Military Stocks Warm Up, Nvidia Goes to Beijing and 'Ball's in China's Court'
Just where is Trump going with its tariff battle and why? Also, don't forget about Taiwan, what the markets are pricing in and about the value of gold and silver.
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Just what is this president and this administration trying to accomplish economically? The president and his representatives have often sent conflicting messages concerning trade relations with China, with our North American neighbors, with our NATO allies, and with Asian allies as well as with others. Especially, though, the chaos, as well as the most severe tariffs seem reserved for the planet's second largest economy, China.
The Chinese economy is a manufacturing/export-focused ecosystem that has been as heavily reliant upon the U.S. consumer as the U.S. government has been at times on Beijing investment in U.S. sovereign debt. That consumer is Pres. Trump's ace card as he proceeds to either improve conditions for U.S. manufacturers and exporters, or as it seems to many, completely reorder what the post-war global economy had evolved into.
A Deal?
Earlier this week, while quoting the president, White House Press Secretary Karoline Leavitt said, "The ball is in China's court. China needs to make a deal with us. We don't have to make a deal with them."
As far as wanting to make a deal, Beijing has, after not publicly responding in any way other than the increase of tariffs on U.S. exports to China, has made several stipulations. Beijing claims to be willing to talk but first needs to see the Trump administration refrain from making disparaging remarks concerning China and must present a consistent position on trade.
In addition, there must be a willingness to address Chinese concerns and the sticking point that is Taiwan. Taiwan is the island of Formosa (and other small islands) that has operated independently of mainland China since the communist revolution came to its conclusion there in 1949. Mainland China (The People's Republic of China) considers Taiwan a rogue province and still claims sovereignty over the region. Conversely, Taiwan (The Republic of China) has historically claimed mainland China as part of its territory as well. Taiwan is a client state of the U.S. for defense purposes, which is a sticking point for Beijing.
Isolation?
Could it be that part of Pres.Trump's strategy concerning China is not necessarily a straight up improvement in trade conditions for U.S. exporters and U.S. manufacturers, but a form of isolationism that forces China into a subordinate position in this relationship?
We are told that dozens of nations are seeking to make trade deals with the U.S. and that a good number have made realistic offers. Bloomberg News (and others) have reported that in exchange for a reduction in tariffs or other relaxed barriers to accessing U.S. consumers, the administration is prepared to ask these trade partners to take steps of their own to limit Chinese dominance as the global manufacturer of choice due to low overhead and a supportive framework.
There is even talk of working the imposition of tariffs on Chinese exports to U.S. allies into any deal between the U.S. and those allies. The U.S. also would like to codify in some way a unity where tertiary nations would not act as dumping grounds for inexpensive or excess goods from Chinese companies.
On the matter, Treasury Secretary Scott Bessent, who has taken a leading role on trade within the Trump administration commented on many U.S. trade partners as a group last week: "They've been good military allies, not perfect economic allies." Bessent has also talked about reaching several trade deals and then, "We can approach China as a group."
Where Are They Now?
On Wednesday, Pres. Trump met with the Japanese delegation. On Thursday, he is set to meet with Italian Prime Minister Giorgia Meloni. Very interestingly, Nvidia NVDA CEO Jensen Huang is in Beijing to meet with trade officials there at the invitation of the Chinese government.
The Real Concern
The real concern that underscores these trade talks and these "tit for tat" escalations in tariffs that will destroy demand for one another's goods, is that a trade war could turn into a cold war, and that a cold war could turn into a hot war. It is regional and perhaps global economic supremacy that may be at the heart of everything that is currently going on around us. That could lead us down a very dangerous path.
It doesn't take a military genius to track incursions into the Taiwanese Air Defense Identification Zone by mainland military aircraft. In 2024, the number of intrusions almost doubled from 2023 to more than 3,000 incidents. The mainland Chinese Navy has been building up to 30 ships annually and now claims over 360 vessels in operation on its way to a stated goal of more than 400. The U.S. Navy operates about 300 ships on an everyday basis.
In addition to harassing Taiwanese forces, Beijing has used its navy to claim and even build small islands in dispute with Japan as well as to intentionally intimidate the much smaller Philippine naval forces.
Don't forget, Chinese actors have consistently and in increasing fashion, probed and even disrupted critical U.S. infrastructure through cyberattacks. China has spent many years building up its offensive technical capabilities. This was an issue for the Biden administration, and one would be foolish to think that this activity has completely come to a halt as power changed hands in Washington. The Wall Street Journal has reported that U.S. ports, sources of water, airports and telecommunications have all been targeted.
It would not take much for an accident to happen or quickly escalate into something nobody wants with such cyber activity or with two such large navies often operating in the same waters. Take the South China Sea for example, which China claims as its own, or more specifically, the Taiwan Strait? Certainly, fertile ground (or water) for someone looking for trouble, or for trouble to find a home by unfortunate chance.
Anyone Else Notice the Military Stocks?
That on Wednesday, with the Nasdaq Composite down 3.07%, the S&P 500 down 2.24%, the Dow Transports down 2.24% (not a misprint) and the Philadelphia Semiconductor Index down 4.1% that Lockheed Martin LMT, Northrop Grumman NOC, Kratos Defense KTOS, and RTX RTX, which is the old Raytheon Technologies, were up 1.6%, 1.54%, 0.94%, and 0.47% respectively. Industrial firms somewhat reliant upon imported resources including rare earths from China? Or key defense contractors where investors see increased demand going forward?
The S&P 500 Since February:
Northrop Grumman since February:
Conclusion
Markets discount risk. That's what they do. Financial markets have certainly been pricing in decreased economic activity, the possibility for higher prices, and a slow to react central bank that currently has a far better case for cutting short term rates today than they did ahead of the election last autumn. Not that we know that short-term rates would stimulate anything in this environment.
The truth is that these markets may be pricing in the possibility, not the eventuality, of something far worse than what the media has been talking about. Let's hope that this opinion piece is more the midnight overreaction of that old man staring back at me from a blackened window, and less the daunting presentation of risk that too few of us fear it could be. To exist in a state oblivious to such risk would be a joyous place indeed. Buy gold. Buy silver.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 225K, Last 223K.
08:30 - Continuing Claims (Weekly): Last 1.85M.
08:30 - Housing Starts (Mar): Expecting 1.417M, Last 1.501M SAAR.
08:30 - Building Permits (Mar): Expecting 1.455M, Last 1.459M SAAR.
08:30 - Philadelphia Fed Manufacturing Index (Apr): Expecting 6.6, Last 12.5.
10:30 - Natural Gas Inventories (Weekly): Last +57B cf.
1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 583.
1:00 - Baker Hughes Oil Rig Count (Weekly): Last 480.
The Fed (All Times Eastern)
11:45 - Speaker: Reserve Board Gov. Michael Barr.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: AXP (3.48), DHI (2.72), SNA (4.81), UNH (7.31)
After the Close: NFLX (5.74)
At the time of publication, Guilfoyle was long NOC, RTX equity. Long gold. Long silver.
