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

Summary: My second hit of the day was at a more reasonable hour–my first was Worldwide Exchange at 2AM–gave me a chance to discuss the impact of the Beijing trade talks on global markets with CNBC Power Lunch anchors Tyler, Melissa, and Kelly. I tried to make two main points. 1) Open Mouth Operations (senior officials making combative public statements) are a bad idea. 2) It is a bad idea to frame our discussion around who gets hurt the most by a trade war. Everybody loses. You can see a video clip of the discussion by clicking here or by clicking on the image below.

In addition, here are a few points a few points I made in the discussion.

• Our discussions of the impact of the trade war on the economy are far too narrow. Most people use the term to mean our $20 trillion GDP, which is a measure of current economic activity. Far more important are our $300 trillion asset markets and our net worth; both are strongly impacted by trade wars and policy statements.
• Asset markets today are extremely vulnerable to a wide range of event risks–unexpected, sudden, discontinuous changes in the information investors use to price assets. The US government shutdown, Brexit, and Chinese debt are examples.
•  Today’s heightened levels of event risk make it practically impossible for a prudent investor, manager, or board member, to make major capital commitments. Until the fog clears, capital spending will be weak everywhere and growth will suffer.
• Finally, it is important in a trade negotiation that both parties are able to go home and declare victory. The fact that most people in the US and China don’t speak each other’s language or read each other’s press releases makes that easier to do. Compare the two official press releases below (the Chinese statement has been translated by our State Dept.) to see what I mean.
  • Chinese statement
  • US statement

JR

Summary: Trade talks are in the headlines so today was a CNBC double-header for me. The first hit was at 2AM California time for CNBC Worldwide Exchange where Brian Sullivan and I talked about what to expect from the US/china trade talks in Beijing. As you will see, I am a lot more optimistic about the discussions than in the past. This note tells you why. You can see the video clip of the spot by clicking here or by clicking on the image below. Note: As you will see below, my hope for a Davos handshake did not materialize but I remain optimistic that we will see meaningful headway in the coming weeks.

Brian wanted to talk about what was at stake in the talks, who stood to get hurt the most, and whether the unannounced presence of Chinese Vice Premier Liu He is a signal the Chinese want to get a deal done? As usual, I prepared a set of talking points for the show, which I have copied below (typos and all) FYI. I have also copied a scan of the notes I had in front of my while on camera–the ones you are not supposed to look down at during the show–so you can see the points I think are important.

Talking Points

• I have been a critic of the trade agenda so far but am much more optimistic on this week’s talks.
• This is (almost) the right way to make progress on trade. Send the worker bees for extended contact to get to know each other and work out an agreement both can live with. Then send the big shots a few weeks later to a photo opportunity in a picturesque locale. Davos would be the perfect place for Trump and my old friend Wang Qishan (Vice President of China and the man who gave me China’s Great Wall of Friendship Award a decade ago) to shake hands on an agreement.
• Both economies are showing weakness. Both stock markets suck. It’s a good time to pull a rabbit out of a hat, even if it is a small rabbit. The agenda gives a lot of room for doing this.
• IP is very important but it is a squishy topic because agreements are difficult to enforce. There is a growing base of billionaires in China (guys like Jack Ma) that make their living out of owning enforceable IP. There is a new IP law in process in China that will mark progress but it will take time and communication to make it stick .
• IP theft and bullying US companies are topics where it is easy to make promises but hard to check on.
• Made in China 2025–China’s industrial policy program–will not budge. They know their future depends on continuing to transform the Chinese economy converting from low-cost assembly operations to advanced manufacturing, technology, and professional services.
• Energy is easy. They will promise to buy a bunch of our exports.
• agriculture same. They can announce massive purchases of soybeans and other crops.
• Auto tariffs have been suspended for now anyway. Tesla is building a new plant in China.
• Progress in banks and financial services should be workable as we are just asking for what they have already promised they would do in the WTO agreements. A big US win would be approval of one of the applications for >50% ownership—JP Morgan? UBS just got approved. Master Card and Visa are also opportunities. Big profits here. Big political power.
• All in all I think we will see some sort of agreement this week that will give both guys a photo opp in Davos. If Xi replaces Wang there, it would be a big one.

JR