Summary: the best thing we can say about this week–Barr letter, Brexit clown car, trade talks, Russian troops in Venezuela–is that it is over and next week will be a lot easier to think about. Here are my thoughts on a few of the items.
Trade. The trade talks in Beijing that ended today (remember, it is already tomorrow there today!) have made real progress, as I advised Kelly Evans they would on her show yesterday. The real work is Intellectual Property law and how to know they are enforcing it. I advised our trade team that the best way to do that is to take advantage of the extraordinary network of American business people already living and working in China to be your eyes and ears. It is helpful that the trade teams–Lighthizer, Mnuchin, and Ross on our side, Liu He’s team on the other–have now spent enough time together to start to know each other. stay tuned next week. Liu He is coming to Washington for more talks. I think we will see progress next week.
Chinese bonds. Some of the bonds in. China’s $13 trillion internal debt market will be included in global indexes next week for the first time. This is important for China because it is the first step in getting foreign investors comfortable owning them (only 2% foreign owned today). And it will make trade issues easier to manage. Today, when the US imposes tariffs on Chinese goods, foreign investors pull their money out of China, pushing the RMB down against the dollar. That capital outflow shrinks liquidity in China, slowing their economy and putting pressure on the PBOC to inject bank reserves, further depressing the RMB. The new effect a higher tariff and a lower RMB is that for US consumers, measured in dollars, Chinese goods are no more expensive today than they were before the tariffs. Broader and more stable ownership of Chinese bonds will make it easier for the PBOC to keep the RMB from falling and make growth more stable in both places. Note to investors: don’t get excited and buy the bonds. They are very risky.
Growth still weak. Q4 GDP here was revised down to 2.2%. Consumer spending revised lower to 2.5%. Weak readings in Europe and Japan as well. The result is the inverted yield curve that has everyone worrying about a recession.
Brexit. the clown-car British government is running out of time. They may actually decide something today, making whatever I write here wrong. My personal bet is that May goes away and that there will be another people’s vote that will reverse Brexit altogether. As I wrote in an earlier post, I think the UK will still be a destination report for capital and is an interesting place to invest. But it is the poster child for the war raging between owners of capital and workers that I wrote about yesterday.
JR
