Stuffed

Last week, markets rallied on hopes of a thaw in the ongoing trade war between the U.S. and China. I'm not biting on that pump fake just yet.

In latest example of market schizophrenia, reports of a "thaw" in the talks was seized upon and immediately translated by AI-powered algo traders into a stock market rally.

It didn't last long.

In advance of the critically important trade talks, U.S. authorities have black-listed a number of Chinese firms on security concerns. The move was meant to express the U.S. government's distain for the mistreatment of Muslin minorities in China (a mistreatment strikingly copied by U.S immigration authorities in Texas - but that's a story for another time).

And in a case of 'loose lips sink ships', Huston Rocket's GM Daryl Morey, committed the ultimate sin of questioning the authority of the Chinese government by ostensibly supporting the cause of Hong Kong independence with a tweet of encouragement. The uncertainty caused by this seemingly minor transgression has instantly depressed the risk markets after hearing the harshness of the Chinese response.

Chinese-U.S. relations are continuing to erode in an atmosphere of mis-trust and acrimony. In losing out on the Chinese tv market, the NBA is the latest victim in the war of ideology that continues to rage in today's world of increasingly complex geopolitics. The real economic effects are now coming fast and thick. Just look at this morning's pathetic PPI.

A bill limiting the eligibility of Chinese based investments by U.S. pension funds is taking shape in the corridors of the U.S. congress, championed by Donald Trump's flying-monkey aide, Larry Kudlow. If enacted, the draconian legislation could easily prompt a risk-off overreaction from fragile markets already reeling from a year of trade tweet landmines.

Capital markets, already caught between the rock and hard place of low rates and slowing growth, continue to oscillate in wide range. The slowing data in the service sector, revealed last week, has added to the growing angst from the recession camp. The last thing markets need now is a ramp-up in interventionist policies from politicians.

So far, effects from the trade war on employment and consumer confidence have been minimal, frustrating the bearish pundits. But should the trade war morph into an attack on capital flows, the disruptions would be far more devastating to stock markets than any slowing of global PMIs. A retaliatory disgorgement of China's U.S. treasury holdings could ensue, raising rates and damaging confidence in capital markets. All this at a time when a cooling-off of rate pressures is critical in supporting the nascent soft landing scenario.

Could all this be an attempt by the Trump team to push their advantage in advance of a surprise change of heart? That theory is plausible when placed in the context of the 2020 election race. As well, the ancillary benefits of deflecting attention away from the impeachment side-show seems to fit that narrative. It's a tempting story.

Still, an enforceable and comprehensive deal seems like an impossible buzzer-beating long shot. Ideologies this far apart rarely compromise without inducement from a crisis environment. A 'partial' deal is more likely at some point, but the water torture of negative headline risk should continue for a while yet.

One last hurrah of positive cyclical growth is still theoretically possible. Depressed capital spending and suppressed business confidence has created a major global inventory correction, inducing a widespread slow-down over the past 18 months. We could easily see a modest global growth recovery next year should the current trade/investment uncertainties recede. The depressed value/cyclical sectors would soar if this were to occur. It could be worth a shot- albeit a highly contested one.

But a potential hissy-fit between Presidents Xi and Trump continues to be a looming threat as Prez Cheeto continues to push his perceived advantages.

So I'm not tempted. As any basketball fan knows, a contested shot often ends up getting stuffed.

Risk Model: 1/5 - Risk Off

Nuff said - what part of risk-off don't you understand.