It was largely a dull week in equity markets, which will come as a surprise to those of you a bit unnerved by the spectre of nuclear war in this week’s headlines. Gold bounced from its low of 14th November, but remains 3% below the high at the end of October. Markets aren’t very good at discounting this kind of risk, so they tend to ignore it almost until the feared event is upon us.
The US stock market indices, including the tech-centric Nasdaq, remain below their peaks of 11th November. The Euronext 100 peaked back in May and has been dithering around, remaining 8% lower. Similarly with the UK’s FTSE 100, 4% below the May high spot – remember from last week, the picture will turn negative with a break down through 8000 (currently 8200).
The UK’s small and mid-cap indices last saw an all-time high way back in 2021, and have been meandering for the last 6 months. This lack of direction is shared in a range of small company indices around the globe, including Asia. It is these which tell you about confidence in domestic economies. Confidence is lacking. (US small caps did exceed their 2021 high in the wake of the Trump win, but that this is still a considerable underperformance versus their S&P 500).
The various peaks in mid-2021 were driven by relief at the end of the pandemic, but it didn’t last judging by the performance of smaller company indices around the globe. How might they get back their mojo?
This week I said I would look at how the Trump presidency could turn into a huge historical success, for the US and the wider world, a possibility which is by-and-large being ignored in a fractured world.
That plan was interrupted by a note appearing on my desk earlier this week from Gavekal’s Louis-Vincent Gave (LVG), always top quality. It was a 10 page note entitled “Prejudice and China”, full of fascinating analysis and insights, and then on page 9 he touched on my intended theme for today:
“Perhaps the most bullish development would be for the new US administration
to repair the damage done to relations by the 2018 semiconductor sanctions”…
…and an ill-tempered meeting in Anchorage in 2021.
The US has mis-managed its relationship with China. This was made absolutely clear when Ford’s CEO visited China in September and could see clearly that the Chinese auto sector poses an existential threat to Ford:
“executing to a Chinese standard is now going to be the most important Ford priority”
As GVL says, this is an earth-shattering statement. No more whinging about China stealing US inventions or silly allegations about microchips in our fridges to spy on our weekly shopping haul.
This Chinese dominance has arisen because the US, and other western nations, notably Germany, were simply not paying attention. Why? Back to LVG:
“China leapfrogged the West in industry after industry over the last 5 years;
during that time no one bothered to visit China.”
Not quite no one, but his point is well made, and he’s not letting “the West” off the hook:
“while Western CEOs focussed on virtue signalling,
Chinese companies forged ahead, producing better products for less money.”
Ouch. He goes on for a few more pages ripping into the West’s limp leadership and an ill-informed and biased media.
This kind of conflict has an ancient pedigree. It doesn’t have to end badly, in fact it could end brilliantly and positively, though history suggests this will require rare skills.
I first wrote about this back in 2021, “The Trap – US versus China”:
This is not any old trap.
It is a trap derived from a stand-off between the two great powers of our time,
which will be the most significant global back-drop to our investing for decades to come,
up there with climate change.
The trap is The Thucydides Trap. The ancient Athenian historian and military general Thucydides said of the hugely destructive Peloponnesian War:
“it was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.”
Similar instances have occurred throughout history, where the fear of an existing great power being displaced by an emerging power has a tendency to lead to extreme conflict - this is The Trap.
In 2012 American political scientist Graham Allisson reviewed 16 similar instances going back over 500 years, and in 12 cases this rivalry led to war. Of course each of these examples are unique. But Thucydides and Allison point us to the common feature – the new and growing capability of the challenger creates fear and paranoia in the other – that is abundantly clear in the US today.
Can China and the United States escape a destructive outcome? In the four instances where all-out war was avoided, it required huge adjustments in attitudes and actions on the part not just of the challenger, but also the challenged.
Perhaps counter-intuitively, a Trump-Musk combo could pull this out of the bag. Imagine if Trump (78 years old) is encouraged to think about his legacy as a global stateman, one who transformed the world by working with China to solve the big problems of today – debt, climate change, growing conflicts, positively harnessing AI for the whole world’s benefit.
The person most incentivised to encourage this new Trump perspective is Elon Musk. Musk surely isn’t greatly motivated by his Trump appointment as leader of the unfortunately named new DOGE (Department of Government Efficiency). In sharp contrast, he is most certainly motivated to encourage an unravelling of US-China tensions, otherwise Tesla is in deep trouble e.g. their biggest factory being in China. The reliance is very deep seated for Tesla and a range of other US firms.
For example, Tesla’s Model 3 was unavailable last month in the US in the wake of the latest US tariffs on Chinese batteries on which Tesla depends.
As you will see in “The Trap – US versus China”, in 2021 I thought Joe Biden might have grasped this possibility, but it was not to be, not even close. Now the baton passes to Donald Trump. I hope this hint of positivity does not turn out to be naïve. But if there is a move in this direction, this is how domestic markets around the globe might regain their mojo.
I was about to start signing off and then received a note from LVG’s father, Charles, original founder of Gavekal, with a warning shot across Trump’s bows:
“Never force your main competitor to become more competitive
because you are not competitive enough”
The parallel is Napoleon blockading British trade with Europe from 1806. This spurred Britain into action, the result being the 19th centuries domination by British industry.
If this lesson can be learnt by Trump, the opportunities are huge and global.