What Steve Smith and China Have in Common

I’m not sure what’s worse; Trump’s trade war that is set to wipe billions more from the Aussie market today, or Steve Smith’s attempts to wipe one side of a cricket ball with tape to get some sort of a demented edge to win a cricket game.

But when you think about it — or at least when you think about it the way that I do — both situations might not be as bad as you think.

Let’s start with Aussie cricket and team captain Steve Smith — ‘the best Aussie batsman since Don Bradman’. On the off chance that you haven’t heard, Smith engaged in some premeditated cheating at lunch on day three of the test against South Africa.

However, he only conceived the plan. In his wisdom, he assigned the ball tampering task to the most inexperienced — and therefore most suggestible — guy in the team. Ball tampering is outright cheating. The positions of Smith and Vice-captain David Warner, who was also apparently involved, are now untenable. They have to go, or at least serve lengthy suspensions.

Why is this a good thing?

Well, it will cause some short term pain, no doubt. But it may also serve to dramatically change the culture of the Aussie cricket team. Let’s be honest, the team’s antics are a national embarrassment. They have been for years.

Admission into the Australian cricket team requires that you can play cricket well…and turn into a dirtbag once you get your baggy green for the first time.

Apart from the sledging and general idiocy, there is simply a lack of humility on display. For example, in the Boxing Day test in Melbourne, David Warner was out for 99. However, the replays showed debutant bowler, Tom Curran, had bowled a no ball, giving Warner a life.

The next ball, Warner got his century. Was his celebration subdued, humble, and respectful given the stroke of good fortune he had just had? No. He celebrated like it was his maiden ton, and sledged the bowler for good measure. All class…

So if this — and many other instances like it — vanish from the Australians’ game in the future, it will be the better for it.

What’s this got to do with Trump’s trade war?

Well, this could be a good thing too. While we don’t know all the details yet, Trump’s plan is to impose tariffs on a range of China’s exports. Like the Australian cricket team, Trump claims China is cheating in the trade game, and he wants to level the playing field back in favour of the US.

According to a recent Yahoo Finance article:

“The goal is to get China to treat U.S. companies in China the way we treat Chinese companies in our market,” a senior Trump administration official told reporters on March 22. A forthcoming government report, he said, “clearly demonstrates there are unfair practices by China as it relates to their efforts to acquire US technology and to favor their companies over US companies.”

Western firms have complained for years that China routinely steals their trade secrets, through outright theft and hacking, and also through domestic rules that require foreign firms to turn over technological know-how as a condition of doing business in China. Keith Alexander, former chief of the National Security Agency, has frequently characterized such intellectual-property theft as “the greatest transfer of wealth in history.”

The impetus for this move is the US’ growing trade deficit with China. Trump believes at least some of the deficit represents the loss of intellectual property, which, if left alone, could turn into an even bigger trade disadvantage longer term.  

The article continues:

IP theft could cost the U.S. economy as much as $600 billion per year globally, with China accounting for most of that, according to the The Commission on the Theft of American Intellectual Property, an independent research group headed by Dennis Blair, who was director of national intelligence under President Obama, and Craig Barrett, former Intel CEO. Trump supposedly fumes about the U.S. trade deficit with China, which was $375 billion in 2017. But that’s not a giveaway to China. Americans get something for that $375 billion—namely, cheap goods that would probably cost more if we bought them from someplace else. Intellectual property, or IP, theft is simply lost wealth, which compounds over time as China uses gained knowledge to become a tougher competitor.

By taking action now, Trump is attempting to get China to play by the ‘rules’ of the game. To the extent that this will hurt global trade and financial market liquidity in the short term, stock markets will not like this ‘trade war’. Stocks will fall, and may even head into a prolonged bear market.

But it might be a better longer term outcome for global stability. Financial markets like big US trade deficits because they are bullish for global growth. Such big deficits bring instability. Trump’s moves may ward off this instability by not letting the trade deficit get any more out of hand.

But short term there will be pain involved. The Aussie market doesn’t look particularly healthy right now. The banks have been on the nose for some time, and now the trade war threat is hurting China-exposed commodity stocks. The ASX 200 will likely fall below support around 5,800 points today (see chart below).

ASX 200 below will likely fall below support around 5,800 points today. 26-03-2018


Source: BigCharts
[Click to enlarge]

The one sector strongly outperforming the market right now is gold. On Friday, with the ASX 200 down nearly 2%, most of the gold stocks that I follow (and the ones in the Crisis & Opportunity portfolio) were up.

If you don’t have any exposure, or want to know which stocks to buy, please have a read of my latest report on gold, here. The special opportunity I mention is starting to move. It jumped 7% on Friday in a market that was a sea of red. I think it’s got a long way to go, but you need to move quickly.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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