Mismanagement and confusion in the US give China a huge advantage
|Outlook:
As in the Brexit case, we doubt it's worth the time to pore over all the conflicting statements about the US-China trade talks. Yesterday the FT reported some talks were cancelled, and then the government denied any had been scheduled in the first place. This follows several instances of one government party saying something about the trade talks and a different party denying it or saying the opposite. We expect the normal necessary secrecy and confidentiality of such talks to prevent front-running, but the Trump version is hardly normal. For one thing, so many people lie, including Trump. For another, there is no plan or strategy. Everyone is winging it. Trade Rep Lighthizer may have a plan but he can get thrown off course by Trump at any moment. Nobody knows where Mnuchin and Kudlow fit in, including Mnuchin and Kudlow. It's worse than a classic political power play—it's just a scrum.
And the Chinese know it. It's very helpful when entering a tactical situation to know the tactics of your opponent—childish temper tantrums—and to know the opponent has no real strategy and can be blind-sided. You don't have to know Sun Tzu's "Art of War" to grasp these basics. Mismanagement and confusion in the US give China a huge advantage. Players like Kudlow know it, too. That means the US side must press the one advantage it does have—that China subsidizes exporters and Chinese companies steal US technology. Remarkably, that is what has emerged. We guess it has emerged by accident and not design, but never mind. It gives the appearance of coherence.
This development implies that a deal is indeed likely. We thought Trump would string it out as long as possible in order to keep his base captivated, but given the stock market's wildly negative response to the situation, he may be pulling in his horns. He can takes them back out again as the 2020 election comes nearer—repudiate the deal this year because China cheated, or some other ruse. Given Trump's mismanagement of the government shutdown—polls show the majority know it's his fault for being pig-headed—he needs to recover. A China trade deal would go a long way to drowning out noises of protest over the shutdown and the failure of Trump's bullying. For the government to re-open, Trump has to "lose" to the Speaker of the House. A woman. This is really hard for a misogynist jackass like Trump.
The press and public are bewitched and beguiled by big shiny things like the US-China trade talks, but under the surface, all is not well. We want to quote again the economist cited by the WSJ on housing: The WSJ cites a MUFG economist: "Federal Reserve officials were already on the lookout for signs that interest-rate-sensitive sectors of the economy were coming under stress, and right now home sales are the smoking gun that the Fed's rate hikes are starting to bite and slow the broader economy down."
Bloomberg offers something named the "Economic Surprise Monitor" that now shows most data coming in below expectations except the labor market and household data. Since consumption is by far the biggest component of GDP, we're still okay. "You could make the argument that, on some level, this is the only thing that matters. The economy is just made out of people, and as long as they're working and are happy about things, then everything else should fall into place. But ultimately, it's difficult to imagine this state of affairs just continuing... if the gloom being felt elsewhere persists, it's bound to translate into the labor and household data."
Not to be snotty, but this little chart excludes the housing market. And the economy is far more than just its consumers... it is also business managers who make capital spending plans and politicians who make budgets. The "analysis" also excludes expectations about financial conditions and the starting points, such as the savings rate and degree of consumer and corporate indebtedness. In a nutshell, it's not terribly useful. At the same time, it may point to the US being able to get over the hump because of the ever-lasting resilience of the consumer and his endless materialism. If we are sliding downhill, the principal player doesn't know it yet.
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