Many parties are monitoring this week’s important, consequential, significant, portentous, imperative, and exigent US-China trade talks with a glass of Australian wine, a bag of popcorn, and a container of Pepto Bismol, all of which are not subjected to tariffs. Europeans will be praying to the heavens for divine intervention and that the trade representatives will have their come to Milton Friedman moment – WWMFD is how we do this, baby. Traders on stock exchanges worldwide will be screaming buy and sell multiple times in seconds on every report released and word uttered. The Democrats’ mood will ebb and flow; if it is good news they will shed tears into their copies of What Happened, if it is bad news then they will celebrate by getting an abortion, paying for an illegal immigrant’s tuition, or proposing we impeach President Donald Trump for something ridiculous, like stealing pancakes in Scotland a few years ago.
Yes, there is a lot at stake this week – so will there be a ceasefire or a blitzkrieg?
Art of the Deal
Last month, the US and China held trade negotiations among low-level representatives. It was considered a modest success that planted the seeds for further discussions. But both sides are now prepared for primetime, hoping that a fair deal can be salvaged in a tough climate.
On October 10, the world’s two largest economies will officially restart high-level talks in Washington. The principal-level meetings will be headed by Chinese Vice Premier Liu He, Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin.
American and Chinese officials have said they are certain that progress will be made with these deliberations, alluding to goodwill gestures in recent weeks. Beijing is buying more agriculture and exempting various American goods from tariffs and the US is delaying new tariffs on Chinese goods.
During this round of talks, the US will concentrate on currency manipulation, stronger protections of US intellectual property, a reduction in industrial subsidies, greater access to China’s domestic markets, and the end to forced transfers of US technology to Chinese companies.
Beijing, meanwhile, will focus on eliminating or sharply lowering tariffs and easing restrictions on telecommunications giant Huawei.
‘Big Surprises’ in Little Washington
President Donald Trump told reporters that there is a “very good chance” that the US and China could make a deal. This sentiment was somewhat echoed by the administration’s chief economic adviser.
Speaking in an interview with Bloomberg, Director of the US National Economic Council Larry Kudlow anticipates “big surprises” to come out of the negotiations.
“There could be positive surprises coming out of these talks. I’m not predicting. I’m just saying don’t rule that out. There could be some positive surprise. Coming into this, China has been buying some commodities. A small amount, but perhaps a good sign.”
Wang Yi, Chinese state councilor and foreign minister, told reporters that Beijing is ready to show signs of good faith, though he encouraged paving a two-way street. He added that he thinks a trade deal would have already been reached if it were not for “pessimistic language.”
Recently, there were tensions after it was reported that the White House is looking at ways to limit American investors’ portfolios in China. One proposal is to delist Chinese businesses from US stock exchanges. But the administration dismissed the reports, calling it “fake news.” The markets reacted negatively to the news and then rebounded when it was disputed.
Senior White House adviser Peter Navarro recently urged the private sector and Main Street to be patient about the trade spat that has lingered 15 months. His remarks came as a survey found that businesses say the dispute is impacting profits and investment outlook.
The US-China tit-for-tat retaliation has not been good for either economy.
While the US economy has been able to weather the storm, the seams are beginning to burst. The Institute for Supply Management (ISM) manufacturing purchasing managers’ index (PMI) plunged to a decade-low, which was followed by ISM’s non-manufacturing PMI growing at its slowest pace in three years. The September jobs report revealed that the sector shed 2,000 jobs. Also, August factory orders contracted, and the trade deficit has not improved. Equities are just treading water.
Analysts are warning about a recession, citing trade uncertainty as to the primary cause. But the overall strength of the US economy and the Federal Reserve intervening with interest rate cuts will likely keep the expansion alive. Plus, if there is one positive development in this saga, it is that the US dollar has been surprisingly strong, poised to record one of the best performances in foreign exchange markets in 2019.
China is not faring well at all in the strife. In every facet of the market, Beijing is finding weakness, bankruptcy, and dilapidation. Its state-owned enterprises (SOEs) are crumbling, households are witnessing their savings rates fall, and debt is skyrocketing. The People’s Bank of China (PBOC) is trying a myriad of things, as many as several times over, such as the reserve requirement ratio (RRR).
But it is Middle America that has borne the brunt of everything as farmers are continually dealt major blows. Soybean growers, for example, have seen their inventories rot, storage costs surge, and revenues slide. To keep quiet, agricultural players are being bribed with their own money in the form of bailouts to the tune of $12 billion.
A Bull in 2020
President Trump recently tweeted that the market would be 10,000 points higher if it were not for the trade war. He is probably right. That said, if the president wants to inject Main Street and Wall Street with a dose of stimulus, effectively increasing his odds of re-election next year, then he will strike a trade agreement in November or December. By doing this, the markets enjoy an end-of-year rally and then kick off 2020 posting new highs with certainty and low interest rates. Trump gets to grandstand, deliver on a campaign promise. And he’ll continue to own the Democrats, who will accuse him of being racist because it is a day that ends in “y.”
If no deal is reached, then grab your gold bullion and hold it tight – winter is nigh.