Blain’s Morning Porridge – May 13th 2019
“Gonna strike all the big red words from my little black book…”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
There is a problem with my Billblain@morningporridge.com email account this morning. Please contact me on this email in the meantime..
The Week Ahead!
Not so much just an interesting week ahead, but the breakdown in China/US trade talks may represent a far more important “Something Happened” moment than is immediately apparent.
What changed? It’s not that a simple trade deal wasn’t inked. It could be far more significant: Traders now have to adjust to a probable new reality of long-term Strategic rivalry between China and the US, rather than any short-term tactical accommodation of the kind markets have been discounting and expecting since January. Time to rethink globalisation, the global trade growth driver and swift recovery.
Asian Stocks and the Yuan are down, while dollars and Treasuries are higher. Following the trade talk breakdown, market action this week is going to be cautious. The papers say Chinese state institutions stand ready to pump liquidity into the system, buying stocks and shares if China markets wobble. Let’s see what happens. Disappointed markets were looking forward to artificially low rates, limited inflation, trade stability and resumed growth to keep the party going… Now what? Plenty of other stuff to worry about – like Iran, European EU Elections etc.
One strand of thinking is Trump can’t afford to let the Trade Agreement go – if he does he will lose the Agri-vote in the MidWest. Soya and Hog farmers are likely to be hit by a trade war, and domestic consumers will feel increased costs from tariffs. I’m guessing Trump will continue to blame the Chinese for reneging on the deal, and the trade war being proof of his strength – and his voters will buy it. Discount the idea Trump will be forced to concede. He won’t.
The situation in China is less clear and may be more delicate – Xi is negotiating a tricky path. 92 million empty Chinese homes in over-expanded dust-bowl cities don’t help. How difficult will it be for the government to continue to bail out the domestic bond market and boost stocks – not that difficult at all we suspect. Yet, if the economy slows and workers feel threatened Xi faces trouble. Although his grip on power has been strengthened – and the cult of Xi is gaining ground – many analysts think he’s less secure at the head of the party than imagined.
The negotiation teams are trying to smooth the reaction. They say the US China trade talks are not dead – the American’s have been invited to Beijing to continue discussions – but the reality is they’re in some kind of clinically induced coma. My bet is they are unlikely to be resuscitated in a substantive form – the battle lines between Trump and his “good friend” XI are drawn. Maybe a photo op at the trade conference in June – but little more. There is now too much “face” at stake, and it plays into the arms of the US hardliners and the Military Industrial Complex (wow – there’s an expression I’ve not seriously used since the last cold war) – who appear to have prevailed.
The questions for markets are complex: where do we go from here? And what are the implications for markets of a seismic shift in trade perceptions and expectations? While the US holds most of the key cards, what are the weapons at China’s disposal? Playing its currency more aggressively, but also more fundamental shifts from aggressive debt diplomacy to build support along the Belt and Road – the “New Silk Roads”, and driving industrial divergence to more clearly differentiate China from the West.
If the breakdown in talks was a deliberate strategy from US hardliners, then the next few years will be a straight up Cold Economic War between the West and East. What’s the choice? US Tech still drives global growth. China is still in transformation from global cheap producer to consumption – and its successes thus far have been to copy and improve the US new tech economy. But, there is nothing particularly inventive or attractive yet – China Tech lags the US significantly. No one is likely to buy a Chinese airliner over a Boeing. China has successfully harnessed Surveillance Technology with little compunction about the rights of the individual or privacy – and that’s a tool many developing countries might see as provokingly attractive to keep down dissent.
Will the Belt and Road, debt diplomacy and Chinese use of tech is likely to see the world diverge into East and West spheres of influence? Or will the US aggressively support its Asian allies to resist China expansion? Might be worth watching the South China seas in coming months for signs of how far the US is willing to push.
My read is as we move further away from a US/China agreement, the next stage will be a scramble for allies. A couple of recent notes from European banks have been looking at the likelihood Trump’s next trade fight, with Europe, is about to kick off. But, would a long-term US attempt to stifle the “Belt and Road” and force China to fight a damaging global trade war mean the Trump administration could go easy on European cars and to garner European support? Europe is far more likely to side with the US.
The implications are fascinating… let’s see how it pans out..
Otherwise, the big news from last week is the flolloping Uber IPO – plenty of folk think the weaker price represents a significant buying opportunity – so why are they waiting? I suspect my prediction Lyft, Uber and WeWork represent a top of the market will prove on the money.
Out of time, got an email to fix, and back to the day job…
Bill Blain
Shard Capital