Cumberland Advisors Market Commentary – Year-End & 2020 Forecast Note #1: US–China Trade War

Author: David R. Kotok, Post Date: December 3, 2019

In our opinion, investors should not be deceived by any promise of a definitive Trump Trade War settlement. It isn’t in the cards. The best outcome is a truce, and even that will be more like a ceasefire. As of this writing, U.S.-China tariff talks continue, and a phase one trade deal is still expected to be passed. Global equities (excluding China, HK) have rallied on improving growth outlooks, assuming that trade talks will lead to a ceasefire and not to the imposition of more Trump tariffs on December 15.

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes 1 - US–China Trade War

US financial markets may celebrate a ceasefire as an alternative preferable to an economic shooting war. So it may be that less tariff shooting is better than more tariff shooting. But we must remember that Trump likes the money from the tariffs. The US is collecting those tariffs from American firms, and the amount they produce is now paying about one fourth of the interest bill on the US net debt.

Trump and his lackey Peter Navarro claim that China is paying the tariffs, but that simply isn’t true. Tariffs are a sales tax on Americans. They are a direct tax on the US consumer, masquerading (with the political help of noted Fox News “economists” like Hannity and Carlson) as tariffs China has to pay. Just check the price of a washing machine now versus the pre-tariff era three years ago.

Readers are encouraged to monitor the China news flow from independent sources. China is suffering large internal credit problems. And it has a massive swine fever epidemic.

But don’t expect China to react the way a Western democracy does in the face of a crisis. China is an autocratic system with a single political party. It has no election calendar, no primary debates, and is a mostly closed system, even in today’s electronic communications world.

China appears to have incarcerated upwards of a million of people in “re-education centers” in predominantly Muslim Xinjiang Province (source: Reuters,, much as it has suppressed other factions of its populace over many decades. Those of us who are older remember the Cultural Revolution of 1966–76, during which the communist government of Mao Zedong killed millions of people and persecuted tens of millions more (Source: Wikipedia,

We remember the way Nixon and Kissinger opened the first dialogue with China, and we remember the hoped-for thaw under Deng Xiaoping. Nearly a half century later, we now witness a serious, expansive Chinese military buildup in the South China Sea. We see the Chinese regime in protracted negotiations with the US but without having to budge on terms.

And now we have the Hong Kong protests, the US House of Representatives responding by passing the Hong Kong Human Rights and Democracy Act (HKHRDA), and Beijing saying it will retaliate (“‘Strong Countermeasures’: After U.S. House Passes Bills Backing Hong Kong Protests, China Threatens Retaliation,” Fortune, Oct. 16, 2019, There were actually two Hong Kong bills passed. HKHRDA puts Hong Kong’s trade status with the US under annual review to determine whether Hong Kong is sufficiently autonomous from China to warrant special treatment. The PROTECT Hong Kong Act prohibits US companies from exporting tear gas, rubber bullets, and other crowd-control equipment for use by Hong Kong authorities.

HKHRDA also allows sanctions on specific individuals. That is a key provision, and efforts to work around it will trigger additional trade negotiations. The Chinese and the Americans negotiate side letters and implementation details to circumvent such sanctions. Look carefully at these details in any press releases or other texts. Read both the English version and the Chinese version in a neutral English translation if you don’t have a reliable source fluent in Mandarin.

Unfortunately, the ban that the PROTECT Hong Kong Act imposes may make the Congressmen who voted for the act feel good, but in the real world the act is meaningless. It forces the Chinese to turn to other suppliers but won’t prevent any violence against protesters. It might actually encourage the use of lethal ammunition, and it might lead to growing numbers of surreptitious arrests for more “re-education.”

The Congress passed the Hong Kong bills on an overwhelming bipartisan vote, and Trump signed them. He had little choice, since any veto would have been overridden.

Finally, the financial markets are starting to worry about the capital structure in Hong Kong. They have dodged warning shots from the protestors, from the HK governing body, and from the escalating tensions between China and the US. The “one-country, two systems” framework instituted by Beijing when China regained sovereignty over Hong Kong in 1997 idea is not due to expire until 2047, but the protests could lead to an accelerated expiration. Beijing will decide on the timing no matter what the US Congress says or does. And painful though the reality may be, it is doubtful that the Hong Kong protest movement can prevail against Chinese might.

Meanwhile, the HK financial sector is still important but not as relevant as it used to be in global finance. Watch what the Hong Kong Monetary Authority does in managing the HK dollar versus the US dollar. Look for changes in interest-rate spreads between the two currencies – the spreads represent a market-based pricing of the perceived risks. Also look for further capital flight from Mainland China and from HK.

Forecast for 2020: There will be no settlement in the Trump Trade War, nor will there be a reduction in China-US tensions. Markets discounting anything more than a ceasefire are making an erroneous assumption.

Dear readers, nothing would please us more than to be wrong with this forecast, but our job is not to base management decisions on hope; it is to base them on realistic assessments. Sometimes realism is more difficult. Hope is not a strategy at Cumberland.

David R. Kotok
Chairman and Chief Investment Officer
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The complete series of Year-End & 2020 Forecast Notes can be found here:
Cumberland Advisors Market Commentaries – Year-End & 2020 Forecast Notes by David R. Kotok

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