Make Trump “Feel the Pain”

“Trump has been outfoxed,” says one reader.

“He’s doing the foxing, just watch,” counters another.

“I was a VP in the Trump Organization in New York,” writes a third, adding with the unimpeachable authority of personal experience:

“Our president was always the smartest guy in the room. He will prevail.”

Trump signed the massive $1.3 trillion omnibus spending bill Friday last, hard against a midnight government “shutdown.”

It fully funded many of his opponents’ programs — and omitted money for “the wall.”

But Monday we revealed a parliamentary trick card available to the president.

If used, Trump could limit spending on programs he opposes — and fund his wall.

So we solicited your opinion:

Was Trump outfoxed by the swamp… or is he the one doing the foxing?

The above sampling reflects the overall flavor of your response.

Trump as fox wins the straw poll.

But today we turn our attention to trade…

Will the president’s tariffs subdue wily China?

Or does China wield a mace that attacks Trump’s position of strength (until recently anyway) — the stock market?

Yesterday’s market action may have yielded a clue.

Details to follow…

The Dow Jones was down 345 points yesterday.

S&P closed the day 46 points lower; the Nasdaq hemorrhaged 211.

Was it because China threatened to devalue its currency in response to the tariffs… or because of speculation that it might?

You may recall that markets plunged 10% the two previous occasions when China devalued its currency — in August 2015 and then later that year.

We put the question to Jim Rickards yesterday.

He informed us:

A big devaluation is definitely a realistic scenario and one that I’m watching.

But China won’t do it right away, because they want to respond delicately to Trump with offers of negotiation, mostly just playing for time and trying to see how serious Trump is. But Trump is serious, and they will find that out soon enough. When that happens, they’ll escalate their response and then a devaluation is in play.

No devaluation fears… at least not yet.

Did the stock market tumble yesterday because China has threatened to dump its vast holding of U.S. Treasuries?

China held almost $1.2 trillion worth of U.S. debt instruments at the close of 2017.

If China ejected a goodly portion of these holdings, U.S. interest rates would soar — with all that implies for a stock market addicted to low rates.

The answer is no.

No such threats were issuing.

After all, China would be waylaid by its own boomerang.

Financial reporter Shawn Tully in Fortune:

The reason is that a sharp increase in rates would tank the value of the U.S. bonds in China’s giant portfolio of foreign reserves.

No devaluation fears… no threats of a bond sell-off.

So what does yesterday’s market drubbing tell us about possible Chinese trade retaliation?

Tech stocks fell yesterday upon report that the Trump administration is considering a crackdown on Chinese investments in U.S. technologies.

Tech leaders like Apple led yesterday’s decline.

Apple is listed in all the major exchanges — Dow, S&P and Nasdaq.

And given its market cap, it has a disproportionate impact on the entire market.

Apple alone accounted for nearly 10% of the S&P’s total return last year.

If a stock like Apple sneezes, the entire market catches a flu.

What does the foregoing have to do with China?

According to the SEC, the greater Chinese market accounted for 20.3% of Apple’s total net sales for the first quarter.

What if China retaliates against U.S. sanctions by putting the arm on Apple?

Knifing into its Chinese sales would vastly damage Apple’s stock.

And given Apple’s outsized influence on the U.S. stock market, China could potentially drag down the entire show — without a risky currency devaluation or a self-damaging unloading of U.S. debt.

Global Macro Monitor:

What more efficient way to take the U.S stock market down than to hit its largest stock by threatening market access to the Chinese consumer? Apple’s market cap is over $800 billion, the world’s largest, and such a scenario would certainly take the overall market down.

Do we forward you naked speculation?

We do not.

Such prospects of mischief issue from the Chinese Commerce Ministry.

A researcher therein, a certain Mei Xinyu, specifically recommends targeting the U.S. stock market to make Trump “feel the pain.”

We suspect Chinese leadership entertains similar designs.

Trump is already “feeling the pain.”

Largely due to trade war fears, the Dow is about to record its worst month since January 2016 — shortly after China last devalued the yuan, we might add.

Of this we are certain:

If China does go after Apple or the overall stock market, Trump won’t be the only one feeling the pain…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning