US/China Trade Tunnel Vision

It seems like traders have a really bad case of focusing on one thing, and the thing isn't even that important from first order effects.  I would like to offer a controversial take on the US/China tariffs.  They are equity market positive because they are bond market positive. 

The total value of the tariffs imposed on China is $88 billion, but that doesn't take into account the farm aid given out since the tariffs went into effect, which adds up to $28 billion.  So its a net $60 billion tax, which can easily be removed by either Trump or a new President after 2020 election.  The US government is running over a trillion dollar budget deficit, reducing that deficit by less than 6% with some tariff taxes seems like a pretty minor effect, no? 

And what has the Fed done after the markets took a dip in May and August?  3 rate cuts and QE4 or, QE lite, whatever you prefer to call it.  Of course, the QE was not called QE but just some massive buying of T-bills masked as repo operations to keep short term funding rates closer to Fed funds.  The reason you are getting the higher short term funding rates is because of the trillion dollar deficit, not because of some "plumbing" problems as some pseudo experts like to call it.  There were no "plumbing" problems when the budget deficit was half of what it is now, all of a sudden, the regulatory capital requirements is too burdensome and banks don't want to lend at Fed funds rates anymore? 

No, the banks are stuffed to the gills with T-bill paper, and that is tying up their reserves, so less money to go around for short term funding. 

And since the Fed is always going to come to the rescue whenever the market has a temper tantrum, in effect, big budget deficits in the future that naturally result in higher short term funding rates due to huge amounts of extra T-bill supply will be monetized by the Fed.  That is why in the short term, big fiscal stimulus is dollar positive, in the long term, it is dollar negative because it eventually leads to money printing.  That is in the first page of the Banana Republic 101 textbook. 

Anyway, the Fed has overreacted again to short term equity market weakness and come to the rescue.  That is why we are having a risk parity party this year, why SPX is making new all time highs, while the bond market remains strong. 

The good news for traders in the long term is that stock market overvaluation sets up future volatility which should make things interesting for 2020 and 2021.  This bull market is unlike a lot of the past bull markets because it is being fueled by stock buybacks and not retail and institutional inflows.  So the only way to get a sustained bear market will be to weaken the cash flows at corporations enough so that stock buybacks are reduced.  That can either happen through a weakening economy and thus weaker revenues and earnings or through higher taxes.  If a Democrat wins in 2020, there will be a lot of pressure to fund spending by increasing the corporate tax rate and income tax rates on the rich. 

So if you think the Trump Twitter bombs and trade news headlines are nervewracking, wait till the market reaction to the release of Presidential poll numbers and Democratic primary results.  2020 and the election will make 2019 and the US/China trade war look like a walk in the park.