wknd notes: America’s Trade Deficit Is Not The Primary Conflict

wknd notes: America’s Trade Deficit Is Not The Primary Conflict

The planet’s most powerful military threatened to reconsider NATO unless Europeans meet their spending commitments. Europe’s leaders repeated unfulfilled pledges to do just that, returning to their parliaments to find the funds. Earth’s biggest consumer threatened to impose 10% tariffs on another $200bln of imports from the planet’s largest producer. Beijing vowed to retaliate. Its deeply indebted economy, overleveraged to ever-rising global trade, now faces the opposite. Lady Liberty warned the West of immigration’s profound threat to cultural identity, domestic security, harmony. American’s voted for real change. And it’s coming.

Overall: “This was completely uncharted, unprecedented territory and nothing like this has been done. So, of course there were doubts,” explained Rick Stanton, returning from The Hero’s Journey. “There was a lot of chaos but we were so task-orientated, focused, and we blanked that out and carried on with the job in hand, step by step, until we achieved success.” From humanity’s very first story - The Epic of Gilgamesh - the hero’s journey has sustained us, provided hope, a torch in the infinite darkness. Our heroes tread a common path; they’re called to adventure, cross into the unknown, encounter obstacles, mentors, helpers, they face death, the abyss, prevail, they’re transformed, and return to share their gifts. “We used our very unique skill set to give back to the community,” said Stanton, humble, inspiring, leaving us to consider our unique skills, and how we put them into the service of others. “I still can’t believe it worked,” admitted Major General Chaiyakham of the Thai rescue command, his sense of what is possible forever expanded. Naturally, Stanton had believed the plan could work, he imagined triumph, victory. The hero wields humanity’s most powerful weapon – imagination - and standing face to face with the impossible, envisions a way through. “So many things could have gone wrong, but somehow we managed to get the boys out,” said the General, in awe of the heroes, the heroism. We all are. 10,000 people participated in the rescue, including 2,000 soldiers, 200 divers and representatives from 100 government agencies. For a glorious few days, 7.6bln humans shared a common hope. “We are not heroes. What we do is very calculating, very calm. It’s quite the opposite,” said John Volanthen, standing with Rick Stanton, returning from their journey, to share the gifts.

Week-in-Review (expressed in YoY terms): Mon: China to use tariff proceeds to support companies hurt by US tariffs, Turkey scraps minimum 5yr term for central bank chief, Erdogan appoints son-in-law as finance minister, EU investor sentiment rises, German exports -1.3%, German far-right AfD overtakes center-left CSU in polls with 17.5% vs 17.0%, UK’s Brexit secretary Davis and Foreign secretary Johnson resign, S&P +0.9%; Tue: China PPI +0.6 to +4.7% (CPI +0.1 to +1.9%), Japan machine tool orders -0.5 to +11.4%, Turkey’s new Finance Minister (Erdogan’s son-in-law) vows to “maintain fiscal discipline,” French IP -2.8 to -0.9%, Switzerland launches WTO dispute proceedings over US steel and aluminum tariffs, NFIB small business optimism 107.2 (all-time high 108.0 in 1983), NFIB “single biggest business problem is finding qualified workers,” Tesla to open Shanghai factory, Trump to impose 10% tariffs on $200bln of Chinese imports, S&P +0.4%; Wed: China vows to retaliate against US $200bln trade tariffs, Pompeo hints at waivers for countries seeking to import Iranian oil, Saudi Arabia hiked May production 400k barrels/day, Erdogan “rates to go down,” Canada hikes rates 25bps to +1.5% (lifts inflation forecasts), copper hits 1yr low, Trump “Germany is captive to Russia because of reliance on natural gas,” Pfizer postpones drug price hike after Trump discussions, Trump tells NATO to increase defense spending to 4%/GDP, wkly crude oil inventories -10mm barrels, soybean prices 10yr low, S&P -0.7%; Thur: Korea rates unch at +1.5%, IEA warns spare oil capacity stretched to limit, EU commission lowers GDP forecasts (2018 +2.1%, 2019 +2.0%), Macron denies NATO leaders agreed to increase spending commitments, US CPI 6yr high +0.1 to +2.9% (core CPI 18mth high +0.1 to +2.3%), Delta slashes forecasts on high fuel prices, S&P +0.9%; Fri: Chinese exports -1.3 to +11.3% (H1 exports to US +5.4%), Fitch downgrades Turkey further into junk, BOE deputy governor makes case for delaying rate hikes, AMLO meets Pompeo/Kushner/Mnuchin and meeting went fine, 2-10yr yield curve hits 24bp low (2007 levels), Trump “UK/US relations stronger than ever,” Mueller charges 12 Russians with hacking Clinton, consumer confidence slips, S&P +0.1% (5mth high); Sat/Sun: Chinese M2 growth falls to 28yr low of 8% (total loans outstanding +12.7 in H1).

Weekly Close: S&P 500 +1.5% and VIX -1.19 at +12.18. Nikkei +3.7%, Shanghai +3.1%, Euro Stoxx +0.7%, Bovespa +2.1%, MSCI World +1.0%, and MSCI Emerging +1.5%. USD rose +8.6% vs Ethereum, +6.2% vs Bitcoin, +5.8% vs Turkey, +1.8% vs Sweden, +1.7% vs Yen, +0.7% vs China, +0.6% vs Canada, +0.5% vs Euro, +0.5% vs Sterling, +0.1% vs Australia, and flat vs Indonesia. USD fell -1.5% vs South Africa, -0.9% vs Chile, -0.9% vs Russia, -0.8% vs Mexico, -0.5% vs India, and -0.3% vs Brazil. Gold -1.1%, Silver -1.5%, Oil -4.5%, Copper -1.5%, Iron Ore -7.8%, Corn -5.0%. 5y5y inflation swaps (EU -1bps at 1.71%, US -3bps at 2.39%, JP -2bps at 0.40%, and UK +3bps at 3.42%). 2yr Notes +4bps at 2.58% and 10yr Notes +0bps at 2.83%.

2018 YTD Equity Indexes: Saudi Arabia +15.7% priced in US dollars (+15.7% in riyals), NASDAQ +13.4% in dollars (+13.4% in dollars), Russia +2.4% in dollars (+11.2% in rubles), Portugal +7.2% (+10.4%), Russell +9.9% (+9.9%), Norway +9.5% (+8.8%), New Zealand +2.4% (+7.5%), Colombia +11.6% (+6.8%), UAE +6.6% (+6.6%), Finland +2.9% (+5.9%), S&P 500 +4.8% (+4.8%), India -2.4% (+4.6%), Australia -2% (+3.4%), Netherlands -0.1% (+2.9%), France -0.8% (+2.2%), Canada -2.8% (+2.2%), Taiwan -0.9% (+2.1%), Israel -3.2% (+1.5%), Czech Republic -3.7% (+0.6%), Brazil -14.2% (+0.3%), Italy -2.7% (+0.2%), Ireland -2.8% (+0.1%), UK -2.6% (-0.3%), Japan -0.6% (-0.7%), Euro Stoxx 50 -4.3% (-1.4%), Sweden -9.6% (-1.7%), Mexico +2.2% (-1.9%), Denmark -5.5% (-2.5%), Germany -5.7% (-2.9%), Spain -5.9% (-3.1%), Austria -6.7% (-3.9%), Malaysia -3.7% (-4.2%), Singapore -6.3% (-4.2%), South Africa -10.7% (-4.4%), Belgium -7.1% (-4.4%), Chile -9.8% (-4.7%), HK -5.1% (-4.7%), Greece -7.8% (-5%), Switzerland -8.3% (-5.6%), Thailand -8.4% (-6.3%), Korea -11.2% (-6.3%), Indonesia -11.7% (-6.5%), Hungary -15.5% (-9.5%), Poland -16.6% (-11.2%), Argentina -39.6% (-11.8%), Philippines -19.3% (-13.5%), China -17.2% (-14.4%), and Turkey -39.2% (-22.1%).

Battle Lines: Peter Navarro, White House Trade Director, published a 36-page paper last month titled: How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World. If you subscribe to the view that the current trade conflict with China will pass with some modest concessions, it’s a must read. Navarro also made a 30min speech on the topic (https://www.youtube.com/watch?v=eRnIse9v_jc), which emphasizes just how deep the conflict runs. America’s trade deficit is an issue, but far from the primary conflict.

Battle Lines II: “It’s very sad when Germany makes a massive oil and gas deal with Russia, where you’re supposed to be guarding against Russia, and Germany goes out and pays billions and billions of dollars a year to Russia,” said Trump. “You’ve given up all of your strength. I think it’s very bad for Germany. It’s very bad for the German people. And I don’t think it’s very good for NATO, if you want to know the truth.” And the message was intended for Europe, but also Americans, who pay China billions and billions of dollars a year. $375bln to be exact. 

Battle Lines III: Peter Navarro details 6 Chinese strategies of economic aggression and 50 state-directed acts, policies and practices that Beijing uses to achieve their goal of global economic dominance. “This also has military implications. It is what we’re up against when we’re trying to build an international trading order based on free, fair, balanced, and reciprocal trade,” he said. “If you have a negotiation and take 25 of these 50 issues off the table,” warned Navarro in the video, drawing clear battle lines, and in no mood to negotiate, “you still have 25 of them left.”

Onshore: Chinese drivers purchased roughly 28mm vehicles in 2017, 26.8mm of which were produced in China. Only 1.2mm were imported due to the 25% tariffs Beijing applied to inbound vehicles. 15mm of the 28mm were domestic Chinese brands. The remaining 13mm were foreign brands, but 11.8mm of those were produced onshore in China. The intellectual property and business-process transfer accompanying onshore production is staggering, ongoing. By contrast, US drivers purchased roughly 17mm vehicles in 2017, of which just 4mm were produced here.

In the Extreme: There are two nations in the world, one rich, one poor, both ageing. Within 20yrs, robots will manufacture all forms of transport in both nations. In fact, robots will make virtually everything. Humans build the first robots, but then robots make robots. And this frees up humans to do things they most enjoy, provided they have money to purchase things made by robots. In the early years, the poor country vies to manufacture as much as possible, employing cheap labor while overlooking environmental degradation. The rich nation welcomes this. 

In the Extreme II: As production becomes dominated by robots, cheap labor is no longer a competitive advantage. Advances in new materials, processes and power generation results in environmentally friendly manufacturing. The greatest social issue in both nations becomes the redistribution of income from robot owners to the consumers of their output. And in this extreme model of the world, there’s no chance that the rich nation allows the poor country to produce the manufactured goods it consumes. In fact, the rich nation will attempt to do just the opposite. 

Anecdote: “I have no great gifts to offer other than a deep sense of the magic that’s possible for all of us…especially the kids,” wrote the guide, checking in from the Rockies. Teddy, our 13yr old, escaped Connecticut’s sea-level insanity to join him at altitude. In a blind race to Ivy League admission, America’s children now suffocate in summer sports. Two club leagues, sometimes three, speed clinics, strength training. “He’s soaking it all up and integrating it. Teddy’s mind and heart are open, he’s taking it in, participating fully. That’s all I seek,” continued the guide. Our children have fallen victim to parental prisoner’s dilemma; a paradox in which two sets of parents acting in their own self-interest (desperate to help their children attract college recruiters), make decisions that result in a suboptimal outcome for their kids. Our family is trapped too - Jackson, Olivia, Charlie, inmates in summer’s insane asylum. “Crystal clear, blue sky mornings. Starlit evenings, afternoon thundershowers and, yes, rain. This will challenge, test, and bond Teddy’s group,” wrote the guide. I smiled, memories of thin air, deep mountain blue, of rising stars piercing the dusk, sparkling, alive. The mountain’s real beauty is derived through our connection to it. Our encounters with it, the unknown, the unexpected obstacles, struggles, discoveries. We return from the journey transformed, inspired by nature’s majesty, our place in it. “It’s the teenagers who keep me doing what I know is earth-shatteringly powerful, timely, everlasting,” he wrote. If there’s one treasure we could give our children, it is imagination. Without it we’re lost, utterly. But like all things of real value, imagination cannot be given, only cultivated. “Teddy returns to basecamp in about 48 hours. Between now and then, I wish for them a symphony of thunder as it can only be heard in the mountains, pine needles in their dinner.”

Good luck out there,

Eric Peters


Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, drink with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.


Mitchell Goldberg, AIF?, AAMS

Owner, ClientFirst Strategy, Inc. / ??Chief Listening Officer / Financial Advisor

6 年

Once per week I get to read something that requires me to stop everything I’m doing and take a deep breath. WKND Notes is both reflective and forward moving at the same time. This is the read I look forward to the most.

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