The 30 Years' (Trade) War

Posted On Oct 3, 2018 By Dave Gonigam

  • Trump notches a trade victory with Canada, Mexico. China next?
  • Or is real endgame with China a permanent conflict?
  • Trump and the Deep State united against China: Lost cause?
  • Blue chips rally, small caps lag: Trouble ahead?
  • Amazon’s shameless gambit with a $15 minimum wage
  • Memories: “The Bernank,” the tea party and Occupy
  • The bad way the gold-silver ratio could revert to the mean

[I’ve] never seen so much ado about so little,” says Larry Summers of the NAFTA replacement treaty dubbed the United States-Mexico-Canada Agreement.

Summers was Treasury secretary during the later Clinton years — and one of the people who helped set the table for the Panic of 2008, but that’s another story.

Our point today is that he speaks for all of the Establishment when weighing in on trade issues. “I thought the old trade regime between Canada, Mexico and the United States was a good one, and this one’s not very different,” he tells Boston’s WBUR public radio. USMCA is, to his mind, a “publicity stunt.”

Which might very well be true. But it surely gives Donald Trump a “deal” to tout as he campaigns for Republican congressional candidates this month. He wants to convey the impression that he’s on a roll. A deal with Canada and Mexico today, a deal with China tomorrow, right?

Today we pose an unorthodox question: What if Trump doesn’t want a deal with China? What if he doesn’t really care about making Beijing “play by the rules”?

What if the aim, instead, is for perpetual conflict? What if the endgame is the destruction of China as an economic power?

As with the Unified Trump Theory we posited last month, we’re not making a hard-and-fast assertion here. We’re engaging in a thought experiment and teasing out the implications.

Yes, we’re swimming against the current and even against many of our own analysts at Agora Financial.

Everyone from trading guru Alan Knuckman to macro maven Jim Rickards agrees that China has little leverage in a trade war… because the Chinese import so much more from us than we do from them. As Jim said here a couple of weeks ago, “China’s problem is that it will soon run out of U.S. imports to tariff.”

Six months ago we asked Jim what victory in a trade war would look like. His answer: Beijing would buy more soybeans, aircraft and other goods from the United States… and buy less from Canada, South Korea, Europe and Brazil.

Getting there could be long and messy, Jim allows — but it’s the only outcome that would be palatable to Beijing while burnishing Trump’s deal-making legacy.

In contrast, Jack Ma says a U.S.-China trade war will last beyond the Trump presidency — “maybe 20 years.”

Ma is the founder of Alibaba — the Chinese giant often described as a combination of Amazon and eBay. Indeed, it’s the world’s biggest retailer.

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“It’s going to last long; it’s going to be a mess.”

He’s made this forecast a couple of times in the last two weeks — most recently yesterday at a gathering of the World Trade Organization in Geneva.

Twenty years? Try 30, in the estimation of Pepe Escobar.

Escobar is the globe-trotting correspondent for the Asia Times website — and a provocative thinker when it comes to geopolitical matters. It is he who got us thinking that the endgame might be one of perpetual conflict.

“The Trump administration plan,” he writes, “has three basic targets:

1. “Displace China from the heart of global supply chains.

2. “Force companies to source elsewhere in the Global South all the components necessary for manufacturing their products.

3. “Force multinational corporations to stop doing business in China.

“The overarching concept is that unending confrontation with China is bound to scare companies/investors away.”

Good luck with that, Escobar says: “There’s no evidence South Korean or German conglomerates, for instance, would withdraw from the vast Chinese market and/or production facilities.”

Jack Ma says China will have staying power for a lengthy war thanks to Beijing’s “Belt and Road Initiative.”

The BRI is Chinese leaders’ grand plan to recreate the Silk Road of old — only now it’s a network of highways, high-speed railroads, airports, bridges, tunnels, ports, dams, fiber-optic lines… linking Beijing to Berlin, Shanghai to Rotterdam, Shenzhen to Lisbon.

map

Belt and Road Initiative, as depicted on China’s state-run CGTN news channel

The map doesn’t do justice to the plan’s ambition. More from Pepe Escobar: “It’s never enough to stress that BRI’s six main connectivity corridors, spanning up to 65 nations, according to the original timetable, are still in the planning stage up to 2021. That’s when actual implementation starts, all the way to 2049.”

2049 marks the centennial of the People’s Republic — thus Mr. Escobar’s 30-year timeline.

Undermining China’s economic rise is a goal on which Trump and the Deep State can agree.

The Deep State’s been playing a long game. Jim Norman, author of The Oil Card, contends that Washington engineered the rise in global oil prices from 1998–2008 and 2009–2014 to act as a brake on China’s economic growth. Indeed, he makes a case that Washington launched the Iraq War in 2003 largely to nix a lucrative oil deal between the Chinese and Saddam Hussein.

Meanwhile, we cited Mr. Escobar’s writings four years ago about BRI — and how it had D.C.’s elites positively panicked: “Washington’s No. 1 objective now,” he wrote, “is to prevent a full economic integration of Eurasia that would leave the U.S. as a nonhegemon or, worse still, an outsider.”

That was months before Donald Trump burst onto the political scene. Now, four years later, Trump has reimposed sanctions on Iran that have the Europeans chafing at how global dollar-based trade compels them dance to D.C’s tune. “The international reach of U.S. sanctions makes the U.S. the economic policeman of the planet, and that is unacceptable,” said French finance minister Bruno Le Maire.

It’s easy to imagine the Europeans accepting Chinese overtures in the years ahead — the wishes of both Trump and the Deep State be damned.

As we’ve said before in other contexts… this is what an empire in decline looks like.

But that’s all in the future. This morning, the Dow is only 75 points away from 27,000.

Bank and tech stocks are leading the way forward. And for once, small caps are keeping pace with the blue chips: Both the Dow and the Russell 2000 are up nearly two-thirds of a percent on the day.

“September wasn’t kind to smaller stocks,” says chart hound Greg Guenthner. “While the Dow has surged higher by more than 2.6% since Labor Day, the Russell has lost ground, tumbling nearly 4% over the same time frame.”

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Is anything wrong with small caps? Probably not, says Greg. “Remember, sectors and industries fluctuate in and out of favor all the time.”

The Dow lagged much of this year until the trade-war headlines receded in recent weeks. “The herd is searching for the next big, market-moving headline and bigger names are finally grabbing a little momentum as the bulls rotate back into stocks like Boeing and Cisco.

“While this market shift might cause some pain for smaller stocks over the next couple of weeks or months, we’re not yet seeing any signs of panic.”

» All’s quiet in the commodity complex. Crude remains above $75, while gold has dipped a bit below $1,200 again.

Amazon is back below $2,000 a share — perhaps a momentary reaction to the big minimum-wage announcement.

Yesterday, AMZN promised to pay all its U.S. employees no less than $15 an hour. Speculation abounds about the motivation. Is it a tight labor market going into the holidays? Caving to pressure from the likes of Sen. Bernie Sanders and the rest of the “fight for 15” crowd? Hoping to stave off an antitrust lawsuit by the feds?

The financial blogosphere is probably closer to the real story, noticing the section of the company’s press release that says, “Amazon’s public policy team will also begin advocating for an increase in the federal minimum wage.”

Of course it will. What a great way to help throttle competition from smaller businesses. “Amazon tends to demand statist measures whenever it will hamper competitors,” says Robert Wenzel at EconomicPolicyJournal.com.

Adds Michael Krieger of Liberty Blitzkrieg, “Pushing for a forced across-the-board wage hike everyone knows Amazon can cope with better than current or potential competition makes his company look good while likely harming other business models in the process.”

The only upside? Maybe fewer of Amazon’s workers will need food stamps to get by. Earlier this year a study found one in three of the company’s employees in the state of Arizona collect SNAP benefits.

What, you didn’t get a thank-you card in the mail from Jeff Bezos for that nice taxpayer subsidy? Must’ve gotten lost…

And now an extended 5 flashback to Nov. 16, 2010: “Bloody hilarious! A truly idiot-proof explanation of the whole deal,” a reader wrote us.

We had linked to a viral video of that era: Someone took the do-it-yourself animation software Xtranormal and used it to create a video called “Quantitative Easing Explained” — a sendup of the Federal Reserve’s post-2008 policy.

That video, at least for a while, immortalized Fed chairman Ben Bernanke as “The Bernank.”

video

“Like most things that go viral, it was more a testament to what was on people’s minds than the quality of the work,” recalls the video’s creator, Omid Malekan.

Malekan wrote a reflection this week for The New York Times’ website. The Gray Lady gave it a misleading headline. (Are you shocked?) “I Created ‘The Bernank’ on YouTube. And I Was Mostly Wrong.”

“Quantitative easing worked, just not in the way it was intended,” Malekan clarifies.

He acknowledges that QE did not “blow up the global economy,” as one of the cartoon characters predicted.

But that wasn’t the video’s main point. “QE was, first and foremost, a policy designed to enrich banks,” Malekan writes. “In that sense, it worked remarkably, and tragically, well.”

That is, Wall Street benefited more than anyone else from low interest rates and rising asset prices. The benefits for people who didn’t own stocks or who lost their jobs or who lost their homes to foreclosure? Not so much. “Quantitative easing worked, but not for those who needed it most.”

Thus, Malekan says the most far-reaching effects of QE were not economic — but instead political.

“The growing wealth gap, which we now understand to be at least partially caused by such policies, has fueled many political and social movements. In this era of political polarization, the one belief that the far left and the far right increasingly share is that our economic system is somehow rigged. That perception has played a part in everything from the insurgent campaign of Bernie Sanders to Donald Trump’s presidential victory.”

Indeed. At the very time the Fed was engaged in QE earlier this decade, we occasionally showed a Venn diagram of the tea party movement and Occupy Wall Street — with their overlapping grievances.

venn-diagram

At first, we showed the diagram to illustrate how the power elite had disenfranchised diverse groups of people. Eventually, we’d run it just to jerk the chain of tea party readers who resented being lumped in with those dirty freaking hippies — heh.

Anyway, we thank Mr. Malekan for the memories…

“I read your take on the ratio of silver pricing to gold pricing and how silver might be a screaming buy because of the widening spread,” a reader writes.

“Here’s another take. What if gold drops in value to narrow the ratio?

“I am not being obtuse, since I am a holder of both gold and silver in varied forms. Your thoughts?”

The 5: Not inconceivable. But since our write-up last week, there’s been an intriguing new development.

As we mentioned, demand has spiked this year for U.S. Silver Eagle coins. And now the U.S. Mint reports that monthly sales to its “authorized purchasers” in September were the highest in nearly two years — once you throw out the month of January, when demand is always high for the new year’s issue…

chart

Besides, if you’re a long-term believer in accumulating both gold and silver, the relative price is all that really matters at the time of purchase. Eventually the absolute price of both metals rises… and you’ll be better off than someone who didn’t use the gold-silver ratio to time their purchases.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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