Blain’s Morning Porridge – May 9th 2019…

Blain’s Morning Porridge  – May 9th 2019

“My old man said be a Tottenham fan…… [expletives deleted]”

In the headlines this morning:

I’ve never ever been knowingly nice about Spurs before, but I can’t fault Norf London’s second-best team on last night’s result…

There is nothing to worry about in trade negotiations. Apparently, all the flubber and fluster in global markets is due to a simple misunderstanding: The Chinese thought Trump asking the Fed to ease rates was a sign of US economic slowdown which encouraged them to row back on some of their earlier commitments. And, with Chinese numbers not quite as bad as the spooks thought they were, the US side had also overplayed its hand..…

Silly. They will all be laughing about it tonight when Lie He arrives in Washington to smooth it all out. Imagine not understanding each other. The talks continue…

Or do they?

Lines have been drawn. The Chinese aren’t happy. The Americans are.. well what are the Americans..? There seem to have been “communication issues” in the mixed messages Trump’s fractured administration has delivered. I read each word of Donald Trump’s tweets translated into $13 bln less on the stockmarket – and he was still blaming the Chinese at a rally last night while tweeting he’s willing to keep tariffs in place for longer than sign a bad deal. “China Broke The Deal” That’s hardly diplomatic, and didn’t he tell us a trade deal was the easiest thing in the world?

Although the Chinese arrive in Washington tonight, 10-25% tariffs will still be slapped on Chinese imports Friday morning with another $325mm to follow. Do the Chinese care? Probably not that much aside from it being a matter of face – Xi can’t be chums with a guy who has insulted China. Global supply chains being what they are, the hikes will be passed to straight to US consumers to pay – but with inflation so low, what’s to worry about.

Actually, the US might have quite a bit to worry about. If US consumers pay for the China tariffs – and they will – then weakening consumer sentiment is just one thing. Last thing the soar-away US market needs is a sharp-intake of air from retail, and a consumer spending clampdown reminding them just how weak commercial property and retail malls are.

And how do the Chinese respond to the new tariffs? By putting duties on US goods..? I suspect Chinese consumers will prove more patriotic than their US counterparts – and who needs a reason to buy fewer US imports from cars to planes? (Hogs are another matter – we suspect the Chinese authorities are withholding just how badly African Swine Flu has compromised China’s main source of protein.)

I read Moody’s saying China retaliation could trigger unemployment and a 1.8% decline in US GDP. (With all things rating agency, discount these numbers dramatically..)

Yet the markets, deep down, still expect the US and China are going to reach a trade accommodation in the near future, and none of the bad things will happen.

What if we don’t get a deal, and the bad things start to happen..?

Under a simple No-deal scenario; The positive market start to 2019 will reverse as it was fuelled by trade optimism. If US inflation increases the Fed will undo its neutral stance and stand ready to address inflation and the market will perceive this as profoundly negative. Stock market stalls, and bond yields rise catching duration extended investors out. Agri-voters get angry and lash out at Trump.

Maybe it gets more complex…

More than a few blogs have wondered about the US Right. They suggest part of the US power complex would rather push China than find a trade solution. Years of IP and US military secrets theft has infuriated the Pentagon. They know China’s massive Red Army is a paper tiger today – unable to stage more that demonstration against US forces. Imagine if they were thinking it’s a good time to face-up to China now, force them to stand down, and pin them back geopolitically across the globe?

That would need to happen before China can reform and create a military capable of the significant force projection needed to back its attempt to capture global infrastructure through the “Belt and Road” initiative?

Just thinking out loud, but if Trump is looking for a way to play the tough guy as the “easy” China trade negotiations stumble, maybe he’s listening to others? I wonder what the Generals and Admirals think? And what about the China Hawks? If they are telling him the US economy is in fine shape and positioned to withstand a trade escalation….

Who knows what goes on in Washington? Damn sure Trump doesn’t…..

And on these happy thoughts.. back to the day job….

Bill Blain