And They’re All Painted Black

Good morning – or, rather, it’s morning but there’s not much good about it news-wise. Everywhere one looks it seems like the Rolling Stones sang, “and they’re all painted black”. Just a few months ago economic pundits everywhere were extolling the ongoing economic expansion while casually drowning any meek voice of dissension in a flood of supporting drivel. And now the most positive note tone hears today is one meekly urging caution – most are way more negative than that, and with good reason.

So, as one of the Bloomberg columnists so pithily called him the other day (forgive me, I don’t know which one), Donald Trump a.k.a. Tariff Man has now embarked on a new course….not content with picking on Mainland China which may indeed prove to be an unwinnable fight for all concerned (notwithstanding his earlier allegation that, “Trade wars are easy to win”), he now relaxed with Canada (for the moment) and restarted his perceived grievances with Mexico, plus added India to the mix…and let’s not forget the ongoing with Europe, Japan, and South Korea. What DT’s bluster has won (sic) long-term for the USA is the realisation by its friends that they have to rethink their relationships.

Good one, Donald – pretty soon the balance of payments is going to be big, huge, yuge – American tourists will stay home because no one will want them anywhere. What he hasn’t yet figured out is that no one will want to travel to the USA either. And, with the trend-line of the US Supreme Court to ‘revisit’ and rewrite past legal foundations, it is a cinch to come to a conclusion that people with long-range investment plans are going to reconsider the safety of the economic harbor that was the USA. Today it is women’s rights under threat, but tomorrow it could be anything or anyone.

But let’s leave the issue of the future for another time. The present situation posed by the ‘trade war’ is getting ever-more perilous. Presumably this whole situation was caused by China taking unfair advantage – trade, postal charges, compelled tech transfer, and outright tech theft. That the USA did/does it when it can get the chance did not enter into the Donald’s cant of perceived injustices. I guess that the biggest injustice, from Donald’s point of view, is that the USA cannot get away with as much as it used to and that that is compounded by the fact that China is getting away with more than it should. And the fact that China was aided and abetted by weak-willed and/or myopic presidents, Republican and Democrat alike, for the last 30 years doesn’t figure much into his storyline – but it should…if someone were giving you the keys to the treasury, wouldn’t you help yourself and, more than that, should you be pilloried for doing so?

The real cost of Tariff Man’s tariffs has yet to be felt – economics don’t become evident overnight and the bigger the economy the longer the time for changes in policy to become apparent. It’s the same with a boat – you turn the wheel/rudder of a motorboat and the response is immediate; doing the same on a cruise ship involves a much longer time period before the course there is any apparent effect. What is evident is the warning that I gave previously, that China will not embark on any path where same is perceived to be a loss of face – they are faced with huge problems food-wise due to swine flu, armyworm, and drought….yet they have cut back (or cancelled) imports of cost-competitive corn, wheat, soybeans, pork etc. from the USA and have, something that is totally untranslatable in Donald’s lexicon, paid more for same elsewhere rather than buy under perceived duress from the USA. Tariff Man and his minions still don’t “get” the fact that Chinese mianzi (face) is not a commodity and that it’s not for sale.  Xi Jinping has said as much but, unfortunately, The Donald is not known for listening.

To counter the blacklisting of Huawei, China has threatened the curbing of the export of rare earths, a strategic product line where it currently has about 80% of world demand. The thing is, it did this once before when Japan was the target and when it had 71% of the world demand. Immediately after they imposed the cut-off, other sourcing came on line…so China did what China does – changed course and made product available cheaper and won back market share plus, and the demand is much bigger now than it was then. But so are the stakes – and when demand leaves now for other climes, it is doubtful that it will come back any time soon, if at all, in these polarized conditions. So China will lose the business and that translates into people losing their jobs and the government losing the tax base and the people not having money to spend on food, housing, schools, cars etc..

Already the economy in China has slowed so much that pollution controls in major cities have been ‘reviewed’ and more auto licenses have been made available (Nikkei May 30/19). And pollution controls (sic) on many factories have been selectively relaxed – China has demonstrated many times in many ways that it is no longer interested in being a supplier of low-tech products. The problem is that they don’t have replacement jobs for the people and they don’t have replacement uses for the factories and machinery and that is compounded by the fact that, in the foreseeable future, they cannot. So making laws and regulations (or not imposing the laws and regulations) on favored industries and companies while dumping on the backs of everyone else is not a well thought out strategy that promotes social cohesiveness.

Economically speaking, the time span of this latest imposition of tariffs and rhetoric is still recent ….so what is almost unprecedented is the degree to which things are being shaken:

  1. Housing sales in Hong Kong – down!
  2. Retail sales in Hong Kong – down! (SCMP May 31/19)
  3. China’s middle class growing anxious about the trade war impact and this is affecting willingness to spend! (SCMP)
  4. China’s food prices and unemployment levels are rising! (SCMP)
  5. China’s industrial profits in April – down! (Reuters May 28/19)
  6. All signs pointing to a rough year for Chinese businesses (CNBC May 28/19)
  7. USA GDP – down!

According to the Financial Times (May 28/19), the acting head of the US Commerce Department, one Ms. Nikakhtar, believes that, “too much of the supply chain has moved to China”…and that companies have prioritised the short term over the national interest”. Of course, if they hadn’t moved where the best costs were, they would have been out of business seeing as there was no government support to do otherwise – and, following that line, it is obvious that the wonks in her department haven’t yet figured out that, as costs of doing business in China have mounted without cease in the last 5 years,  people were already moving manufacturing out of China, including the Chinese. But of course DT will take (and has already taken) all credit for what was already the beginnings of an exodus. Once various logistics bottlenecks (as reported in The Wall Street Journal of May 23rd/19) are resolved, you can expect to see significant movement.

John Authers of Bloomberg (May 28th/19) reported that trucking demand for the next 3 months has, in my words, fallen like a rock. The Treasurer of Federal Express, Mike Lenz, noted that there is, “concern on the industrial economy enhanced by ongoing trade uncertainty”. Authers also mentioned that the S&P 500 Transportation Index is down and, based on current trends, may have “further to go”.  And only a few months ago, trucking companies were worried about having enough truckers to put in the trucks.

Donald Trump has recently said numerous times in numerous places that he isn’t ready to make a deal (with China). Presuming that this is not fake news, where Donald says something and then denies that he ever said it and attributed the reporting of it to be “fake news”, it calls into question just what the hell he is playing at. He wants a second term – so maybe his thinking (sic) is that he shleps this out until nearer to the election period and then settles and proclaims a victory. In the meantime, he engages in fisticuffs with India, another supposed friend, and tosses that bone to China who, shall we say politely, doesn’t have any warm fuzzy feelings where India is concerned. But putting the bite (again) on Mexico, especially after a deal was presumably done, makes no sense as:

  1. Mexico is the logical location for manufacturing to consider in the course of leaving China
  2. Mexico is already heavily tied into the North American supply chain and implementing tariffs will create bottlenecks throughout the system
  3. The point that a deal was done and is now undone will not be lost on anyone (except Donald)

What a mess – just saying!

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Comments? – suggestions? Please let me know.

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