Legendary Fund Manager, Felix Zulauf, Says U.S.-China Trade Deal Setting Up for 'Buy the Rumor, Sell the News' Event

Though expectations continue to run high for positive impacts from a U.S.-China trade deal, it won’t change the economy or stock market’s fortune for long, says Felix Zulauf, head of Zulauf Asset Management and Zulauf Consulting.

China and the U.S. are in the midst of a long-term power conflict, he said. After the trade deal, Trump will revive the issue yet again, this time with a greater focus on technology, weapons systems and military spending.

Buy the Rumor, Sell the News

Though a trade deal is likely, its effects will only be short-term, Zulauf stated. Both sides will present any agreement as a great success, and markets will probably rally or peak short-term on the news, but with the U.S. election looming next year, we will likely see President Trump go back on the attack.

Long-term, the problems between the two competing economic systems are too profound to be resolved easily.

Trump is attempting to change China's behavior toward trade and bring it in line with World Trade Organization rules. This isn’t going to happen, Zulauf said.

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As a result, any solution to the current trade dilemma is likely to present a buy-the-rumor, sell-the-news setup. Also, it is likely to hurt other players because as China buys more from the U.S., assuming that is part of the trade deal, it will buy less from other countries, particularly Europe.

Ultimately, the trade conflict between the U.S. and China goes much deeper, and systemic issues will lead to growing geopolitical tensions amid a bid for technological dominance.

Global Macro Outlook

While the International Monetary Fund and other observers have been relatively upbeat and are only now revising their forecasts downward, Zulauf has been expecting a slowdown in the second half of 2019 for a couple years.

“I think the consensus is moving closer to my view,” he said. “Right now, the consensus believes the world economy is bottoming out. I think that is a little bit too early.”

Instead, he expects more negative surprises ahead into fall or later this year, which will likely produce a shock. Nominal GDP in essentially all major economies around the world could decline substantially.

He expects the U.S. could see a decline from over five percent to maybe three percent in nominal terms. China is already at three percent real growth and around two percent inflation, and those figures could decline further as well.

“The current optimism that things are bottoming out by those who have been wrong for quite some time is premature,” Zulauf said. “I think the consensus will be disappointed again in the second half, and that will have implications for the corporate sector's earnings situation.”

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