“Decisions in a modern state tend to be made by the interaction, not of Congress and the executive, but of public opinion and the executive.” ―Walter Lippman, The Basic Problem of Democracy, 1919
Before going on to this week’s commentary, we wanted to share a passage from These Truths: A History of the United States by Jill Lepore:
Progressivism had roots in late nineteenth-century populism; Progressivism was the middle-class version: indoors, quiet, passionless. Populists raised hell; Progressives read pamphlets. Populists had argued that the federal government’s complicity in the consolidation of power in the hands of big banks, big railroads, and big businesses had betrayed both the nation’s founding principles and the will of the people, and that the government itself was riddled with corruption. “The People’s Party in the protest of the plundered against the plunderers―of the victim against the robbers,” said one organizer at the founding of the People’s Party in 1892. “A vast conspiracy against mankind has been organized on two continents and is rapidly taking possession of the world,” said another. Progressives championed the same causes as Populists, and took their side in railing against big business, but while Populists generally wanted less government, Progressives wanted more, seeking solutions in reform legislation and in the establishment of bureaucracies, especially government agencies.
Populists believed that the system was broken; Progressives believed that the government could fix it. Conservatives who happened to dominate the Supreme Court, didn’t believe that there was anything to fix but believed that, if there was, the market would fix it. Notwithstanding conservatives’ influence in the judiciary, Progressivism spanned both parties.
The United States of America has been here before.
We will be sharing passages from Jill Lepore’s magnum opus over the coming weeks and months in the run up to the Democratic primary battle for 2020 Presidential Election.
Osaka: From Trade to Tech
From The Wall Street Journal:
Some money managers are bracing for a potential resurgence in trade tensions after President Trump’s meeting with Chinese President Xi Jinping this weekend by hedging their bets with currencies and options.
Strategies include a short on the Australian dollar and other currencies as well as bearish put options on the iShares China Large-Cap exchange-traded fund. Money managers including Russell Investments have pared their exposure to U.S. stocks, favoring more-attractively-valued shares of emerging-market companies.
How those moves pan out largely depends on what happens in Osaka, Japan, this weekend, when Messrs. Trump and Xi meet Saturday on the sidelines of the Group of 20 summit. There is no clear consensus among investors on whether the U.S. and China can reach a deal. Trade-policy uncertainty remains at elevated levels, according to data compiled by Wells Fargo Investment Institute.
Rather than being left flat-footed, investors are taking precautions in case talks lead to an impasse or, worse, a full-blown escalation in tensions. The S&P 500 slumped 6.6% in May following the unexpected implementation of additional tariffs on China’s products.
With one trading day remaining before President Trump and President Xi are expected to meet at the sidelines of the G-20 summit in Osaka, the S&P 500 Index is down 69 basis points while the Philadelphia Stock Exchange Semiconductor Index is up 317 basis points. Huawei is likely to be part of any potential trade deal, the recent strength in semiconductors could well reflect some optimism for trade negotiations taking a turn for the better following the meeting between Messrs. Trump and Xi.
While we are somewhat optimistic with progress being made on trade negotiations, more on that anon, we are concerned the economic hostilities between the US and China gradually shifting from being centered around trade to being increasingly focused on enabling technologies, such as semiconductors, and core technology infrastructure, such as telecommunication networks. For that reason, we would use any trade optimism related rallies in semiconductor stocks to further reduce exposure or add short positions.
Trade Optimism
The noise out of Washington suggests that there is a more than even chance that the talks between the leaders of the largest economies in the world will result in a deal in the next few months. It may well also be that the US and China negotiate a truce on Huawei, although any deal relating to the Chinese telecommunication changed could be torpedoes by Congress.
Our view is predicated on President Trump, not the trade hawks in his administration, wanting a deal rather than applying further tariffs on US dollar 325 billion of Chinese imports that he threatened to impose as early as next month.
We expect the two leaders to announce, following their meeting, that trade talks will resume and they expect a deal to be hammered out before the end of the year. The hawks on the Chinese side are likely to agitate for all tariffs to be eliminated with immediate effect. While the hawks in the Trump Administration will continue to insist that China enshrine its commitments in law.
Beijing has already made changes to its laws by passing a new Foreign Investment Law in March, and making amendments to its intellectual property-related laws and regulations. Changes to the intellectual property laws and regulations offer, accord to experts we have spoken to, significantly stronger protection for foreign intellectual property rights and limit Chinese corporations ability to coerce technology transfer. More action is likely to be required China, but at least there appears to be meaningful progress on this front.
Putting China’s Technological Progress in Check
Among the preconditions for a trade agreement put forth by China is the requirement for the US to remove its ban on the sale of US technology Huawei. This will be a tricky matter to resolve. The Trump Administration has for months been drumming up anti-Huawei sentiment in Washington that any attempt to compromise will be seen as selling out national security for monetary gains. Senator Mitt Romney is already working on legislation that would prevent the President from removing Huawei from the export ban list.
Of the few bipartisan issues in Washington is the desire to put China’s technological progress in check, particularly its development of semiconductor and defense industries. Therefore, in our opinion, any trade deal is likely to skirt around the Huawei and technology transfer issues. These issues are then likely to manifest through alternative channels after a trade deal has been struck. One possibility is for a compromise allowing Huawei to resume buying components from US suppliers, in exchange for some restrictions on Huawei building out telecommunication networks US-friendly jurisdictions.
The technology-led US equity bull market might not die of old age but may die because the power players in Washington decide that the no amount of lost revenue is worth salvaging in its bid to slow the rise of China.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.