Dr. John Rutledge: Far from Equilibrium Economics, Finance and Investing

Summary: I did an interview today with Wilfred and Morgan on CNBC Closing Bell to discuss the long-awaited trade deal. President Trump needs a win. And he has a chance to get one with a mini trade deal. That will not end the rivalry. You can see a short video of the interview by clicking here.

Pres. Trump badly needs a trade deal. He has painted himself into a corner with, an election in a year, a softening industrial economy, tariffs scheduled to be hiked again next month, and impeachment hearings on the TV. He needs a win.

Larry’s comments suggest they will try to pull a (small) rabbit out of a hat in the coming week(s). He is a dear friend of 45 years, a world class wordsmith, and the best possible spokesman Trump could have to pull this off.

Looks like the mini deal they announce would say they buy a lot of soybeans and have made progress on IP protection issues, and we say never mind on the tariffs. Both China gives are true but are already happening. 

China needs our soybeans, our chickens, and our pigs; getting them to buy more is not a big win. Pork is the major source of protein for the new middle class. Half the pigs in the world are in China. African Swine Flu has killed half of those this year. Pork prices are +70% over year ago and inflation is rising. Food is a much bigger %age of China’s CPI than is true in the US. Bottom line, they need soybeans and other farm to provide protein and calm food prices.

China has been making advances in IP protection for the past year, including new laws and a new central court in Beijing to hear IP cases. This is happening because there is huge political pressure to protect IP inside China from all the companies that benefit from it. (Think Alibaba, Huawei, ZTE, TenCent, Baidu, …..).

Xi Jinping has internal political pressures too from his own version of our Neocons. They want him to insist on rolling back existing tariffs, not just the increases planned for December. He understands the political pressures on Pres. Trump and has been holding the signing location hostage pending further progress on tariffs. Signing in a farm state like Iowa would give Trump a big political win—Xi won’t do that unless he gets paid a big price to do it.

Ray Dalio is right–trade is just one facet of the growing rivalry between China and the US. Inside China, the dominant view from the beginning of the trade war is that this is not just a trade war, its the beginning of a new face-to-face competition between the old sheriff (the US) and the rising power (China). Globally, this is being played out with the One-Belt-One-Road program and the global buildout of technology infrastructure (5G) in developing countries. The next phases of the game will be fought with technology (Huawei, ZTE, etc.) and capital (attempts to restrict China’s access to western capital). It won’t work but will cause a lot of problems.

I am just back from the recent Davos in the Desert meetings in Riyadh, where 6000 global investors met to discuss strategy. There were a lot less delegates there from the US and a lot more from China, India, and Russia. The dominant theme at the conference was that small countries can no longer afford to just have one big backer. They must learn to do business with both. Whether this means we will learn to get along or the world will have to learn to live with two dominant teams remains to be seen.

JR

Summary: Thirty years ago today, as I finished a speech in Zurich, I heard that the students had toppled the first section of the Berlin Wall . I boarded the first flight to West Berlin, a twin engine propeller plane. I remember looking out the window as we flew in over the wall while listening listening to Tina Turner’s “Steamy Windows” on my Sony Walkman. Landed, bought a hammer, joined the others breaking the wall into pieces. 

I hated that wall. I had lived in West Berlin in 1968. My apartment was the upper floor of an old at house at 68 Steinträgerweg in a small village called Alt Buckow, 200 meters from the Wall, which means 250 meters from the first guard tower. The Wall at that point was a grotesque combination of a tall wire fence, then a mine field, then towers manned 24/7 by rotating pairs of guards with machine guns at 50 yard intervals, then Steel barriers to stop people crashing through with their cars. I could walk along the edge of the fence and wave at the guards but they never waved back. At night I would be woken by sirens, searchlights and machine gun fire; someone else had tried to slip across. At that point, some 500 people were killed trying to get to the other side of that wall.

My sharpest memory of 11/9/89 was standing beside one of the gaping holes in the wall, hammering away while talking with an armed East German guard standing just on the other side of the wall. He looked a little embarrassed that he was literally on the wrong side of the story. He did nothing to interfere as we chipped away at the concrete. He tried his best not to look happy. I am holding a small piece of that concrete in my hand as I type this post.

People today seem to have forgotten what it means to have a totalitarian government. I never will. 

JR