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Late last week, JPMorgan’s strategist John Normand announced that the largest US bank “adopted a new baseline that assumes a US-China endgame involving 25% US tariffs on all Chinese goods in 2019” because “the US and China will not resolve their differences this year and that the Administration will make good on its threats to escalate.” Such a full-blown trade war “could take $8 off consensus 2019 EPS projections of $179 and reduce next year’s EPS growth from 10% to 5% year-on-year” with JPMorgan predicting that this could “potentially end the US stock market rally even assuming a forward multiple of 17, unless some other offset materializes.”

JPMorgan wasn’t finished, however, and around 2pm on Wednesday, JPMorgan took its “new baseline” call further when it announced that as a result of its new baseline assumption for a “full-blown trade war” next year between the world’s two largest economies, the bank downgraded its bullish call on Chinese stocks. Echoing what it said previously in the context of US stocks, JPMorgan strategists including Pedro Martins Junior, Rajiv Batra and Sanaya Tavaria wrote that the trade conflict will only escalate as the U.S. maxes out tariffs on Chinese imports, the dollar strengthens and the yuan weakens further.

JPMorgan became only the latest bank to downgrade Chinese stocks – which earlier in 2018 slumped into a bear market as a result of trade war fears and a sharp slowdown in China’s economy as a result of the crackdown on shadow credit – following similar moves by Morgan Stanley, Nomura and Jefferies earlier this year.

Curiously, while JPMorgan slashed its target and earnings estimates for the MSCI China Index which was already down 24% from its peak in January, the strategists still expect the gauge to rebound 8.9% from Wednesday’s close.

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

Chinese Imports Of US Crude Have “Totally Stopped” As Tariff Threats Persist

October 4, 2018

Chinese Imports Of US Crude Have “Totally Stopped” As Tariff Threats Persist

It has been roughly two months since China threatened to impose a 25% tariff on US energy imports (it eventually went back on those threats), and less than two weeks since the latest round of tariffs has been implemented. But even as China has shied away from its threats to punish the US energy industry, Reuters data are showing that imports of US oil to China have ground to a halt.

Confirming the data, Xie Chunlin, the president of China Merchants Energy Shipping Co, said on Wednesday that crude oil shipments to China have “totally stopped” as the trade war has taken its toll, reversing growth in what had been a rapidly expanding market for US shale producers.

“We are one of the major carriers for crude oil from the U.S. to China. Before (the trade war) we had a nice business, but now it’s totally stopped,” Chunlin said on the sidelines of the Global Maritime Forum’s Annual Summit in Hong Kong.

“It’s unfortunately happened, the trade war between the U.S. and China. Surely for the shipping business, it’s not good,” the CMES president said.

He also said the trade dispute was forcing China to seek soybeans from suppliers other than the United States, adding that China now bought most its soybeans from South America.

In place of US imports, China, which is the world’s largest importer of crude oil, is becoming increasingly reliant on the Middle East and Russia while it has also shifted to using Iranian tankers to bypass impending US sanctions on Iranian crude while also becoming more reliant on Iranian crude in general. But while it’s grabbing the most headlines right now, the trade fight is hardly the only source of contention between US oil producers and China, as China’s yuan-denominated crude futures contracts are beginning to show their teeth.

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

US, China Diving Into A New Cold War; Jack Ma Warns: “When Trade Stops, Sometimes War Starts”

October 4, 2018

US, China Diving Into A New Cold War; Jack Ma Warns: “When Trade Stops, Sometimes War Starts”

One of the most significant themes heading into 2019, is the new US-China Cold War. Recent tit-for-tat exchanges on economic, political and strategic fronts threaten to escalate into a full-blown conflict between both superpowers.

As Washington squeezes Beijing economically through an escalating trade war, it simultaneously uses Freedom of navigation (FON) to sail its warships and or fly its nuclear-capable Boeing B-52 bombers dangerously close to Beijing’s militarized islands in the heavily disputed South China Sea. This high-stakes game of chicken is now spiraling out of control and could lead to a possible military conflict.

Last month, President Trump slapped Beijing with new tariffs on an additional $200 billion worth of Chinese products, adding to the $50 billion applied on Chinese imports earlier this year, said Asia Times.

Trump also threatened to slap tariffs on another $267 billion of Chinese imports if Beijing failed to address concerns over what his administration views China’s predatory and unfair trade practices.

China responded by applying retaliatory tariffs on $60 billion worth of American imports while suspending trade negotiations with Washington.

Asia Times said China “views its roiled relations with the US as an existential struggle, with the ongoing trade war seen as part of a broader containment strategy Washington is now intensifying through military means in the South China Sea.”

Alibaba founder Jack Ma recently warned that Trump’s trade war with China could lead to military conflict.

“When trade stops, sometimes the war starts. So trade is the way to stop wars,” Ma warned Tuesday during an opening panel discussion at the World Trade Organization Public Forum in Geneva. “Trade is the way to build up trust,” he continued. “Trade is not the weapon to fight against each other.”

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

US Navy Proposes A “Global Show Of Military Force” As A Warning To China

October 4, 2018

US Navy Proposes A “Global Show Of Military Force” As A Warning To China

The trade war between the US and China is turning into a hot war with every passing day.

As we reported on Monday, Chinese ships came to actively confronting the USS Decatur while the US ship was carrying out yet another in a series of “freedom of navigation” operations – or “freeops” – in the South China Sea. The Navy destroyer had to maneuver to avoid colliding with the Chinese destroyer Luyang that came within 45 yards of its bow while the Decatur was sailing through the Spratley Islands on Sunday in what was the closest direct confrontation between US and Chinese ships since Trump’s inauguration (after which the Navy began conducting these freeops with increasing frequency).

On Tuesday, China accused the US of violating its “indisputable sovereignty” over the Spratley islands, saying in a statement “We strongly urge the U.S. side to immediately correct its mistake and stop such provocative actions to avoid undermining China-U.S. relations and regional peace and stability.”

Now it’s the US turn to respond, and according to CNN, the US Navy’s Pacific Fleet has drawn up a classified proposal to carry out a global show of force as a warning to China and demonstrate the US is prepared to deter and counter their military actions. The draft proposal from the Navy is initially recommending the US Pacific fleet conduct a series of operations during a single week in November.

The navy’s goal – whether with or without the White House’s prodding – is to carry out a highly focused and concentrated set of exercises involving US warships, combat aircraft and troops to demonstrate that the US can counter potential adversaries quickly on several fronts.

Even without knowing the details, one can easily see how this can go horribly wrong. It only gets worse from there.

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

China for the Trade Win?

October 3, 2018

China for the Trade Win?

Empire of Debt
Debt in Pictures
Wargaming the Trade War
Some Thoughts on Getting Through the Great Debt Reset
San Francisco, Frankfurt, and Puerto Rico?

With all the trade war talk, we all ask the obvious question: Who will win? President Trump says the US will win. Chinese business leaders say no, we will win. Free-traders on both sides say no one will win. Few stop to ask, “What does a ‘win’ look like?”

This makes discussion difficult. People are chasing after a condition they can’t even define. Victory will remain elusive until they know what they want. Regardless, you can score me on the “no one wins” side. I believe, and I think a lot of evidence proves, that free trade between nations is the best way to maximize long-run prosperity for everyone.

However…

As Keynes famously said, we’re all dead in the long run. Trade war may end with no winners, but the parties will be better and worse off at various times as it progresses. So we have to distinguish between “winning” and “holding a temporary lead.”

On that basis, I think the US will have the upper hand initially, and could hold it for a year or two. This is because, for now, our economy is relatively strong and we can better withstand any Chinese retaliation. Beyond that point I think our current policies will begin to backfire, maybe spectacularly.

Remember, too, China has growing trade surpluses with much of the world. One Chinese insider told me that within four years China can replace lost US exports via increased trading with the rest of the world. I can’t verify that but looking at general statistics it certainly seems plausible. That doesn’t mean lost US trade won’t be felt, but China is not entirely helpless.

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

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

October 3, 2018

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

A UN report has everything wrong as to the cause of current problems. Yet, the report mentions central bank liquidity.

Seldom does one see a report that “debt is the problem” while being 180 degrees wrong as to the cause of the buildup in debt.

The United Nations’ Trade and Development Report for 2018 blames the “Free Trade Delusion” for what ails the word.

International trade in the late nineteenth century was managed through an unholy mixture of colonial controls in the periphery and rising tariffs in the emerging core, often, as in the case of the United States, pushed to very high levels. But like today, talk of free trade provided a useful cover for the unhindered movement of capital and an accompanying set of rules – the gold standard, repressive labour laws, balanced budgets – that disciplined government spending and kept the costs of doing business in check.

Wow. There’s more:

But if there is one lesson to take from the interwar years, it is that talking up free trade against a backdrop of austerity and widespread political mistrust will not hold the centre as things fall apart. And simply pledging to leave no one behind while appealing to the goodwill of corporations or the better angels of the super-rich are, at best, hopeful pleas for a more civic world and, at worst, willful attempts to deflect from serious discussion of the real factors driving growing inequality, indebtedness and insecurity.

With such an ass-backward premise, one might expect the entire report to be wrong. Far from it.

Liquidity Driven Bubbles

Unlike their progressive MMT brethren, the authors understand some things:

There’s an unsustainable buildup of debt
There are huge asset bubbles
Cheap liquidity stretched valuations to extreme levels

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

Iran “Finalizing” Mechanism To Bypass SWIFT In Trade With Europe

October 2, 2018

Iran “Finalizing” Mechanism To Bypass SWIFT In Trade With Europe

Just days after Europe unveiled a “special purpose vehicle” meant to circumvent SWIFT and US monopoly on global dollar-denominated monetary transfers – and potentially jeopardizing the reserve status of the dollar – Iran said it was finalizing mechanisms for the oil trade to bypass US sanctions against the country, said Iranian Deputy Foreign Minister Abbas Araghchi.

According to RT, Araghchi said that Tehran is not ruling out the possibility of setting up an alternative to the international payments provider SWIFT to circumvent sanctions imposed by Washington.

“As we know, Europeans are also trying to see how SWIFT can continue working with Iran, or if a parallel [financial] messaging system is necessary… This is something that we are still working on,” Araghchi said.

According to the Iranian diplomat, the independent equivalent of the SWIFT system that was earlier suggested by the EU to protect European firms working in Iran from US sanctions will be available for third countries.

“This is the important element in SPV (Special Purpose Vehicle) that it is not only for Europeans but other countries can also use this. We hope that before the re-imposition of the second part of the US sanctions [from November 4], these mechanisms can be in place and be functional,” said the official.

One can see why: the Iranian economy has been hit hard in recent days, and the Rial has plunged to all time lows, amid fears that the sanctions will cripple Iran’s most valuable export resulting in a shortage of hard currency, eventually leading to a replica of Venezuela’s economic collapse.

Separately, Iran’s Foreign Ministry spokesman Bahram Qassemi said that “after much negotiation over a clear mechanism with Europe, we have neared certain understandings; and for sure, US sabotage in that regard will fail.”

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

Moscow On US Idea To Block Russian Trade: Naval Blockade Would Mean WAR

October 1, 2018

Moscow On US Idea To Block Russian Trade: Naval Blockade Would Mean WAR

In a new report, United States Secretary of the Interior Ryan Zinke suggested the US could use the Navy to block Russian energy from hitting Middle East markets. But the head of the Russian Senate’s Information Policy Committee, Aleksey Pushkov, said that act would mean “war” with the US.

Zinke appeared to be concerned that the real reason behind Russia’s involvement in Syria is trade expansion. Pushokov said that that is “absolute nonsense,” according to Russia Today. The idea that Russia could potentially supply energy to the Middle East, which is literally “oozing with oil,” is absolutely detached from reality, Pushkov said. Russia does not supply any energy to the region, which is itself a major oil exporter and has never announced any plans to do so.

The Russian senator added that Zinke’s statement is “on par” with Sarah Palin’s claim that she was qualified to talk about Russia since “they’re our next-door neighbors, and you can actually see Russia here from Alaska.” The former Alaska governor made the statement in an interview when she was the Republican vice-presidential candidate in the 2008 US election. -RT

Attempts to exert further pressure on Russia “are not going to end in anything good,” a member of the Russian Senate’s Defense and Security Committee, Franz Klintsevich, told journalists, according to RT. Klintsevich added that these attempts would lead “to a major scandal” at the very least, and Washington “should clearly understand it.”

The Trump administration has been seeking to replace Russia as Europe’s gas supplier by boosting exports of its liquefied natural gas, even though Russian gas is a cheaper option for Europe. The Trump Administration is also going to have a tough time convincing countries to do more business with them in light of an economically disastrous trade war and ever-increasing tariffs on imported goods.

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

As The Trade War Rages – China Won’t Be Held Hostage By The U.S. Dollar

September 28, 2018

As The Trade War Rages – China Won’t Be Held Hostage By The U.S. Dollar

In last week’s Palisade Weekly Letter, I wrote about how the Chinese are now selling their U.S. debt. And since this was an important write-up, I also published it as an article – so if you missed it, click here.

I mentioned that although China’s now a net-seller of U.S. debt – they’re slowing doing so.

I reckon they’re doing just enough to let the Treasury and Trump know that they can send yields soaring and can’t afford it if China unloads the whole $1+ trillion amount.

That’s why we at Palisade Research have called this China’s ‘nuclear‘ option – it’s no doubt a financial weapon of mass-destruction (FWMD).

If China suddenly dumped their $1+ trillion of U.S. debt, it would cause markets worldwide to implode.

But that also means China would suffer. . .

Now, China isn’t stupid. They’ve worked decades to grow their massive dollar surplus and reserves. They won’t recklessly lose it all for nothing.

But still, this put’s China in a corner. Because although they won’t risk blowing themselves up to hurt the U.S. – what if the U.S. must cheapen the dollar to boost trade? Or get out of a recession? Or monetize the Treasury’s never-ending spending and huge fiscal deficits?

The depreciation of the U.S. dollar for any reason is a huge threat to China currently.

Today China holds roughly 3 trillion of dollar reserves. That’s down 25% from the 4 trillion they had in beginning of 2015 (the strong dollar really hurt them).

And putting things into context – if the U.S. dollar devalues by just 10%, that’s more than 300billion of purchasing power lost from China’s dollar reserves. . .

Gone – just like that. And completely out of China’s control.

Imagine if someone else held the power to devalue the money in your own bank account. That puts you at their mercy – in a very fragile place – right?

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

Macron Says “France Won’t Deal with Countries that Don’t Respect Climate Accord”

September 26, 2018

Macron Says “France Won’t Deal with Countries that Don’t Respect Climate Accord”

French President Emmanuel gave a blistering speech at the UN pointed at Trump. I suggest Macron should look at Germany.

Hoot of the Day

French president Emmanuel Macron is calling on other countries to join him in refusing to sign new deals with ‘powers that do not respect’ the Paris Accord

Please consider this hoot of the day: Macron Rejects Trade Deals with Countries Outside Paris Climate Accord.

Emmanuel Macron has announced France will no longer accept “commercial agreements” with countries that do not “respect” the Paris Climate Accord during a fiery speech at the United Nations General Assembly.

The French president called for the upholding of trade rules that “guarantee fair competition on equal footing” during his Tuesday speech, following a Monday afternoon meeting with Donald Trump and the US president’s speech on Monday morning. Mr Macron appeared defiant towards Mr Trump, suggesting he’d no longer negotiate trade deals with the US after its withdrawal from the climate agreement last year.

“We will no longer sign commercial agreements with powers that do not respect the Paris accord,” Mr Macron said without directly referencing Mr Trump or the US.

What a Hoot

I suggest France start with Germany.

German Parties Agree to Drop 2020 Climate Goal

Politico reports German Parties Agree to Drop 2020 Climate Goal

Angela Merkel’s conservatives and the center-left Social Democrats (SPD) agreed during preliminary coalition talks to give up the country’s climate goal for 2020, according to media reports.

The two blocs decided that reaching the goal — to cut carbon dioxide emissions by 40 percent from 1990 levels by 2020 — is unrealistic.

Germany Fails Paris Climate Accord Test

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

China Vows Not To Negotiate Under Threat, As Trump Teases “Major Broadside” Against Beijing

September 24, 2018

China Vows Not To Negotiate Under Threat, As Trump Teases “Major Broadside” Against Beijing

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…

Global Stocks Slide As Trade War Enters New Phase; Oil Surges

September 24, 2018

Global Stocks Slide As Trade War Enters New Phase; Oil Surges

U.S. stock futures followed European and Asian shares lower in thin volume after China called off planned trade talks with the U.S. and the Trump administration imposed another $200 billion in “Phase II” China tariffs just after midnight; oil jumped 2.4% as OPEC+ members defied Trump’s calls for lower oil prices during a weekend conference, refusing to boost output.

Asia set the downbeat tone as Hong Kong stocks fell, while thinner than average volumes across Asia due to holidays in China, South Korea and Japan. “Given that the trade talks are off, investors will be watching what happens after the implementation of the tariffs and particularly whether the U.S. will move to the next phase, which would be tariffs on a further $267 billion of Chinese goods,” said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore. White House trade adviser Peter Navarro said on NPR’s Morning Edition that “the president was crystal clear in his statement: if China retaliates, the process will move forward on the additional amount.”

European stocks followed lower, with miners and carmakers, both sectors heavily exposed to global trade, among the biggest decliners in the Stoxx Europe 600 Index, while futures on the S&P 500 and Dow pointed to a weaker open. Randgold Resources and bucked the trend to rally on merger news following news of a merger with Barrick, creating the world’s largest gold miner; Sky also rose after Comcast beat Fox in the auction for the broadcaster with a $39 billion bid, a deal that has been two years in the making. Comcast will start buying Sky shares in the market in order to reach the 50% threshold before the Oct. 11 deadline. Current shareholders just got an extra 9% for their patience as Comcast will pay 1,728p for the shares.

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

Here comes the 30-year trade war

September 24, 2018

Here comes the 30-year trade war

Trade tensions between the US and China could drag on for decades but China’s focus on its Belt and Road Initiative could provide relief

We might be at the start of a decades-long trade war between China and the US. Photo: iStock

Alibaba’s Jack Ma has warned that the ongoing US-China trade war could last at least 20 years. As we’ll see, it’s actually more like 30 – up to 2049, the 100^th anniversary of the foundation of the People’s Republic of China (PRC).

Steve Bannon always boasted that President Trump was bound to conduct a “sophisticated form of economic warfare” to confront China.

The Trump administration plan – which is, in fact, trade deficit hawk Peter Navarro’s plan – has three basic targets:

Displace China from the heart of global supply chains.
Force companies to source elsewhere in the Global South all the components necessary for manufacturing their products.
Force multinational corporations to stop doing business in China.

The overarching concept is that unending confrontation with China is bound to scare companies/investors away.

There’s no evidence South Korean or German conglomerates, for instance, would withdraw from the vast Chinese market and/or production facilities.

And even if the Flight Away from China actually happened, arguably the American economy would suffer as much, if not more, than China’s.

The latest US tariff volley may lower China’s GDP by only 0.9 percentage points, according to Bloomberg Economics. But China may still grow a healthy 6.3% in 2019.

This is a decent overview, with numbers, of what the trade war might cost China.

What’s certain is that Beijing, as confirmed by a rash of editorials in Chinese state media, will not just play defense.

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

Can US-China trade war rivalry reverse the worst economic trends in both countries?

September 23, 2018

Can US-China trade war rivalry reverse the worst economic trends in both countries?

The door for compromise and restoring a functional relationship between the United States and China appears to have closed. The 10 per cent tariffs on US$200 billion of Chinese goods, rising to 25 per cent from January 1, is the final straw. There will be more negotiations to come. At some point, there may be announcements of compromises and a positive outlook. But, for now, the reality is that China and the US have gone into rivalry mode – a rivalry that will define the 21st century.

The dispute began with US President Donald Trump’s complaints about the bilateral trade balance and access to China’s market. It then morphed into a dispute on intellectual property rights violations and China’s economic model of subsidising technology development. Now, it is about global strategic rivalry.

Beyond the trade war: how Chinese companies can survive the next decade

The US’ contention is that China makes money from the US and is using it to push America out of Asia and elsewhere. It is difficult to see how the US could climb down from this position. To follow its rhetoric, it will try to cut off China from its market and block technology exchanges.

This rivalry may bring short-term pain to both nations, and to the world, but it may prove beneficial to all in the long run.

The lack of external checks has led to rising internal imbalances in both countries. Since the end of the cold war, the US has been marred by surging inequality, while bubbles and ignorant hubris have come to occupy the central ground in China’s economic management and political thinking.

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

China Summons US Ambassador Over Sanctions Scandal

September 23, 2018

China Summons US Ambassador Over Sanctions Scandal

China’s foreign ministry summoned the US ambassador on Saturday to lodge an official protest over the sanctions imposed by the United States against a Chinese military organization for buying Russian fighter jets and missiles, state media reported. The announcement came just hours after a Chinese defense ministry spokesman called on the US to “immediately revoke the sanctions or “bear the consequences.”

Vice Foreign Minister Zheng Zeguang, summoned US Ambassador Terry Branstad and “lodged solemn representations over US sanctions against (the) Chinese military”, the Foreign Ministry said in a brief online statement, and added the following:

Zheng Zeguang pointed out that the US action to impose sanctions on Chinese military agency and official on the ground of relevant military cooperation between China and Russia severely violates basic norms governing the international relations. Such mean behavior is a blatant hegemonic act. The China-Russia military cooperation is normal cooperation between two sovereign states, and the US side has no right to interfere. The US act has severely harmed the state-to-state and mil-to-mil relations and affected the cooperation in international and regional affairs between China and the US. The Chinese side will take every necessary measure to firmly safeguard its national interests. We strongly urge the US side to correct its mistake immediately and withdraw so-called sanctions. Otherwise, the US side will have to bear all the consequences.

China’s central military commission also summoned an acting military attache at the U.S. embassy on Saturday night over the sanctions. The Chinese side also decided to immediately recall commander Shen Jinlong, who is in the United States for an international maritime force meeting, CCTV reported.

Quoted by the Chinese state broadcaster, Zeguang also said that “China will take all necessary measures to firmly defend its national interests”, and added that the Chinese military reserves the right to take further countermeasures.

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

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