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The President Who Cried Wolf

Written by Briton Ryle
Posted October 14, 2019

It happened yet again last week...

The S&P 500 was right at a critical breakdown point. And Thursday morning, S&P 500 futures were saying that yes, indeed, it's about to get ugly.

Amazingly, incredibly, at that very moment, President Trump informs us that China was coming begging back, puh-lease let us take another seat at the bargaining table. We desperately want to make peace!

And like good little sheep, we all bid stocks higher until Trump lets us know that he doesn't want to just give away the upper hand in the negotiations until he gets every single thing he demands. (Because, after all, everyone says that nobody knows more about deal-making than Donald Trump.) 

Thirteen times. I read that we've done this song and dance 13 times. And no, I'm not going to verify that. The actual number doesn't matter. We should be looking for signs that the dancers are tiring and want to hear a new tune...

You'd think we'd be getting pretty close to that time, wouldn't you? 

In any event, the president told us on Friday that a "phase one" deal was complete, and the market launched, applauding Trump for doing more for farmers than anyone, ever. 

But then we found out that the deal was indeed done, all except for talking about it some more and actually putting it in writing...

And I think I speak for everyone when I say I am very excited about more talking. Because I got a fever, and the only cure is more... talking?

Anyway.

Trump says he's gotten China to agree to buy $40 to $50 billion in American agricultural products. That's a little better than twice the $19.5 billion China bought in 2017, before all this nonsense began...

Very Substantial! 

This morning, Treasury Secretary Mnuchin said the phase-one trade deal is soooo substantial...

How substantial is it? 

VERY SUBSTANTIAL!

Now, I could be wrong about this, but when somebody is trying to impress you but they don't have any specific numbers or details and instead insert the word "very" to conjure up a big number, well, there usually is no big number. 

If we get right down to it, China will spend some money to get a deal signed. After all, what are the checks and balances on the Chinese government? They have a closed economy, you can't freely trade the yuan, so in a very real sense China can print as much money as it wants. 

But give in on technology transfers and intellectual property issues? I don't think this happens. And as I wrote last week, I don't think China cares. I think China's already gotten the technology and IP it needs to keep President Xi Jinping and all the other Chinese elites in power and living the good life. 

Communism? The good of the people? Please. This is about solidifying power. And they're just about done. 

Once China's real-time facial recognition AI goes live in surveillance cameras next year, it's over. The communist state will have total control. There will be no need for a trade deal anymore.

Sell the News

It may seem like overkill when the S&P 500 loses 5–15% every time trade talks break down. But if you think about how important China is for America's bottom line, well, it's likely this doesn't end well...

Apple. General Motors. Starbucks. Caterpillar. Qualcomm. Texas Instruments. Boeing. 

These companies all have some pretty significant exposure to China. Those chip stocks get around half of their revenue from China. Half.

So damn right the market sells off when trade talks go south. Imagine what will happen if total revenue for the companies that make up the S&P 500 fall even 10%? It would be a bloodbath...

I'm not saying that's what's going to happen. My point is that China has us by the short hairs, and they know it. They can crush our stock market and ensure that the current president doesn't see a second term. 

Trump will take a watered-down deal at some point. Probably not this year, though. I'm sure China knows it can drag this out as long as it wants. 

You remember when Saudi Arabia tried to kill U.S. shale companies, only they didn't understand the game and they ended up losing their control over the oil markets? These trade talks are similar...

Trump thought he could push China around. He didn't understand the rules, and now he's getting pushed around. 

Are you tired of all this winning? I know I am...

Can't wait to hear the new Team America cheer: We're #2! We're #2!

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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