What the Hong Kong Takeover Means for Chinese Stocks

Last week, I mentioned that a return of last year's clash with China was a wildcard that could upset the markets.

Well, China has gone ahead and put my words to the test.

On May 21, China announced that it would impose a draconian new security law over Hong Kong, the largely democratic and self-governed Chinese city.

You might remember that when Hong Kong's pro-Chinese government tried to do something similar last year, the demonstrations there brought the city to a standstill. Because Hong Kong has long been a center of Asian trade and finance, the costs to China were huge, both in terms of lost money and loss of face.

From March through the end of the year, the people of Hong Kong made it clear they would not accept a takeover by China's ruling Communist Party. The Hong Kong government retreated, and the matter disappeared as the COVID-19 pandemic started spreading.

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Well, now China is trying it again. This time, they're not even pretending that Hong Kong's local government is in charge.

On Tuesday of this week, the market didn't show much reaction. The Reality Gap between the mild market reaction and the potential ramifications from an escalation in confrontation over Hong Kong has started to come into full view. The White House's announcement about a news conference on China sent the markets down 350 Dow points yesterday afternoon. And trading is muted Friday morning as traders are showing concern over how aggressive China is getting and what U.S. foreign policy and trade reactions could be. Hong Kong is just the tip of the iceberg.

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This past Thursday really should have been a day for the bears.

New unemployment numbers were released that showed record-shattering jobless claims across the country – something that ordinarily would have driven the market down sharply.

Instead, the Federal Reserve sideswiped those bears, going absolutely nuclear with their latest stimulus actions aimed at giving the economy a much needed boost.

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I'm really relieved to see the first signs of the slowing of the coronavirus in Europe.

And in the U.S., confirmed cases and deaths from the virus are growing more slowly.

Many science and medical experts say that the social distancing measures are starting to work.

And that brings us to today's Reality Gap.

Big Media hails the slowing growth as a reason the market has been up the last two days – and that seems to be quite true.

But the reality is that slowing growth doesn't mean a return to business as normal anytime soon.

And while we prepare to put together our post-crisis Trade of the Decade portfolio, we need to keep in mind that even when the economy starts to recover, it's going to happen in a step-wise fashion.

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Markets opened up 4% this morning as yesterday gave us some hopeful numbers.

Italy, Spain, and the U.S. reported drops in the daily amount of new coronavirus infections and deaths.

Traders are grasping at this reduction as a sign that we've reached the bottom, and it's a straight shot up from here.

I'm afraid that's just a load of "hopium."

In fact, if you look back at the last few weeks, Sundays often have lower numbers.

Presumably some numbers get reported on Monday instead as even in a middle of a crisis, some people need a break.

The Bulls Are Wrong. So Are the Bears...

Last Tuesday through Thursday, the markets were on a tear.

Action was being taken against the coronavirus pandemic, the President was signing the stimulus bill that Congress had bickered over, and Boeing Co. (BA) jumped 70.5%.

For the Dow and S&P 500, it was the first three-day win streak in months.

Then come Friday, markets tumbled. Still, the Dow was up 12.8% for the week, the best weekly result since 1938.

The big question for April and beyond is whether the winning streak of the middle of last week will carry on, or whether Friday's tumble is a sign of things to come.

For the bears, we're on the express elevator to an 80% drop, no question about it.

But the Reality Gap here is that, while the bullish believers are convinced they have it right, so do the bearish ones.

And while those two forces battle it out, we're not going to get either of their outcomes.

Don't Let This Rally Fool You, The Market Hasn't Hit Bottom Yet

Things are somewhat looking up for the market today.

After all of the doom and gloom over the last few weeks caused by the coronavirus outbreak, people are desperate for any good news, and investors are eager to find a floor to the market.

But it's that bias that may be causing a Reality Gap between what people are hoping for in the market, and what is actually happening.

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Tuesday's market open is giving hope that the market might be able to find a bottom.

As I write this Tuesday morning, there are hopes that Congress can finally agree on a fiscal stimulus package that will help Main Street and not just big companies and Wall Street.

And the White House is pushing for a quicker return to work for many Americans should progress on containing the spread of the coronavirus warrant it.

The big question I'm hearing, and have been hearing for weeks, is this – Are we at the bottom of this historic market drop?

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The now-global coronavirus outbreak is still the main driver behind the markets – no surprise there.

And after last week's record falls ended with a small rally into the close on Friday, traders were looking for good news over the weekend to keep the rally going.

But what they got instead was very mixed, and I'm not optimistic about this week.

What You're Being Told About Bitcoin Prices Is Wrong...

This week, during my weekly sit down with America's most-watched business TV host, Stuart Varney, the topic of a flight to safety came up. A flight to safety is when investors sell what they perceive to be higher risks investments for safer ones.

But Stuart didn't want to know about your traditional, run-of-the-mill flight to safety in assets like gold or U.S. treasuries. Instead, he asked about one of the newer assets available to investors these days…

Bitcoin.

Stuart mentioned that Bitcoin had recently reached its highest level since October, and asked me if the cryptocurrency's big move up since early December was due to a flight to safety over coronavirus concerns.