Last week, China and the U.S. announced they were resuming trade talks in early October. Right on cue, the stock market rallied, bonds and gold fell and the euro came roaring back from interim lows. It was as if they were playing “Happy Days Are Here Again” on CNBC.
By the way, the early October date was not random. It follows the Oct. 1, 2019, celebration in Beijing of the 70th anniversary of the Communist victory over the Nationalists for control of China and the beginning of the regime of the Communist Party of China that continues until this day. President Xi did not want messy trade talks, let alone failed talks, to muddy the waters on this big celebration.
That aside, the question is whether the stock market rally was justified and whether anything really changed in the China-U.S. trade wars as a result of these new talks. The short answer is no.
Talking is certainly better than not talking and much better than fighting. But the issues are still irresolvable.
China cannot give up its theft of U.S. intellectual property because it depends on that theft to propel growth. China cannot amend its internal laws to provide enforceability of any agreement because that involves a major loss of face and erodes Xi’s power. Trump cannot let the Chinese trade surplus with the U.S. persist because it’s a major drag on U.S. growth and it steals U.S. jobs.
None of the big issues are any closer to a solution and that state of affairs may last for years. Despite the temporary euphoria, the market will realize sooner than later that the resumption of trade talks is just part of China’s strategy of delay and Trump’s strategy of propping up the stock market. When that realization sinks in, probably in late October, stocks will reverse course and bond and gold prices will resume their long-term climb.
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