Sell In May? Market Worries Trump On Crash Course For New War With China

If we’re in for a repeat of last May, it won’t be pretty for equities this month.

April found the S&P logging its best monthly gain since 1987, but things ended on a decidedly sour note. May looks poised to begin in similarly downbeat fashion amid concerns the White House could finally make good on implicit (and, in some cases, explicit) threats to ban The Thrift Savings Plan from executing a planned reshuffle that would entail having a $50 billion fund mirror the MSCI All-Country World index. China is the third-largest country weight in the benchmark.

The decision to lift government employees’ exposure to Chinese equities was made two years ago. The debate about whether to stick to it has been raging for months, with Marco Rubio spearheading an effort to force The Federal Retirement Thrift Investment Board to cancel the plan due to concerns about funneling money to China.

Read the backstory: Marco Rubio’s China Pension Ban Will Save You From Accidentally Becoming A Communist Financier

The administration is weighing options for punishing Beijing for a lack of transparency around the coronavirus, and high on the list is an executive order blocking the TSP’s transition, which is scheduled for this year.

A senior administration official said Thursday that no decision has been made, but Rubio was quick to cheer the “rumor”.

“It’s outrageous that five unelected bureaucrats appointed by the previous administration have ignored bipartisan calls from Congress to reverse this short-sighted decision, and I applaud President Trump for directing his administration to take swift action preventing this from going forward”, he remarked.

Of course, some think it’s “outrageous” that Congress would presume to instruct an investment board to cancel a plan deemed in the best interests of the employees whose returns it’s tasked with maximizing, but Rubio has been unrelenting in this push. The government connection gives him a leg to stand on.

The senator sparred with MSCI itself last year over the index provider’s inclusion of firms which the US has targeted in various efforts to send a message to Beijing over its human rights record.

A decision to overturn TSP’s plans by executive decree was actually seen as the least controversial option last year when the administration was considering a variety of measures to cut off the flow of capital to China. Trump also reportedly considered forcibly delisting Chinese companies from US stock exchanges and commandeering the stock index construction process at benchmark providers. Those plans were widely decried as potentially dangerous and panned as a “disastrous non-starter” by some market participants.

Traders are now concerned about a re-escalation of the trade war and further recrimination around the virus. Tariffs appear to be back on the worry list in addition to possible restrictions on capital flows.

Last May, equities suffered what would end up being their worst month of 2019 when Trump broke the Buenos Aires truce on the way to hiking tariffs and blacklisting Huawei. It goes without saying that just about the last thing the market needs right now is a trade escalation in the middle of the deepest global downturn since the Depression.

Larry Kudlow on Thursday was forced to refute a Washington Post report which suggested the administration is at least considering the criminally insane (forgive the hyperbole, but that’s about the only way I know to convey the absurdity of it) idea of canceling some US debt to Beijing.

As detailed extensively in “Lindsey Graham: America Should Intentionally Default On Trillions In Debt To Punish China For Pandemic“, repudiating government obligations on a country-specific basis is quite literally non-sensical. China’s Treasurys are not “debt to China”. They are marketable securities. Beijing can just sell them. The only way to carry out such a plan would be to make it illegal to transact in US debt instruments with Beijing or any entity thought to be acting on its behalf.

According to one industry veteran I spoke to on April 12, that “would basically be an act of war”. Another strategist at a major Wall Street bank said any such effort would be “financial armageddon”.

In any case, Trump seems determined to take action against China in connection with the pandemic and spent a good part of this week lobbing thinly-veiled accusations Beijing’s way.

Despite a statement from the Office of the Director of National Intelligence saying there is no definitive assessment as to whether the outbreak “began through contact with infected animals or if it was the result of an accident at a laboratory in Wuhan”, Trump told the media he’s seen evidence that COVID-19 in fact came from the Wuhan Institute of Virology.

Given the president’s penchant for reveling in conspiratorial narratives, it’s a slippery slope from “lab accident” to “bioweapon”, and it wouldn’t be at all surprising to see Trump slide that way. Such a storyline might play particularly well in an election year, given how effective “blame China” was in 2016.

Pressed to clarify what makes him more confident in the lab origin story than the generally accepted wet market theory, Trump said “I can’t tell you that”. Pressed further, he reiterated the point. “I’m not allowed to tell you that”.


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10 thoughts on “Sell In May? Market Worries Trump On Crash Course For New War With China

  1. There seems to be a consensus among historians that the Great Powers “sleepwalked” their way into the catastrophe that was WWI. With folks like Trump, Navarro, Rubio, Cotton, and Kyle Bass leading the charge, one can only hope that, contra Twain, history neither rhymes nor repeats.

    1. History does rhyme. Even the good stuff. Look at all the Bull markets. He is making the Bear case for them with his new direction. Great people always understand critique, the near great only hear criticism. That is fully in play. The FED was getting the credit for this run up not him. The tax base that keeps most of his base in comfort will be milked dry. Chaos and unrest will be perfect for a “law and order” campaign.

  2. Given how bad his “war” on coronavirus is going… I suspect he may indeed go looking for a fight he can win. I guess he could mint a few trillion dollar US coins and send them to china then blow up their island bases in the south pacific and then call it a day and dare China to do anything about it.

    1. The U.S. hasn’t “won” a war since WWII — and we only “won” that conflict because the USSR was willing to sacrifice 20 million of its people. Trump would be a fool to pick a fight with China, which by selling U.S. treasuries could bring the American economy to its knees in a matter of months.

  3. I’m 10000+ per cent against anything remotely connected to Trump hype and bs and strongly believe few people within his base have the ability to correctly spell the first ladies name, but, be that as it is, I’m very much against American entities being financially linked to Chinese corporations, that do not have verified gaap accounting. I was very unhappy when Alibaba was allowed on USA exchanges and then commingeled into American pension funds. That type of risk aversion is dangerous and in my mind, no fund from any country with garbage accounting should be vilified, in addition to every American corporation that is allowed to abuse accounting regs. And now we the Treasury itself, with Fed abusing rules and regs, and now in our highly broken casino, Orange Clown wants to add in as much insanity as his genius brain can pee out …

  4. The bankruptcy King and his supporters are flirting with a bankruptcy of the USA. How does he avoid jail with this move as he is likely to spur election of 67+ democrat senators and the rest voting for his removal on prior charges.

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