If you were following the markets on Friday, things seemed well. Markets were moving up, the yen crosses were moving up. Likely a typical Friday before the week ends.
And then it came.
Markets dropped significantly, and the Yen appreciated. Many traders in chat rooms were wondering what had happened. Well, it came out that President Trump is considering imposing capital control measures on China. This would include a potential limit of US investment in China, delisting Chinese companies from US stock exchanges (unlikely to happen), but the most important is it would deny China access to US Dollars.
This is the big one.
Before we delve into what this all means, the most important thing you need to note is that there has been NO progress between the US and China. For months I have been speaking about how this story that President Trump keeps tweeting out there about a deal being very close, is just a way to buoy the markets. Very soon the markets will begin to ignore this.
In reality, we need a pen to paper, hand shaking type of deal.
I have outlined how the Chinese can be patient. They know President Trump’s Achilles Heel are the US stock markets. If they fall, he will likely lose the elections next year. Also, if they fall, China can pressure the US to come to the trade table in order to accept a Chinese dictated deal. If not, then they can await for a weaker US President likely from the Democratic side.
Hedge fund manager Kyle Bass, has been advising the US trade team free of cost. He has stated that a deal had been agreed upon before the G7 meeting, but the Chinese wanted 50 pages removed (all to do with imposing everything agreed upon) at the last minute. Kyle Bass has said that China wanted a complete victory trade deal. Nothing mutually beneficial.
If you follow my blog and work, I have said that China is in it for the long game. There are only two ways that China would consider coming to the table:
- They cannot control their food issue (swine flu and army virus has hit China hard. The government is now subsidizing food prices especially pork).
- A Credit issue in China goes out of control (we are already seeing banks in China receiving bailouts).
These capital control measures would try to exacerbate the latter. The US is getting more aggressive and I believe they must.
Steven Bannon who left the Trump team did mention how the US had to be more aggressive using the US military and telling China they have 72 hours to leave and demilitarize the South China Sea otherwise the US navy will remove Chinese assets. Also trade adviser Peter Navarro, wrote a book on how the US has military advantage over China (for the time being) and must capitalize on this.
Robert Lighthizer, who is the prominent member of the US trade team also wants a more aggressive stance. He wants a clear US victory because he knows China will not comply with agreements detailed in a truce or ceasefire type deal.
Lighthizer is definitely an interesting part of this deal. It is said when he went to Beijing, he called out China for all the violations they have made since the 90’s without needing notes. He really surprised the Chinese. He also lives next to Mar-A-Lago and President asks him to board Air Force 1 with him so they can speak about the Trade deal. You do not hear much about him because he prefers to avoid the limelight.
It seems that the US are realizing that this really is the Thucydides trap. One side will come out on top, the other will have to capitulate.
Denying China access to US Dollars is a very big move if implemented. However, another interesting geopolitical point is the fact that Russia and China have been diversifying out of the US Dollar into Gold. This could be as a way to counter act this eventual move.
Again, if you follow my work I have mentioned how Russia and China are attacking US Dollar demand, and Iran is a key for this as well. I would not be surprised if the Chinese and Russians, through dark pools and such, are bidding up the US Dollar because they know all the problems in the world get worse with a stronger dollar. This is why I believe the US really want to cut rates, but as mentioned in my posts, the Dollar will still go up due to the reasons I discuss and the US will have to ‘kill’ their Dollar (perhaps another Plaza accord where the Dollar was devalued by 40%). Yes, the US Dollar would go up against the Ruble and the Yuan, but Gold priced in those currencies will also go up meaning the Russians and Chinese protect themselves.
The Russians and their Central Bank did this successfully as a way of surviving through US sanctions.
So the President is using this as a threat to entice China back to the trade table by force. If he does implement this, the markets would not like it at all. Some say we would see markets drop 10% within two months.
However, this would put pressure on the Federal Reserve to cut rates to 0 as the President wants (well even into the negative). Why? Because remember the Fed’s new mandate is to keep assets propped up. Period. There would be a pension and retirement (heck even banking crisis) if markets dropped that much.
The Chinese probably think the President is bluffing because they know he needs a strong stock market for re-election. However, if rates are dropped to 0, there is nowhere to go for yield except the stock market and it would drive more money into it, which would help Trump in achieving higher stock markets by next year Fall.
It gets even more interesting with all this impeachment talks. The Chinese were a bit annoyed that the Russian collusion impeachment charges dropped. Once they were dropped, China had to come to terms and realize they had to deal with President Trump until 2020.
With this new impeachment talks, the Chinese can now sit back and hope they do not have to deal with President Trump, and perhaps they will be able to deal with a weaker Democratic President.
I have already outlined how China ran circles over President Obama. The Chinese also loved President Clinton since he got them into the World Trade Organization…even though China did not meet the two top requirements for WTO membership:
- Free and open markets (China had closed stock markets. No foreigners could invest in it).
- A free floating currency (Don’t need to say much about the Yuan here).
In summary, expect this trade war to continue, and do not expect a resolution anytime soon. Once again, one side will have to capitulate, and the other side will come out on top. Let us hope I am wrong, but it is likely to escalate to a shooting war or even the US kicking China out of SWIFT. Those are really the only two options the US has against China (even Russia). The troubling thing is that the US probably has 1-2 years before China catches up militarily, more importantly, China creating anti-satellite missiles to take away America’s strategic advantage.