A Silver Lining in the Trade War

Today, we try something new…

All week, you’ve been submitting questions about the technology trends we cover in these pages. In today’s special mailbag edition of The Bleeding Edge, I answer your questions.

Huawei’s troubles are great news for other network infrastructure firms…

First up, a reader wonders about the long-term implications of the U.S.-China trade war:

Was curious to learn your thoughts on the Trump administration’s order that effectively bars American firms from selling components and software to Huawei. But I saw no mention of this ban.

As you know, this order has had, and probably will have going forward, a serious impact on the share prices of many of the companies that you have recommended both in Exponential Tech and the Near Future Report, as these companies do a lot of their business in China.

And as I would think you understand, this ban on sales to Huawei is something rather different from the trade war that is ongoing with China. The trade war may be resolved soon, but this ban on Huawei was prompted by a much different concern, that of national security. I don’t see the fear of Chinese hacking and espionage going away anytime soon. Thus your thoughts on whether our 5G and related technology companies that do a substantial part of their business with China remain strong investments in the current climate would be welcome.

– Jonathan F.

Thanks for your question, Jonathan.

As you correctly point out, there are actually two separate dynamics at play right now.

The issues surrounding the trade negotiations are temporary. We can expect that the ban on selling components to Huawei, and Google’s suspension of Huawei’s Android OS license, will be lifted once a trade agreement is put in place.

Any current negativity in U.S.-based technology companies that are selling to Huawei, or other China-based companies for that matter, is a buying opportunity from an investor’s perspective.

To be very clear, the current tariffs related to the ongoing trade negotiations are having a severe impact on most China-based companies that export to the U.S. It is also having an impact on China at a national level.

The risk of protracted trade negotiations would be nothing short of catastrophic for China. If an agreement is not put in place, U.S. companies will continue a trend of building new manufacturing plants onshore.

In the last two years, we’ve seen the strongest manufacturing job growth in decades. If that trend continues at an accelerated pace, it would be bad for China’s economy… for obvious reasons.

As for national security, this is quite a separate issue. We can expect that the U.S. and other Western government agencies will ban the purchase of Huawei products that connect to wireless or wired network infrastructure.

Huawei’s products could still be purchased and used by enterprises in those countries, just not on government agency networks or critical network infrastructure.

That simply means that there will be more business for companies like Nokia, Ericsson, and Cisco, and less for Huawei.

The Long-Term Stock Exchange wants to end “fast money”…

Next up, a question about the impact the Long-Term Stock Exchange (LTSE) would have on everyday investors:

How would [the Long-Term Stock Exchange] affect our investments in the Exponential [Tech] investment newsletter, if this should come to fruition? How would it affect our Nasdaq holdings?

– Mark A.

Thanks for the question, Mark. But not to worry. There is no impact at all to our current portfolio holdings.

Even if one of the current portfolio companies decided to switch from the Nasdaq to the LTSE, no action would be required by investors.

Online brokerages manage the access to all major equity exchanges, so investors would still see the stock in their brokerage accounts.

In theory, the effect of the LTSE on company stock prices should be less volatility. The desire of the LTSE is to have investors with a long-term investment strategy, not “fast money” looking to trade in and out of positions.

In practice, we’ll have to see how the exchange develops.

FATF can’t stop crypto trading…

For our last question, a reader asks if the Financial Action Task Force (FATF)’s attempt to implement the “travel rule” for blockchain transactions will slow down cryptocurrency adoption.

Greetings from Beirut. Regarding the new FATF rule for cryptocurrencies, they have always wanted a big piece of this cake and the problem is that they run the current financial world. We were counting on big-money trading exchanges to open up crypto trading platforms and expecting their greed to push Bitcoin and altcoin prices high. Should we be worried now with FATF and keep our hopes lower for some good return on our crypto investments?

– Maram Z.

Thanks for writing in, Maram.

Sadly, if the travel rule is successfully implemented by FATF and member countries, the largest burden will be on individual investors. Large institutions are already built to support those requirements and can manage associated costs of implementation across their businesses.

It will not, however, have a negative impact on the trading of digital assets on digital exchanges. Trading will continue no matter what happens with FATF.

The industry needs to have institutional money in the cryptocurrency space. The big money provides necessary liquidity for the market.

And for the institutional money to flow into digital assets, the world needs regulatory clarity, strong custodial services, and financial instruments (derivatives) that can be used to hedge positions in cryptocurrencies.

These are the things that the industry is building out right now – this is the key focus for 2019. And hopefully progress will be made on the regulatory front as well.

Thanks to all the readers who read and wrote in this week.

Do you have a question you’d like answered? Write me an email by clicking right here.

Regards,

Jeff Brown
Editor,
The Bleeding Edge