Why China is quietly breaking up with the US

Trade Relations and Economic Uncertainty [00:00]

• The president made conciliatory comments about a major world leader and the trade war, stating "it will all be fine," which the market reacted positively to.
• There is a lot of uncertainty, with China being the world's second-largest national economy and the US dependent on it for key imports like rare earth minerals.
• An escalation of the trade war captures the market's attention.
• The president has signaled that negotiations are likely, and markets are leaning in a more hopeful direction.
• Chinese stocks and trade-related stocks, including technology, are performing well.
• China has indicated a lack of need for certain imports, stating they are "fully stocked" from other countries and have changed their supply chains.
• Both countries are rewiring their exports and imports to reduce dependence on each other.
• A projection over a 5 to 10-year horizon suggests a movement towards a world where the US and China are fully decoupled.
• Currently, there is still mutual dependence between the two nations.

But I think we were reminded today that President Trump is aware of that and has signaled as he has in the past that negotiations are likely and I think that the markets are leaning in the direction still a little bit uncomfortable but leaning in a more hopeful direction than on Friday.

This section highlights the immediate market reaction to shifting rhetoric in trade relations, while also acknowledging the underlying structural changes in supply chains indicating a potential long-term decoupling.

Economic Data Delays and Earnings Importance [02:13]

• There is a wait for economic data, much of which is government-driven and currently unavailable due to a government shutdown.
• Key data like September retail sales and consumer price index (inflation number) will be delayed.
• Some independent data, such as the Empire State Manufacturing Survey and housing market indicators, will still be released.
• The lack of government data critically reduces the capacity of analysts and the market to evaluate the economy.
• This situation increases the emphasis on third-quarter earnings reports.
• Discussions during earnings calls will focus on margin pressures, the pass-through of tariffs, and ongoing AI investment by firms.

Well, uh we critically miss uh the government data and uh our capacity to be able to evaluate and candidly the market's capacity to be able to evaluate where the economy is is reduced.

The government shutdown's impact on data availability is a significant concern, forcing a greater reliance on corporate disclosures for economic insights.

Financial Sector Performance and Valuations [04:14]

• The bond market is currently closed, and historical price data is being used.
• Yields hit a 3-week low at 4.148%, and are currently slightly lower.
• There is a cautious approach to commenting on specific company names, but the financial sector and markets are viewed as solid.
• The financial sector is expected to remain strong due to a strong consumer.
• Financial EPS expectations for S&P companies are up 12.6% year-over-year, with revenues up 3.4%-4%.
• The S&P 500 is expected to be up 8% year-over-year.
• While stocks may be considered overvalued by some, their valuations are largely supported by the strong earnings trajectory of US firms.
• There is a significant investment planned ($1.5 trillion over 10 years) in national security related areas, including energy and artificial intelligence.
• A key takeaway from recent events is the need for economic policymakers and the corporate sector to focus more on "essential security," which is broader than national security, to build a more resilient economy during times of stress.
• This focus on resilience is expected to be a rich field for investment in the coming decade.

You know, I've got to be careful not to comment on specific names. but I think you know broadly the financial sector and the markets are looking continuing to look solid and I think that in this environment with a strong consumer the financial sector is likely to continue to look strong.

The financial sector demonstrates strength, underpinned by consumer confidence and robust earnings, with a growing emphasis on national and essential security driving future investment.

Gold's Surge as a Cautionary Signal [05:58]

• Gold is surging to a record high.
• This surge may be a cautionary signal.
• Gold typically rises in two circumstances:
  • Concerns about inflation, which may not be front and center but could arise in some US economic scenarios.
  • Periods of uncertainty, which are currently prevalent due to question marks about the future direction and policy, and the economy's durability.
• There is an ongoing debate, with an optimistic outlook but acknowledgment of lingering uncertainties.

You know, it may be a little bit of a cautionary note. When does gold rise? Gold rises on two kinds of of circumstances. One, when there's concern about inflation, which doesn't seem to be front and center now, but there are some scenarios for the US economy where inflation could rise. but secondly during periods of uncertainty and I think that is the other side of this that there are still a lot of question marks about where we're headed what policy is going to look like and whether the economy proves durable.

The rising gold prices are interpreted as a sign of underlying economic anxieties, stemming from both potential inflation and general uncertainty about the economic future.