This is all beginning to look like China will be put in the trade penalty box, not just by the U.S., but in coordination by the global democratic powers.  

In the near term, this confrontation with China will further disrupt global supply, which is already feeding into a formula for higher prices, which will soon be followed by higher wages. 

In the medium term, a globally coordinated hardline penalty for China would force the movement of the global supply chain sooner, rather than later, and force the restructuring of economies (for the better) of the United States, Europe and Japan.

The question is, how would China respond to an economic penalty box?  Likely with aggression.  The CCP can't politically withstand the suffocation of exports.  

And how would Russia align?  They would likely stand back and watch. 

There was a recent article in Foreign Policy (here) on this, laying out the reasons why Russia and China would not form an effective alliance against the U.S. (and allies). 
 
Here's the gist:  "history shows that autocratic allies tend to fight each other more than the enemy. In spite of the Molotov-Ribbentrop Pact, Adolf Hitler turned on and invaded the Soviet Union, betraying his partner Joseph Stalin. The major military action of the Warsaw Pact during the Cold War was attacking its own members, Hungary and Czechoslovakia. The last time China and Russia were aligned, they nearly fought a nuclear war with each other in the 1969 Sino-Soviet border conflict. And Putin invaded Ukraine and Georgia at a time when these countries were involved in the Russian-led Commonwealth of Independent States.

Moreover, there are many conflicts of interest between Russia and China that will push them apart without any help from the United States. Depopulation in Russia’s Far East has led to fears that an expanding China will attempt a land grab. Russian colleagues report that Russia’s new nuclear-armed intermediate-range missiles are not aimed at NATO but meant to deter a rising China. More broadly, Moscow was the senior partner during the Cold War, and Putin will not be keen to now play second fiddle to Beijing."

Interestingly, the move in stocks today was up, following Trump's speech.  If you have money in China or Hong Kong, you're getting it out. Where will it go?  U.S. stocks, treasuries, gold … bitcoin.  
 

Another step along the path came today, as the White House announced that Trump will  hold a press conference tomorrow, regarding China’s move to control Hong Kong.  

Stocks came off hard, late in the day, on the news.  And assuming this press conference doesn’t take place until late tomorrow afternoon, it’s a pretty safe bet that tomorrow will be a “risk-off” day for markets as we head into the weekend. 

Add to that, the President signed an executive order this afternoon, to pursue legislation to regulate social media platforms.  This should weigh on broader stocks too, as we end the week.   

We’ve talked about this slow moving “regulatory purgatory” for the tech giants, in my notes for the past two years.   

The tech giants have gotten too big to manage, too powerful and too dangerous for the economy (and society). 

But ironically, regulation only widens the moats for these companies, given their scale and maturity.  The higher cost of compliance, the smaller the chance that there will ever be another Facebook developed in a dorm room.    

That said, the regulation of the “disruptors” should open the door for the “disrupted” to survive.  But the position of dominance by Amazon, Facebook, Google (etc.) seems to have been set – the die has been cast. 
 

The strength today was thanks to even more global stimulus.  This time from a combined $2 trillion of additional government spending/aid coming down the pike from Europe and Japan. 

This puts global fiscal stimulus at about $11 trillion, in response to the crisis.  That has come in the form of direct budget support, public sector loans and equity injections (backstops) and guarantees.   

That's more than 12% of GDP.  And that doesn't include the money created by central banks.

The question is, who will be the buyer of net new government debt issuance, when the entire world is deficit spending and creating more, less valuable paper currency? The buyer will be global central banks (of their own debt) – the buyer of last resort.  This means even more and less valuable currency will be sloshing around the world.  

As we've discussed, this is all a recipe for reduced buying power, of the money in your pocket, which translates into higher asset prices (stocks among them).

Now, let's talk about the building path to confrontation between China and the U.S. …

It's been a long and rocky path, which has included three decades of economic war.  Is something bigger coming, perhaps the seeds of which sowed by the virus? 

China's overt move to control Hong Kong looks like the tipping point.  Pompeo told Congress today that the U.S. no longer recognizes Hong Kong as autonomous from China.  There are some dominos that are lined up to fall.  

Keep an eye on the lynchpin:  The Hong Kong dollar.