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Investors had managed to cling on to optimism that the ‘trade skirmish’ between the US and China would reach a swift conclusion – and that the US would ultimately be better off, as China would be forced to curtail practices like its IP theft from US companies.

But as downbeat markets observed on Monday morning, hope of a harmonious resolution died when Beijing cancelled plans to send two delegations to Washington. The delegates would have engaged in the fifth round of talks since the trade conflict – war, whatever you want to call it – began earlier this year.

Meanwhile, the US formally imposed 10% tariffs on roughly $200 billion in Chinese goods just after midnight on Monday morning, pushing China to impose tariffs on roughly $60 billion of goods. Even before the tariffs took effect, US stock futures and the yuan tumbled after the start of trading Sunday night, leading European and Asian stocks lower (to be sure, these moves took place with holidays in China, Japan and South Korea, which led to much thinner trading volumes).

Those losses were exacerbated when Beijing-run Xinhua news wire published a white paper where Chinese officials revealed that they would not engage in any further negotiations while the US continues to threaten further tariffs, per Bloomberg.

“The door for trade talks is always open but negotiations must be held in an environment of mutual respect,” according to a white paper carried by the state-run Xinhua News Agency. Negotiations “cannot be carried out under the threat of tariffs.”

This confirms that “the trade war is now a reality,” according to Fitch chief economist Brian Coulton.

…click on the above link to read the rest of the article…

Trump’s Hand-Picked Winners and Losers: China vs Canada, NAFTA Threats, and P&G

September 22, 2018

Trump’s Hand-Picked Winners and Losers: China vs Canada, NAFTA Threats, and P&G

As a single country, China is the US’s largest trading partner but Canada is the largest export partner.

As Trump struggles to get a NAFTA deal going on account of Canada, the above chart puts things into perspective.

Canada is the US’s largest export partner. Moreover, when it comes to goods (as opposed to goods and services), the US consistently runs a trade surplus with Canada.

The US has had a goods surplus with Canada every month since 1985. Nonetheless, Trump is incredibly annoyed at Canada and threatens to put tariffs on Canadian cars.

Here’s the broad picture.

US Balance of Trade 2011-2017

I created the above chart from downloads of these three Census Department files.

Notes

Hong Kong, Singapore, and Taiwan were added in 2015.
The format of the reports changed in 2014, but that link has annual totals that date back to 2011.
Prior to 2014 there was no Exhibit 20 (selected countries).

2018 Subtotals

Mid-year 2018, the US is still running an overall trade surplus with Canada, so this will likely be the fourth year the US records a trade surplus with Canada (total the first two highlighted columns).

Nonetheless, Trump is moaning. And the global chart shows it’s over very insignificant totals.

This is the true nature of the “worst trade deal in history” where Canada is now more important than Mexico.

NAFTA negotiations are at an impasse.

As President Trump threatens to ink a deal with Mexico by Sept. 30 and leave Canada behind, the New York Times asks Can Nafta Be Saved? These Two Negotiators Are Trying.

…click on the above link to read the rest of the article…

A Path To War? China Cancels US Trade Talks As ‘Skirmish’ Escalates

September 22, 2018

A Path To War? China Cancels US Trade Talks As ‘Skirmish’ Escalates

Following a surge in Chinese, European, and much of the US equity markets this week amid hopes that the so-called ‘trade skirmish’ was less ‘war-like’ than expected, China just dropped an early Saturday morning (local time) tape bomb that is sure to resurrect ‘trade war’ talk.

After President Trump slapped a fresh round of tariffs on Chinese goods, targeting 10 percent duties on $200 billion of goods; the two camps were scheduled to meet in order to dial back tensions. As we noted earlier in the week, China had ‘downgraded’ the team with a mid-level delegation from China due to travel to the U.S. capital to pave the way for Vice Premier Liu’s visit.

That was what sparked hope that this was just a trade skirmish (as Jamie Dimon attempted to play down), sending stocks soaring all week.

However, that is all over now.

The Journal just reported on Friday that, according to sources, China has rescinded the proposals to send two delegations to Washington.

Chinese officials have said such pressure tactics wouldn’t induce them to cooperate.

By declining to participate in the talks, the people said, Beijing is following up on its pledge to avoid negotiating under threat.

“Everything the U.S. does hasn’t given any impression of sincerity and goodwill,” Chinese Foreign Ministry spokesman Geng Shuang said at a press briefing Friday.

“We hope that the U.S. side will take measures to correct its mistakes.”

* * *

The timing of this news, after the exuberant equity week, is also noteworthy as it follows Ray Dalio’s, founder of Bridgewater, warnings that the current trade tensions mirror those of the 1930s:

…click on the above link to read the rest of the article…

Ex-PBOC Head Warns China’s Exporters Could Soon Ditch The US

September 21, 2018

Ex-PBOC Head Warns China’s Exporters Could Soon Ditch The US

Former Chinese central bank governor Zhou Xiaochuan suggested on Wednesday that the direct impact on China of the trade war with the US “appears limited,” though it could quickly prompt China’s top exporters to pivot away from US markets. Xiaochuan, who left the bank in March after 15 years at the helm, told Reuters that China’s economy would be stable in 2018, with an expected growth rate of 6.5%, but needed to shift away from an economic model based on “urbanization,” or constructing ghost cities.

However, the main risk to the global economy is protectionism according to the ex-PBOC head. The costs of protectionism could hit the US the hardest, as Chinese firms are expected to withdraw from US markets and expand into other global economies:“I think it will force China to look at many other markets. So it’s not necessarily a good thing for the United States,” he said.

“I think the speed of (geographical) diversification can be relatively fast and beyond many people’s expectations.”

Reuters said Xiaochuan downplayed the idea that protectionism will severely affect economic growth in China, which he said had been estimated at 0.2-0.8% of GDP, but added that trade wars are creating uncertainties and could hurt business confidence.

Xiaochuan is right, in the latest US Economic Outlook via Barclays, US Economist Michael Gapen revealed that global growth momentum is already slowing.

Gapen also showed that global trade volume as a share of world GDP has likely reached a turning point into a protectionist era.

As a result of the peak in “hyper-globalization”, China is being forced to change its growth strategy after many decades. The economic driver of supplying Western markets with cheap goods and constructing ghost cities in China are over. “Whether this is reaching the peak or has peaked and maybe going down, we need to find some new economic growth driver,” said Xiaochuan.

…click on the above link to read the rest of the article…

China Retaliates: Beijing To Levy $60BN In Tariffs On US Goods Effective Sept 24

September 18, 2018

China Retaliates: Beijing To Levy $60BN In Tariffs On US Goods Effective Sept 24

Just as Donald Trump was further threats aimed at Beijing after he launched another $200BN in tariffs targeting Chinese imports, and warning that “there will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!”, China’s Ministry of Finance issued a statement disclosing that it would retaliate by levying tariffs on another $60BN in US goods (effectively covering all US imports with tariffs), which would take effect from Sept. 24 at 12:01 p.m.

While the retaliation was expected, in what appears to be an olive branch to Trump, Beijing said that it would impose a 10% tariff rate on goods that it previously listed at a 25% rate, and a 5% rate for goods that previously were seen as being in the 10% rate bucket.

Here are the highlights, from Reuters and Bloomberg:

CHINA SAYS NEW TARIFFS ON U.S. GOODS EFFECTIVE AT 1201 LOCAL HOURS ON SEPT 24
CHINA TO LEVY TARIFFS ON $60B U.S. GOODS
CHINA SAYS TO LEVY TARIFF RATES RANGING BETWEEN 5 TO 10 PERCENT ON U.S. GOODS
CHINA SAYS NEW TARIFFS WILL BE LEVIED ON 5,207 U.S. PRODUCTS, UNCHANGED FROM INITIAL PROPOSAL

China also said that if the US insists on raising tariffs rates on Chinese goods (from 10% to 25% or more), China would respond accordingly, but noted that it hopes to stop trade frictions and hold a constructive dialogue.

The full statement, google translated:

According to the “Notice of the Customs Tariff Commission of the State Council on Adding Tariffs to Certain Imported Goods Originating in the United States (Second Batch)” (Announcement of the Taxation Committee [2018] No. 6), the relevant implementation matters are hereby announced as follows:

…click on the above link to read the rest of the article…

Trump Slams China For Meddling In US Elections “By Attacking Farmers & Industrial Workers”

September 18, 2018

Trump Slams China For Meddling In US Elections “By Attacking Farmers & Industrial Workers”

Having ordered the unleashing of the next round of tariffs (to hit next Monday) on China, President Trump has taken to Twitter to explain what he feels China is trying to do.

His first shot across the bow claims that China is meddling in the US election: ” China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me,” adding that China has miscalculated, because “these people are great patriots and fully understand that China has been taking advantage of the United States on Trade for many years.“

China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me. What China does not understand is that these people are great patriots and fully understand that…..

— Donald J. Trump (@realDonaldTrump) September 18, 2018

Then Trump makes it clear that only he is capable of stopping the trend of the last few decades, ” They also know that I am the one that knows how to stop it.”

…..China has been taking advantage of the United States on Trade for many years. They also know that I am the one that knows how to stop it. There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!

— Donald J. Trump (@realDonaldTrump) September 18, 2018

Trump ended the tweets with a threat – confirming his order last night of a further hike to 25% tariffs and $267 billion more goods under tariffs – “ There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted! ”

This could be an immediate problem since China just confirmed it will release its new tariffs on US goods (effective on Sept 24th) of between 5 and 10% on $60 billion of US goods.

Meanwhile in China, Implosion of Stock-Market Double-Bubble

September 18, 2018

Meanwhile in China, Implosion of Stock-Market Double-Bubble

Bubbles don’t end well for those who don’t get out in time.

US tariffs and threats of more tariffs have not been particularly well received in China, which is already being rattled by corporate credit problems, quakes in the shadow banking system, a peculiar Enron-type phenomenon at provincial and municipal governments called “hidden debt,” and the implosion of nearly 5,000 P2P lenders that have sprung up since 2015. And so today, the Shanghai Composite Index dropped 1.1% to 2,651.79.

This is a big milestone:

Below the low of its last collapse on January 28, 2016 (2,655.66)
Down 25.5% from its recent peak on January 24, 2018, (3,559.47)
Down 49% from its bubble peak on June 12, 2015 (5,166)
Down 56% from its bubble peak on October 16, 2007 (6,092)
Below where it had been for the first time on December 29, 2006 (2,675), nearly 12 years ago. That’s quite an accomplishment.

This chart of the Shanghai Stock Exchange Composite Index shows the last bubble in Chinese stocks. Note the rise from the last low in January 2016. This rise has been endlessly touted in the US as the next big opportunity to lure US investors into the Chinese market, only to get crushed again:

But what makes Chinese stocks interesting is not the collapse of one bubble and then the collapse of the subsequent recovery, but the longer view that is now taking on Japanese proportions.

The chart below shows the double-bubble and the double-collapse, interspersed with collapsed recoveries and failed excitement:

It is not often that a major stock market goes through two majestic bubbles and then revisits levels first seen 12 years earlier – despite inflation in the currency in which these stocks are denominated.

…click on the above link to read the rest of the article…

Trump Unwisely Escalates Trade War: Expect a “Rare Earth” Response From China

September 18, 2018

Trump Unwisely Escalates Trade War: Expect a “Rare Earth” Response From China

Trump’s imposed more tariffs on China. If China retaliates, Trump will respond with tariffs on all imports from China

A threatened, Trump Hits China with Tariffs on $200 Billion in Goods, Escalating Trade War.

President Trump, emboldened by America’s economic strength and China’s slowdown, escalated his trade war on Monday, saying the United States would impose tariffs on $200 billion worth of Chinese goods as punishment over Beijing’s trade practices.

The fresh round of tariffs comes on top of $50 billion worth of Chinese products already taxed earlier this year, meaning nearly half of all Chinese imports into the United States will soon face tariffs. The new wave is scheduled to go into effect on Sept. 24, with tariffs starting at 10 percent before climbing to 25 percent by the end of the year. The timing will partially reduce the toll of price increases for holiday shoppers buying Chinese imports in the coming months.

The White House also said that the United States was prepared to “immediately” place tariffs on another $267 billion worth of imports “if China takes retaliatory action against our farmers or other industries.”

Unlike the first round of tariffs, which were designed to minimize the impact on American consumers, this wave could raise prices on everyday products including electronics, food, tools and housewares.

American businesses — which have warned that tariffs could hurt profits, force job cuts and, in some cases, destroy companies, said the taxes were going to hurt the United States more than the administration realized. The National Association of Chemical Distributors released a study this month that predicted nearly 28,000 chemical distributor and supplier jobs would be eliminated because of higher prices from the $200 billion round of tariffs.

Response Coming

The question not whether China responds, but how.

I would expect China to immediately pull out of Trump’s recently initiated trade talks.

…click on the above link to read the rest of the article…

Trump Slaps Tariffs On $200BN In China Imports; Will Add Another $267BN If China Retaliates

September 18, 2018

Trump Slaps Tariffs On $200BN In China Imports; Will Add Another $267BN If China Retaliates

With traders waiting with bated breath for hours, moments ago the White House announced that it has imposed tariffs on approximately $200 billion worth of imports from China, effective September 24.

The tariffs will start at 10% until the end of the year, but in an unexpected twist, are set to rise to 25% on January 1, 2019, in what is worse case scenario than what the market had been pricing in, namely a 10% rate indefinitely.

Trump also warns that if China takes any retaliatory action “against US farmers or other industries”, the US will immediately pursue “phase three”, and impose an additional $267 billion in tariffs on Chinese imports.

The statement notes that while the US has given China “every opportunity to treat us more fairly”, so far China “has been unwilling to change its practices.”

Trump concludes by saying that it is his duty “to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself. My Administration will not remain idle when those interests are under attack. China has had many opportunities to fully address our concerns. Once again, I urge China’s leaders to take swift action to end their country’s unfair trade practices.”

Separately, the USTR announced that it has removed about 300 product categories from the tariff list and has cut some subsets of products, but the total value remains “approximately $200 billion”, and – as we showed earlier – a substantial portion of the imports targeted this time are consumer goods, which means that the pain to the US household bottom line is about to get real.

Meanwhile, these are the states that will be most impacted by the new tariffs (chart via Bloomberg):

Full statement below:

And text:

…click on the above link to read the rest of the article…

China May Skip Trade Talks, Cripple US Supply Chains After New Trump Tariffs

September 16, 2018

China May Skip Trade Talks, Cripple US Supply Chains After New Trump Tariffs

When discussing yesterday’s WSJ report that the Trump admin may slap the new, $200BN round of tariffs on Chinese imports as soon as tomorrow, we said that such an escalation would likely derail talks with top Chinese officials, currently scheduled in Washington for Sept. 27 and Sept. 28. Now, in a follow up report, the WSJ has confirmed that in light of the Trump’s imminent announcement, China is considering declining Trump’s offer of trade talks later this month as Trump’s “pressure tactics” aren’t “sitting well” with Beijing, which has repeatedly said it wouldn’t negotiate under threat.

“There is a lot of uncertainty right now,” one of the officials said. “If more tariffs come out, the Chinese side could very well choose not to go.” That said, a final decision has not yet been made on the trips and will depend on what Trump does in the coming days.

Underscoring China’s growing anger toward Trump’s negotiating tactics, Yang Weimin, a former senior economic adviser to President Xi Jinping, said on Sunday that “China never said it doesn’t want to negotiate with the U.S.,” “But the U.S. side has to show sincerity” toward resolving the trade dispute. Added a current senior official who advises the leadership on foreign-policy matters: “China is not going to negotiate with a gun pointed to its head.”

While China’s lack of desire to negotiate would hardly come as a surprise – after all there will be little to discuss if Trump does pull the trigger on even more tariffs – what may come as a shock to US businesses is how China plans to retaliate to the $200BN in new tariffs. Yesterday, we noted that Beijing could prompt respond “qualitatively” by selectively targeting US companies which have a major presence in China, such as US auto makers or Apple.

…click on the above link to read the rest of the article…

Trump To Announce $200 Billion In New China Tariffs As Soon As Monday

September 16, 2018

Trump To Announce $200 Billion In New China Tariffs As Soon As Monday

In the latest installment of the story that just won’t go away, the WSJ reported on Saturday that – as Bloomberg reported first yesterday – the Trump administration plans to announce new tariffs on up to $200 billion in Chinese goods as soon as Monday and otherwise “within days”, in a move that will likely render moot the high-level, U.S.-China talks set for later this month, will prompt an immediate retaliation from China, and may lead to a sharply lower futures open on Sunday night.

The silver lining in the imminent announcement is that while previously Trump had said he would proceed with a 25% tariff level, the WSJ reports that the US will start with tariffs of “around 10%.” The level was lowered “following extensive public hearings and the submission of written comments where importers and others complained of the possible impact of the duties” as well as to try to reduce the bite on American consumers ahead of the year-end holiday shopping season, these people said.

But the people familiar said that the tariff level could be raised back to 25% if Mr. Trump concludes that Beijing doesn’t soon show signs that it is acceding to U.S. demands to change its economic policies.

Furthermore, WSJ sources said that while details were still being completed over the weekend, the tariff level could change, or that Trump could change his mind entirely. As of Saturday, an announcement was planned for Monday or Tuesday.

Recall last week Deutsche Bank calculated that so far the US had carefully avoided consumer and China dependent products, and as a result, the trade war so far has had little impact on US economy and consumers. But this would become harder as the tariff list expands to the next 200 billion, which contains about 78 billion in consumer products (chart below, left).

…click on the above link to read the rest of the article…

Robert Shiller: Look For One Final Surge In Stocks Before The Crash

September 14, 2018

Robert Shiller: Look For One Final Surge In Stocks Before The Crash

It seems like only yesterday that Robert Shiller, a Nobel-Prize winning economist (and esteemed member of the Yale School of Management’s faculty), was telling anybody who would listen that the US equity market was headed for a vertigo-inducing correction.

But with stocks once again hovering near record highs, it seems that Shiller – the co-creator of the Shiller P/E ratio – has become the latest CNBC stalwart to throw in the towel. While sell-side banks (most recently SocGen) are increasingly focusing on the fallout from the Trump trade war, Shiller has pivoted to an analysis of other Trump economic policies like the Trump tax cuts and his rollbacks of regulation, which, taken together, have provided an unprecedented level of support to corporate America, per Bloomberg.

While he once lambasted President Trump as “totally unbecoming and unfit”, Shiller demonstrated a newfound reverence for Trump and his policies during his latest interview (we can only imagine why).

Shiller’s focus instead is on President Donald Trump’s support for corporate America, which he says is driving sentiment and market strength. The S&P 500 Index has climbed almost 9 percent this year, with the total return to investors running at an annual rate of more than 14 percent. It closed Thursday less than 0.5 percent from its August record high.

“It has something to do with our president, who is an exceptionally business-oriented president and who wants to deregulate and favors lower taxes,” he said. “That has an effect on the market but it goes beyond the rational, logical effect – it has something to do with our animal spirits. The U.S. is just doing great right now in terms of the strength of the economy and the stock market. That seems to be built around the Trump story at this point in history.”

…click on the above link to read the rest of the article…

Tepper: Trump’s China Tariffs Could Trigger A 20% Pullback In US Stocks

September 14, 2018

Tepper: Trump’s China Tariffs Could Trigger A 20% Pullback In US Stocks

David Tepper was probably riding high after his Carolina Panthers bested the Dallas Cowboys in Sunday’s NFL season opener until Thursday afternoon, when he was forced to reckon with the fact that he’s been underweight US equities since he predicted back in April that the “highs are in.”

Of course, Tepper isn’t the only hedgie who dialed back his exposure after February’s volocaust whiplashed many funds and forced them to adopt a defensive posture as they waited for the other shoe to drop. And he deserves at least some credit for readily admitting during Thursday afternoon’s interview with CNBC’s Scott Wapner that he’s only been “about 25% exposed” to US equities – which, in retrospect, is about 75% short of the ideal allocation.

I probably don’t have enough exposure I’ve taken down my exposure. So I’m still long. But you know, not – I would in percentage terms of s&p-type exposure, might be 25% or something of that. And that’s been wrong, because the market has been very hot and the problem for people like me is I’ve had that express with long individual stocks and short you know, futures of some sort or the market in some fashion. And quite frankly our stocks have not done that well this quarter. Which you probably know, you’re going to ask me next or something like that, right

All things considered, assuming the market was fairly valued, a reasonable investor might expect to reap returns of up to 8% over the next year. But Tepper feels like some caution is warranted, which is why he still has cash he can put to work. Because anybody who has taken the president at his word would probably agree that the market has been too naive in pricing in the possibility that Trump’s trade conflict with China will come to an amicable resolution.

…click on the above link to read the rest of the article…

China Halts Licenses For US Companies Amid Tariff Battle

September 11, 2018

China Halts Licenses For US Companies Amid Tariff Battle

As the tariff battle between Washington and Beijing worsens, China has halted license applications from American companies in financial services and other industries until progress is made towards settling the trade dispute, reports AP, citing an official belonging to a business group.

The disclosure marks the first public acknowledgement that US companies expect their operations in China, or access to China’s markets, may be disrupted by the dispute over Beijing’s technology policy.

China is running out of American imports for penalties in response to U.S. President Donald Trump’s tariff hikes, which has prompted worries that Chinese regulators might target operations of U.S. companies.

The license delay applies to industries Beijing has promised to open to foreign competitors, according to Jacob Parker, vice president for China operations of the U.S.-China Business Council. The group represents some 200 American companies that do business with China. –CNBC

In meetings held over the last three weeks, Cabinet-level officials told USCBC reps that applications from US firms will be put off “until the trajectory of the US-China relationship improves and stabilizes,” according to Parker.

Chinese officials, meanwhile, have promised to increase non-US foreign access to several areas, including banking, insurance, securities and asset management.

“There seem to be domestic political pressures that are working against the perception of U.S. companies receiving benefits” amid the dispute, said Parker, who added that Chinese officials want an end to Trump’s tariff hikes as well as a negotiated settlement.

Beijing matched Trump’s earlier tariff increase on $50 billion of imports but is running out of American goods for retaliation due to their lopsided trade balance. China bought American goods worth about $1 for every $3 of goods it exported to the United States.

Trump is poised to decide whether to raise duties on $200 billion of Chinese goods. Beijing has issued a $60 billion list of goods for retaliation. –CNBC

…click on the above link to read the rest of the article…

The Biggest Threat To The Oil And Gas Indust

September 3, 2018

The Biggest Threat To The Oil And Gas Industry

Trump’s trade war is taking a toll on the oil and gas industry.

There has been some eleventh-hour drama over the renegotiation of NAFTA, but the energy industry is likely going to dodge a bullet on that front, with the most contentious issues revolving around agriculture and automobiles.

But even if the NAFTA renegotiation succeeds, the oil and gas industry has already taken a hit from Trump’s broader trade war.

The most obvious impact comes from the 25 percent steel and 10 percent aluminum tariffs that the Trump administration has placed on a variety of countries, which have pushed up the cost of steel in the U.S., leading to cost inflation for oil and gas projects. Worse, the application system for waivers is cumbersome and time-consuming, and some companies are angry because precisely who obtains an exemption from the federal government seems to be arbitrary.

For instance, as Reuters reported, Chevron received a waiver for importing a 4.5-inch steel pipe used for oil exploration while a small company called Borusan Mannesmann Pipe saw its application rejected by the U.S. Commerce Department for a similar steel pipe used in well casing. The Commerce Department has been accused of not providing adequate information on why it rejects certain cases, offering only vague language such as the availability of domestic steel. A common thread in the rejections seems to be opposition submitted from steel producers.

Reuters says that Commerce has received over 37,000 applications for waivers from U.S. companies, but the agency has only issued decisions on 2,871 of those requests as of August 20. Roughly two-thirds of the applications were approved, but nearly 1,100 were rejected.

…click on the above link to read the rest of the article…

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