and global markets.
We believe the continued lack of liquidity throughout the Christmas holiday season may prompt a very big breakdown price move at any time in the near future.
When any one of these charts begins a price move to confirm these predicted setups, it won’t take long for the bigger major trends to follow-through.
