China's Huawei: More than just tariffs

We want to share an article that we came across while following news on the U.S. trade dispute with China.  It is a little outside our normal discussion of markets and economics, but we think it gives important insight into what is going on between the U.S. and China, as well as other major world powers.  We have added some highlighting to bring attention to certain details in the article.  

Some may be inclined to believe the issues with Huawei are politically motivated, and some of the articles published in the media may serve to bolster that opinion, but the data presented in this article would suggest it is NOT:

  1. a new issue
  2. politically motivated
  3. only an issue between the U.S. and China

President Obama's National Security Advisor General James Jones said that until last year, the U.S. government "wasn't paying attention" to the security risks posed by 5G.  Additionally, in 2012 a House Intelligence Committee Report found that Chinese Tech companies posed a threat to national security

Further, research conducted by Australia, Great Britain, New Zealand, and the U.S. have all concluded Huawei may pose threats to National Security.  Each of these countries has either already placed restrictions on Hauwei or is in the process of determining if and how much restriction will be placed on Huawei. 

So why the sudden debate on Huawei and 5G?  We believe much of it is because 5G has finally arrived.  As of January, the following U.S. Cities had active 5G networks:

  • Los Angeles
  • Sacramento
  • Indianapolis
  • Houston
  • Jacksonville
  • Atlanta
  • Louisville
  • New Orleans
  • Charlotte
  • Raleigh
  • Oklahoma City
  • Dallas
  • Houston
  • San Antonio
  • Waco
  • New York
  • Las Vegas

By April, the reported list had grown to include 

  • Austin
  • Nashville
  • Orlando
  • San Diego
  • San Jose

Until now, the 5G roll out was a future problem.  Now it current problem.

Below we have included the full text of the article:

MAY 21, 2019

Special report - Hobbling Huawei: Inside the U.S. war on China's tech giant

Cassell Bryan-Low, Colin Packham, David Lague, Steve Stecklow, Jack Stubbs

CANBERRA (Reuters) - In early 2018, in a complex of low-rise buildings in the Australian capital, a team of government hackers was engaging in a destructive digital war game.

The operatives – agents of the Australian Signals Directorate, the nation’s top-secret eavesdropping agency – had been given a challenge. With all the offensive cyber tools at their disposal, what harm could they inflict if they had access to equipment installed in the 5G network, the next-generation mobile communications technology, of a target nation?

What the team found, say current and former government officials, was sobering for Australian security and political leaders: The offensive potential of 5G was so great that if Australia were on the receiving end of such attacks, the country could be seriously exposed. The understanding of how 5G could be exploited for spying and to sabotage critical infrastructure changed everything for the Australians, according to people familiar with the deliberations.

Mike Burgess, the head of the signals directorate, recently explained why the security of fifth generation, or 5G, technology was so important: It will be integral to the communications at the heart of a country’s critical infrastructure - everything from electric power to water supplies to sewage, he said in a March speech at a Sydney research institute.

Washington is widely seen as having taken the initiative in the global campaign against Huawei Technologies Co Ltd, a tech juggernaut that in the three decades since its founding has become a pillar of Beijing’s bid to expand its global influence. Yet Reuters interviews with more than two dozen current and former Western officials show it was the Australians who led the way in pressing for action on 5G; that the United States was initially slow to act; and that Britain and other European countries are caught between security concerns and the competitive prices offered by Huawei.

The Australians had long harbored misgivings about Huawei in existing networks, but the 5G war game was a turning point. About six months after the simulation began, the Australian government effectively banned Huawei, the world’s largest maker of telecom networking gear, from any involvement in its 5G plans. An Australian government spokeswoman declined to comment on the war game.

After the Australians shared their findings with U.S. leaders, other countries, including the United States, moved to restrict Huawei.

The anti-Huawei campaign intensified last week, when President Donald Trump signed an executive order that effectively banned the use of Huawei equipment in U.S. telecom networks on national security grounds and the Commerce Department put limits on the firm’s purchasing of U.S. technology. Google’s parent, Alphabet, suspended some of its business with Huawei, Reuters reported.

Until the middle of last year, the U.S. government largely “wasn’t paying attention,” said retired U.S. Marine Corps General James Jones, who served as national security adviser to President Barack Obama. What spurred senior U.S. officials into action? A sudden dawning of what 5G will bring, according to Jones.

“This has been a very, very fast-moving realization” in terms of understanding the technology, he said. “I think most people were treating it as a kind of evolutionary step as opposed to a revolutionary step. And now that light has come on.”

The Americans are now campaigning aggressively to contain Huawei as part of a much broader effort to check Beijing’s growing military might under President Xi Jinping.Strengthening cyber operations is a key element in the sweeping military overhaul that Xi launched soon after taking power in 2012, according to official U.S. and Chinese military documents. The United States has accused China of widespread, state-sponsored hacking for strategic and commercial gain.

A THREAT TO CRITICAL INFRASTRUCTURE

If Huawei gains a foothold in global 5G networks, Washington fears this will give Beijing an unprecedented opportunity to attack critical infrastructure and compromise intelligence sharing with key allies. Senior Western security officials say this could involve cyber attacks on public utilities, communication networks and key financial centers.

In any military clash, such attacks would amount to a dramatic change in the nature of war, inflicting economic harm and disrupting civilian life far from the conflict without bullets, bombs or blockades. To be sure, China would also be vulnerable to attacks from the U.S. and its allies. Beijing complained in a 2015 defense document, “China’s Military Strategy,” that it has already been a victim of cyber-espionage, without identifying suspects. Documents from the National Security Agency leaked by American whistleblower Edward Snowden showed that the United States hacked into Huawei’s systems, according to media reports. Reuters couldn’t independently verify that such intrusions took place.

However, blocking Huawei is a huge challenge for Washington and its closest allies, particularly the other members of the so-called Five Eyes intelligence-sharing group – Britain, Canada, Australia and New Zealand. From humble beginnings in the 1980s in the southern Chinese boom town of Shenzhen, Huawei has grown to become a technology giant that is deeply embedded in global communications networks and poised to dominate 5G infrastructure. There are few global alternatives to Huawei, which has financial muscle – the company reported revenue for 2018 jumped almost 20 percent to more than $100 billion – as well as competitive technology and the political backing of Beijing.

“Restricting Huawei from doing business in the U.S. will not make the U.S. more secure or stronger,” the company said in a statement in response to questions from Reuters. Such moves, it said, would only limit “customers in the U.S. to inferior and more expensive alternatives.”

For countries that exclude Huawei there is a risk of retaliation from Beijing. Since Australia banned the company from its 5G networks last year, it has experienced disruption to its coal exports to China, including customs delays on the Chinese side. In a statement, China’s foreign ministry said it treated “all foreign coal equally” and that to assert “China has banned the import of Australian coal does not accord with the facts.”

Tension over Huawei is also exposing divisions in the Five Eyes group, which has been a foundation of the post-Second World War Western security architecture. During a trip to London on May 8, U.S. Secretary of State Mike Pompeo issued a stark warning to Britain, which has not ruled out using Huawei in its 5G networks. “Insufficient security will impede the United States’ ability to share certain information within trusted networks,” he said. “This is exactly what China wants; they want to divide Western alliances through bits and bytes, not bullets and bombs.”

Huawei’s 74-year old founder, Ren Zhengfei, is a former officer in China’s military, the People’s Liberation Army. “Mr. Ren has always maintained the integrity and independence of Huawei,” the company said. “We have never been asked to cooperate with spying and we would refuse to do so under any circumstance.”

In an interview with Reuters at the company’s headquarters in Shenzhen, Eric Xu, a deputy chairman, said Huawei had not allowed any government to install so-called backdoors in its equipment - illicit access that could enable espionage or sabotage - and would never do so. He said 5G was more secure than earlier systems.

“China has not and will not demand companies or individuals use methods that run counter to local laws or via installing ‘backdoors’ to collect or provide the Chinese government with data, information or intelligence from home or abroad,” the Chinese foreign ministry said in a statement in response to questions from Reuters.

Washington argues that surreptitious backdoors aren’t necessarily needed to wreak havoc in 5G systems. The systems will rely heavily on software updates pushed out by equipment suppliers - and that access to the 5G network, says the United States, potentially could be used to deploy malicious code.

So far, America hasn’t publicly produced hard evidence that Huawei equipment has been used for spying.

Asked whether the United States was slow to react to potential threats posed by 5G, Robert Strayer, the State Department’s lead cyber policy diplomat, told Reuters that America had long been concerned about Chinese telecom companies, but that over the past year, as 5G loomed closer, “we were starting to talk more and more with our allies.” Banning Huawei from 5G networks remains “an end goal,” he said.

THE TECH THREAT

The West has long harbored concerns about Chinese telecom equipment. In 2012, a U.S. House Intelligence Committee report concluded Chinese tech companies posed a national security threat. Huawei denounced the finding.

Despite such concerns, the U.S. government’s response to the threats posed by 5G only took shape more recently.

In February 2018, Malcolm Turnbull, then prime minister of Australia, flew to Washington D.C. Even before Australia’s eavesdropping agency had run its war game, Turnbull was already raising red flags in Washington. A former technology entrepreneur, he believed 5G presented significant risks and wanted to press allies to act against Huawei.

“He was warning about how important 5G networks would be and the security risks we all needed to think about around countries that had capability, form and intent, as well as coercive laws,” a senior Australian source told Reuters.

A spokesman for Turnbull declined to comment.

Turnbull and his advisers met U.S. officials, including Kirstjen Nielsen, then U.S. secretary of homeland security, and Michael Rogers, then head of the U.S. National Security Agency, the U.S. signals-intelligence operation. The Australians said they believed Beijing could compel Huawei to do its bidding and that this posed a threat should tensions with China rise in the future, said two of the Australian officials familiar with the meeting.

The U.S. officials were receptive to the Australian message, but imposing restrictions on the world’s largest maker of mobile network gear didn’t appear to be a high priority, according to the two Australian officials. “They didn’t share our concern with the same urgency,” said one.

Rogers declined to comment. A Department of Homeland Security official did not elaborate on the meeting, but said the agency works closely with Australia on security issues and that “China will continue to use cyber espionage and bolster cyber-attack capabilities to support its national security priorities.”

5G technology is expected to deliver a huge leap in the speed and capacity of communications. Downloading data may be up to 100 times faster than on current networks.

But 5G isn’t only about faster data. The upgrade will see an exponential spike in the number of connections between the billions of devices, from smart fridges to driverless cars, that are expected to run on the 5G network. “It’s not just that there will be more people with multiple devices, but it will be machines talking to machines, devices talking to devices – all enabled by 5G,” said Burgess, the Australian Signals Directorate chief, in his March address.

This configuration of 5G networks means there are many more points of entry for a hostile power or group to conduct cyber warfare against the critical infrastructure of a target nation or community. That threat is magnified if an adversary has supplied equipment in the network, U.S. officials say.

Huawei said in its statement that the company does “not control in any way the networks in which our equipment is deployed by our clients. The US and Australian allegations are fanciful and are not rooted in any evidence at all.”

In July 2018, Britain delivered a blow to Huawei. A government-led panel that includes senior intelligence officials said it was no longer fully confident it could manage national security risks posed by the Chinese telecom equipment giant.

That panel oversees the work of a laboratory that was set up by the British government in 2010 and is funded by Huawei to vet the company’s equipment used in the UK. The facility was established because even then Huawei was perceived as a security risk. The oversight panel said serious problems it had identified with Huawei’s engineering processes “exposed new risks in the UK telecommunication networks and long-term challenges in mitigation and management.”

That report was a “bombshell,” shaping how the Americans viewed the Huawei 5G risk, said one U.S. official.

U.S. officials also point to Chinese laws enacted in recent years that they say could compel individuals and companies to assist the Chinese government in conducting espionage.

China’s foreign ministry called this portrayal by U.S. officials of Chinese legislation “a misreading and a wanton smearing of relevant Chinese laws,” adding: “Trying to smear others to wash oneself clean is futile.”

THE WEST AWAKES

Through the middle of last year, the Australians continued to apprise other countries of their worries about 5G. “We were sharing our concerns about security with many allies, not just the U.S. and not just the traditional partners,” said one of the senior Australian officials. “We shared our thoughts with Japan, Germany, other European countries and South Korea.”

In Washington, the administration began imposing restrictions on Huawei. In August, Trump signed a bill banning federal agencies and their contractors from using equipment from Huawei and ZTE Corp, another Chinese telecom equipment maker. Huawei has since filed a lawsuit in federal court in Texas challenging the ban.

In late August, the Australians went further: They banned companies that didn’t meet their security requirements, which included Huawei, from supplying any equipment for the country’s 5G network, whether run by the government or by private firms.

Australia’s decision, China’s Foreign Ministry said in a statement, “has no basis in fact, and is an abuse of ‘national security’ standards. China urges the Australian side to abandon Cold War thinking and ideological prejudices, and provide a fair, transparent, non-discriminatory environment for Chinese companies.”

In November, New Zealand’s intelligence agency blocked the country’s first request by a telecom service provider to use Huawei kit for a 5G network, citing national security concerns.

Like the Australians and Americans, British security officials had concerns over China’s potential use of Huawei as a channel for conducting espionage. But the options are limited. Huawei is one of only three major global companies that analysts say can supply a broad range of advanced mobile network equipment at scale. The other two are Ericsson and Nokia. And Huawei has a reputation among telecom operators for supplying cost-effective equipment promptly.

Nevertheless, British security officials were becoming increasingly frustrated with what they viewed as Huawei’s failure to fix software flaws in its equipment, particularly discrepancies in the source code – the programs’ underlying set of instructions. This problem means the laboratory near Oxford set up to vet Huawei equipment can not even be sure that the code it is testing is exactly the same as the code Huawei deploys in its real-world equipment. This makes it difficult to provide safety assurances about the company’s gear.

British officials say the array of flaws could be exploited by China, as well as other malevolent actors. Ian Levy, a British security official who oversees the UK’s review of Huawei equipment, told Reuters the company’s software engineering is like something from 20 years ago. “The chance of a vulnerability with a Huawei piece of kit is much higher than other vendors,” he said.

The company said it has pledged to spend at least $2 billion “over the next five years” to improve its software engineering capabilities.

British ministers have agreed to allow Huawei a restricted role in building parts of its 5G network, but the government has yet to announce its final decision. The European Union has left it to individual governments to decide whether to ban any company on national security grounds. Some European security officials say banning one supplier doesn’t address the broader issue of the risks posed by Chinese technology in general.

HUAWEI FIGHTS BACK

As the tensions between the West and Huawei intensified through last year, they suddenly took a personal turn. U.S. law enforcement officials had for some time been investigating links between Huawei and Iran, including the involvement of Meng Wanzhou, Huawei’s chief financial officer, who is the daughter of the company’s founder. The probe followed Reuters stories in 2012 and 2013 that revealed links between Huawei, Meng and another company that allegedly attempted to violate U.S. sanctions on Iran.

When U.S. officials became aware that Meng would be traveling through Vancouver in December, they pounced, asking Canada to detain her on allegations of bank and wire fraud. Meng remains free on bail in Canada while the U.S. government tries to have her extradited. Huawei said in its statement that Meng “is not guilty of the charges she faces,” and that they are “politically motivated.”

The Huawei conflict isn’t only about U.S.-China superpower rivalry:The activities of Meng and Huawei were under scrutiny by U.S. authorities long before Trump began a trade war with China, according to interviews with people familiar with those probes. But there is no doubt the wider showdown with Huawei has now become intensely geopolitical.

In recent months, the U.S. has ramped up diplomatic efforts to urge allies to sideline Huawei. 5G is a “game-changing technology with implications across all aspects of society from business, government, military and beyond,” Gordon Sondland, U.S. ambassador to the European Union, told Reuters in February. “It seems common sense to me to not hand over the keys to your entire society to an actor that has … demonstrated malign conduct.”

Asked whether there is evidence of Huawei equipment having been used for espionage, Sondland said “there is classified evidence.” He declined to expand on the nature of the material beyond saying there was no doubt that Huawei had “the capability to hack a system” and “the mandate by the government to do so upon request.”

Pompeo has publicly gone further than most U.S. officials by directly linking the company to Beijing. “Huawei is owned by the state of China and has deep connections to their intelligence service,” he said in March. “That should send off flares for everybody who understands what the Chinese military and Chinese intelligence services do.”

Huawei has repeatedly denied it is controlled by the government, military or Chinese intelligence services. “U.S. Secretary of State Pompeo is wrong,” the company said in its statement, adding that it is owned by its employees.

While Huawei was initially muted in its public response, it too has become more combative. In late February, the company confronted the United States at a major annual gathering of mobile industry executives in Barcelona, where Huawei’s red logo was ubiquitous. Top American officials arrived intent on warning government and industry representatives off Huawei. But the company had flown in a team of senior executives to offer customers and representatives of European governments reassurance in the face of the U.S. accusations.

In a keynote speech, Guo Ping, a deputy chairman at Huawei, took aim at America’s own spying operations. “Prism, Prism on the wall. Who’s the most trustworthy of them all?” he said. Guo was referring to a mass U.S. foreign-surveillance operation called Prism that was disclosed by former NSA contractor Snowden. The barb drew laughter from the audience.

Europeans pushed back, too. During one closed-door session, senior representatives from European telecom operators pressed a U.S. official for hard evidence that Huawei presented a security risk. One executive demanded to see a smoking gun, recalled the U.S. official.

The American official fired back: “If the gun is smoking, you’ve already been shot. I don’t know why you’re lining up in front of a loaded weapon.”

Reporting by Cassell Bryan-Low, Colin Packham, David Lague, Steve Stecklow and Jack Stubbs. Additional reporting by Charlotte Greenfield in Wellington; Yoshifumi Takemoto in Tokyo; Jonathan Weber; Sijia Jiang; Ben Blanchard and Gao Liangping in Beijing. Edited by Peter Hirschberg and Richard Woods.

 


 

Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

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There are many facets to consider with the current trade negotiations...it's not as simple as most people think

Trade dominated market sentiment as investors reacted to the breakdown in U.S./China trade negotiations and the potential economic impact. Trading volumes suggest that many investors chose to sit on the sidelines amidst the uncertainty.  Last Monday, the Dow Jones Industrial Average fell 617 points (-2.38%) then reversed course leading all indices at the end of the week with a decline of 0.69%, followed by the S&P 500® (-0.76%), Nasdaq (-1.27%) and Russell 2000® (2.37%).  President Trump indicated that he believes the U.S. economy can withstand higher tariffs and is necessary to achieve greater concessions from China.  This represented a reversal of prior comments believing a trade agreement was imminent.  It was reported that trade discussions will continue in China the last week of May but there has been no official confirmation.  In addition to the breakdown in negotiations, the U.S. issued a ban on the purchase of equipment and products from Chinese telecommunications company Huawei which increases the complexity of trade discussions.

Most people think this is a simple tit for tat dispute but for China it is much more.  We sometimes forget China is still a developing nation economically.  Even though China is the second largest economy in the world they still have many challenges.  One challenge that is facing China imminently is the fact that the trade war will hurt them much more than the U.S.  Let’s assume the U.S placed 25% tariffs on all goods exported from China to the U.S and China did the same on all products from the U.S to China.  The net effect would be that the U.S economy would be down by approximately .50% on annual GDP. However, China would have a hit of an estimated 4.5% to its GDP. The other fear China should have is a changing supply chain.  If China were to raise its tariff’s on the U.S for a long period of time, U.S companies would look to move manufacturing from China to other favorable countries like South Korea, Vietnam or even come back to the U.S.  This would cut China out completely and jeopardize their longer term economic prosperity.

In all of this China Trade/Tariff  drama, I have not heard one thing about the fact that the US corporate tax rate is now one of the lower corporate tax rates in the world at 21%!  Trump said before he jumped on Marine One that he really wants American companies to come home and make their products here in the USA (no tariffs here).  This is what the China Trade/Tariff is all about and nobody is talking about it!  Trump has set the stage for a corporate boom in the USA with corporate tax rates now at 21% (below the global average of 23%).  Don’t forget, money goes where it is best treated and the USA is the best/strongest country in the world.

There is no clarity at this time as to resumption of trade negotiations.  Presidents Trump and Xi will meet next month for the G7 meeting and it is expected that they may discuss the current impasse.  The impact of higher tariffs cannot be applied across all companies in a uniform manner.  Many companies have multiple sources of production which can be adjusted to minimize the impact of tariffs.  Other companies rely heavily on China for parts and assembly such as Apple.  Many smaller companies in the U.S. generally do not rely as much on Chinese products and services and may be favorably positioned in comparison to some of their competitors.

On a brighter note, President Trump deferred the imposition of auto tariffs for six months to give more time to negotiate with Japan and Europe.  There was also an announcement on Friday that the U.S., Canada and Mexico have reached an agreement to remove the steel tariffs imposed last year.  

The preliminary May reading of consumer confidence came in at 102.4 which is the highest level in fifteen years.

Despite both positive and negative reports surrounding trade agreements it is evident that the process can change very dramatically in a short period of time.  Short-term investors try to take advantage of these shifts in sentiment as reflected in the extreme swings in the market this week.  Longer-term investors are more likely to move more cautiously to avoid over reacting to changing markets.  In politics there is an often used expression, “It’s the economy stupid.”  Indeed, leaders of both countries will be monitoring economic and political sentiment as they contemplate their next move.

Source: Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 


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Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.  The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates.  Past performance is no guarantee of future results.  All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.  Forward looking statements are based on current expectations and assumptions, the economy, and future conditions.  As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict.  Actual results may differ materially from the anticipated outcomes.  Carefully consider investment objectives, risk factors and charges and expenses before investing.  Fortem Financial is a registered investment adviser with the SEC.  Advisory services are offered through Fortem Financial.

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China, China and More China... The trade fight is escalating and markets don't like it

On Sunday April 5th, President Trump tweeted that trade negotiations with China were moving too slowly; he announced a tariff increase (from 10% to 25%) on $200 billion of Chinese imports effective Friday April 10th and announced his intention to initiate a 25% tariff on an additional $320 billion of imports from China.  China, while offering no details, indicated its intention to reciprocate.  The sudden change in outlook for a trade agreement sent the markets tumbling last week: the Nasdaq declined -3.03% followed by Russell 2000® Index (-2.54%), S&P 500® Index (-2.18%), and Dow Jones Industrial Average (-2.12%); the losses for the S&P 500® were the worst since the December 2018 selloff. 

Last week, the U.S. trade negotiators reportedly told President Trump that China was backing away from some key commitments to a developing agreement; the Chinese may have interpreted President Trump’s criticism of the Federal Reserve as an indication that the U.S. economy was weakening and that President Trump needed a trade pact sooner-rather-than-later.  Details are in short supply; but, given the high stakes, the pressure tactics on both countries are not unexpected.  Two days of negotiations in Washington DC concluded Friday with both sides indicating that the discussions were “constructive.”  Many companies have responded to the trade turmoil by taking steps to reduce the impact of higher tariffs by stockpiling and sourcing supplies from other countries.  Most executives such as JP Morgan’s CEO Jamie Dimon still believe a trade agreement will be reached; on Wednesday, he put the odds of an agreement at 80% stating,  “Now we have this whole kind of little bump in the road” adding, “Sometimes his [President Trump’s] tweets don’t pan out to be as bad.”

On the corporate front, Occidental Petroleum raised its cash offer for Anadarko which caused Chevron to drop out of the bidding.  The much-hyped IPO of Uber debuted Friday at $45, priced at the low end of the projected range; the stock lost 7.62% on its first day of trading.  

Earnings season is nearing an end; results continue to exceed analysts’ expectations.

Uncertainty is always a nemesis for investors seeking predictability.  Last week’s volatility was a step back even as year-to-date returns remain strong.  Commentary on the progress of trade negotiations will likely influence equity performance for the foreseeable future.  Events may unfold quickly given the pressure on the U.S. and China to avoid the economic threat of an escalating trade war.  

Since hitting new all-time highs two weeks ago, the S&P 500 has fallen about 2.2% as trade negotiations with China hit this snag. Last week, the US announced new tariffs on Chinese imports. This morning, China announced new tariffs on some US goods. Many fear a widening trade war.

Don't get us wrong. We want free trade, and we understand the dangers of trade wars and tariffs (which are just taxes on consumers). At the same time, we think trade deficits themselves are not a reason for trade wars. We all run personal trade deficits with the local grocery store and benefit from that. Even if the entire world went to zero tariffs, the US would almost certainly still run trade deficits, even with China.

But today, the trade deficit with China is partly due to the fact that China has higher tariffs on imports than the US does – working to eliminate these lopsided tariffs is worthwhile.

In 1980, China was an impoverished nation. Then it began adopting tools of capitalism – property rights, markets, free prices and wages. Chinese businesses started to import the West's technology, and growth accelerated.

Initially, China didn't have to worry about intellectual property. When you replace oxen with a tractor, all you have to do is buy the tractor, not reinvent the internal combustion engine. But China has now picked, and benefited from, the lowest hanging fruit. So, China decided to steal the R&D of firms located abroad. Some estimates of this collective theft run into the hundreds of billions of dollars.

That's why normal free market and free trade principles don't neatly apply to China. 

Remember President Reagan's old story supporting free trade? "We're in the same boat with our trading partners," Reagan said. "If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat?" The obvious answer is that it doesn't, and so our own protectionism would hurt us.

But China hasn't just shot a hole in the boat, they've become pirates. If Tony Soprano and his cronies robbed your house, would free market principles require you to trade with them to buy those items back? Of course not! 

It's true tariff increases will not help the US economy. But $100 billion of tariffs spread over $14 trillion of consumer spending is not a recession inducing drag. It's true some business, like soybean farmers, are hurt. But the status quo means accepting hundreds of billions in theft from companies that are at the leading edge of future growth.

Either way, if tariffs nick our economy, China's gets hammered. Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP. Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy. We have enormous economic leverage that they simply can't match.

An extended US-China trade battle means US companies will shift supply chains out of China and toward places like Singapore, Vietnam, Mexico, or "Made in the USA." If that happens, the Chinese economy is hurt for decades. 

Anyone can invent a scenario where some sort of Smoot-Hawley-like global trade war happens. Realistically, though, that appears very unlikely. We're not the only advanced country China's piracy has victimized, and China may realize it's more isolated than it thought.In the end, China wants to trade with the West, not North Korea, Russia, and Venezuela. China needs the West. And all these trade war hysterics just aren't warranted.

Source: Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 


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Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

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Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

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The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

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