A scary movie

It’s the fortieth anniversary of the 1979 film The China Syndrome [1] starring Jane Fonda, Jack Lemmon and Michael Douglas, which exposes serious safety issues at a California nuclear plant. The term ‘China syndrome’ refers to a nuclear accident causing the theoretical meltdown of nuclear material to seep all the way through the earth’s core and surface on the other side of the earth in China.

Today, forty years later, another kind of China syndrome has been causing concern and hesitation in the economy and markets across the globe [2]. It has become clear since early 2018 that the Trump administration was going to pursue a policy of both threatening and implementing tariffs on Chinese imports in order to push the Chinese into negotiations to try to settle long standing US complaints about trade imbalances, the forced sharing and theft of intellectual property, and the requirement for US companies to form joint ventures with Chinese partners in order to do business there. The Chinese, of course, have their complaints that the US is looking to impose its will on changes to Chinese laws.[3]

Deal or No Deal?

For the last few months as negotiations have been underway, the reporting had been consistently positive that good progress was being made and that a deal was at hand. But as the great baseball legend Yogi Berra said, “it ain’t over ‘til it’s over.” [4] According to the Administration, the Chinese decided to back off of points that were believed to have been settled, which has derailed an agreement. While talks are supposed to continue, for now, tariffs on $200 billion worth of Chinese goods that were at 10% have now been raised to 25% [5]. The Chinese announced retaliatory penalties first thing Monday morning. [6]

Markets have responded negatively, with the S&P 500 dropping over 2.4% the week of the failed negotiations (still up 15.38% for 2019) [7], a pretty modest fall given the high expectations that a major deal was imminent. Monday morning, however, the Dow futures were down 500 points [8] after the response from China. There are always many factors affecting how markets move, both positively and negatively. Markets have recovered strongly since the late 2018 selling storm not just because of optimism about a China trade deal but also because the Federal Reserve has shifted to a more benign interest rate policy and economic data and earnings have generally come in somewhat stronger than previously expected. As markets continue to absorb the new reality of no deal for now, increased volatility is likely to be with us for a while.

Be Prepared

While markets are concerned about the China trade deal being delayed or cancelled and tariffs rising, why haven’t the markets reacted even more negatively? Companies have been adjusting for some time realizing that the China trade issues are likely to be long-lasting and are bipartisan in nature, so waiting for the next election may not change things very much. Like smart investors, smart managers are long-term oriented, think strategically and diversify. Global manufacturers of products from shoes to vacuum cleaners and from electronics to heavier equipment are typically not beholden to any one country; they source parts and assemble not just in China but across the globe from places like Vietnam, Malaysia, Egypt, Mexico and Colombia. Some companies are better positioned than others, but in time the laggards will either catch up or suffer accordingly. [9]

This perspective is not at all meant to dismiss concerns about a failed deal with China. Clearly, the worst-case outcome of an all-out trade war with China would not be good for the US, China and the rest of the global economy and hopefully will be avoided. However, effectively preparing for long-term strains in relations with China and others, just like preparing for changes in demographics, technology, and climate, are what great companies and investors have to do to be successful over time. It requires patience, perseverance, and discipline. We overcame the China syndrome of 1979, and we’ll overcome the China syndrome of 2019.

Best regards,

John M. Bussel

Chief Investment Officer

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1 Douglas, Michael, et al. The China Syndrome. https://www.imdb.com/title/tt0078966/

2 “Understand the Trade War Better: A Primer on International Tariffs.” Up To Us, www.itsuptous.org/blog/understand-trade-war-better-primer-international-tariffs.

3 CNBC Kempe, Fred. “It’s Time for Markets to End Their Illusions about a US-China Trade Deal.”

4 Scott, Nate. “The 50 Greatest Yogi Berra Quotes.” USA Today, Gannett Satellite Information Network, 28 Mar. 2019, ftw.usatoday.com/2019/03/the-50-greatest-yogi-berra-quotes.

5 Herron, Janna. “Trade War Update: White House Expects China to Retaliate on Tariffs.” USA Today, Gannett Satellite Information Network, 12 May 2019, www.usatoday.com/story/money/2019/05/12/new-tariffs-2019-white-house-expects- china-retaliate-trade-war/1183367001/.

6 Herron, Janna. “Trade War Update: White House Expects China to Retaliate on Tariffs.” USA Today, Gannett Satellite Information Network, 12 May 2019, www.usatoday.com/story/money/2019/05/12/new-tariffs-2019-white-house-expects- china-retaliate-trade-war/1183367001/.

7 Source: Yahoo Finance, data as of 5/13/2019. https://finance.yahoo.com/quote/%5ESP500TR/

8 Matthews, Chris. “Dow Tumbles More Than 500 Points as U.S.-China Tariff battles escalates.”, May 13, 2019, https://www.marketwatch.com/story/dow-futures-drop-over-200-points-as-u-s-china-trade-talks-appear-stalled-2019-05-13.

9 Aeppel, Timothy. “U.S. Companies Adapt to ‘Endless’ China Tariffs.” Reuters, Thomson Reuters, 2 Mar. 2019, www.reuters.com/article/us-usa-trade-china-tariffs-idUSKCN1QI55S.

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