Brace for China’s Trump Freakout

  • A seamless handoff from Obama to Trump — really
  • Rickards back from China… where there’s panic over Trump
  • Why China can’t meet Trump even halfway
  • America’s contingency plans to cut off China’s oil
  • Why Trump’s drug-pricing rant makes no difference to early-stage biotechs
  • A retail bust… Soros schadenfreude… The 5 urged to “get on board with supporting your president”… and more!

Who says there won’t be any “continuity” between President Obama and President Trump?

Yesterday, Team Obama edged closer to a trade war with China — filing a formal complaint with the World Trade Organization. The White House believes Beijing’s subsidies to its aluminum industry are a raw deal for American aluminum producers. If the WTO agrees, Washington will slap higher tariffs on imports of Chinese aluminum and other goods.

In case you’re keeping count, this is the 16th complaint the Obama administration has made against China at the WTO. Meanwhile, Trump is stacking his administration with economists, financiers and lawyers even more eager to confront China over trade.

Jim Rickards is just back from China… collecting “ground truth” on a gathering financial storm.

“I traveled to Shanghai and Nanjing and took the amazing Chinese high-speed rail link between the two cities. The train travels at 200 miles per hour and runs almost silently on a specially welded rail. I had a business-class seat nicer than business class on a good international airline, including a flat-bed option.”

Jim traveling in style: Way better than Amtrak… and only $65 round trip.

It looks great… but Jim says like much of the rest of China’s economy, it’s all a sham.

“The Chinese stole the rail technology from Germany. They did not invent it. The entire rail system (and almost everything else in China) was paid for with debt that can never be repaid. The $65 subsidized train ticket does not even come close to generating enough revenue to make the system viable. The Chinese national railroad corporation lost over $1 billion in 2016 and is set to lose billions more in the years ahead.

“Everyone I met in China — from government officials to top economists to everyday people on the street who just wanted to practice their English — told me the same two things,” Jim goes on: “People are getting their money out of China as fast as possible, and everyone is scared to death of what Donald Trump will do.”

We’ll discuss the getting-money-out-of-China angle next week. Today, though, we’ll take up Trump — who Jim says is, in fact, a known quantity when it comes to China.

“He’s going to call for an end to subsidies to major Chinese industries such as steel. He’s going to demand a strong yuan to make up for years of an undervalued yuan. And he’s going to ask for help with the North Korean nuclear problem, the South China Sea disputes and an end to Chinese hacking and theft of intellectual property.

“If China does not meet Trump halfway on most of these issues, Trump is prepared to impose tariffs, border adjustment taxes and other penalties on Chinese imports to the U.S. Trump has also indicated he’s willing to put the ‘One China’ policy on the table and improve U.S. relations with Taiwan.”

The problem is that Trump will make demands Chinese leaders can’t possibly meet — even halfway.

“China cannot end subsidies, because it would mean mass unemployment as the subsidized industries shut down operations,” Jim explains. Mass unemployment means civil unrest… if not a return to the nearly nonstop turmoil that China experienced from the 1840s to the 1970s.

As for the yuan, Jim reiterates a point he’s made for weeks now: “China needs a weaker currency to keep from burning through its remaining hard currency reserves to prop it up.”

And on the geopolitical front, “China cannot put pressure on North Korea,” Jim goes on, “because North Korea would retaliate by opening its borders and allowing North Korean refugees to flood into China, which would be highly destabilizing. Finally, China cannot back off its claims to the South China Sea, because it needs the fish there to feed its people. From the Chinese perspective, the Taiwan issue is nonnegotiable.

“In short,” Jim sums up, “Trump will try to strike a deal with a country that has nothing to offer because it has too much to lose if it makes concessions.

“This is a slow-motion train wreck. Trump will make demands, China will refuse to strike a deal, Trump will impose tariffs and taxes, China will retaliate by devaluing its currency, and matters will escalate into a full-scale trade and currency war.

“That’s the best case. The worst case is we end up in a shooting war in Korea, Taiwan or the South China Sea.”

And the pressure could start ratcheting up the moment Trump is sworn in, a week from today. There’s every chance he’ll immediately brand China a “currency manipulator” — a step that was always a bridge too far for Obama. Such a move would instantly throw global markets into turmoil.

To help you prepare — and to parlay that turmoil into big short-term gains of 200% or better — Jim is hosting a live online briefing next Wednesday at 7:00 p.m. EST. He’ll clue you into everything you need to know before Inauguration Day next Friday.

Access to this event is free; you can RSVP at this link.

[Ed. note: Yes, we realize Agora Financial is doing two of these live online briefings nearly back to back. We’re not trying to overwhelm you; it’s just that the onrush of events here in early 2017 is such that these exclusive briefings are the most reliable way of getting critical information to you in timely fashion. We promise it won’t become a weekly thing…]

As long as Jim brought it up, that “worst-case” scenario is more likely now than it was 48 hours ago.

On Wednesday, Trump’s nominee for secretary of state, the former Exxon CEO Rex Tillerson, suggested the U.S. military should blockade a string of artificial islands China is building in the South China Sea, in waters claimed by several of China’s neighbors. “We’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands is also not going to be allowed.”

This summer, we’ll be keeping a close eye on Talisman Saber — a joint military exercise between the United States and Australia that occurs during odd-numbered years.

The last one in 2015 was, by some accounts, the biggest military exercise staged by the United States since the Cold War. American ships and long-range bombers rehearsed a blockade in the Straits of Malacca, one of the great “choke points” in global shipping.

Without access to the Straits of Malacca, China’s access to oil and other raw materials from the Middle East and Africa would become much more limited. Chinese leaders watched Talisman Saber 2015 with alarm… and began to accelerate construction of those artificial islands in the South China Sea. Now Mr. Tillerson proposes to blockade the islands, although he didn’t say how.

Reminder: In 1940–41, Washington was determined to cut off the sea lanes that gave Japan access to oil and other raw materials. Fearing the loss of that access, Japanese leaders resorted to a desperation measure. They figured the odds of long-term success were low but they had no other choice. They attacked Pearl Harbor.

To the markets… where the safety trade is off for the moment.

The Dow is up a tad, back above 19,900… and small caps are up much stronger. Treasury yields are backing up, the 10-year at 2.42%. Gold is backing down to $1,195. The dollar index is stabilizing at 101.3.

Among the items on traders’ radars today….

  • Retail sales: The holiday season was something of a bust. Sure, the number grew 0.6% from November to December… but if you take autos out of the equation (remember, there was some crazy year-end discounting), the increase was only 0.2%. Makes you wonder what people were doing running up their credit card bills in November, as we mentioned earlier in the week…
  • Wholesale prices: Moving in the right direction, as far as the Federal Reserve is concerned. The Producer Price Index notched a 0.3% increase in December, and a 1.6% year-over-year increase. The Fed wants more inflation, but not too much — this reading is “just right”
  • Earnings season is underway in earnest; JPMorgan Chase and Bank of America both delivered a “beat”… but Wells Fargo missed, thanks to the “ghost accounts” scandal
  • George Soros lost a cool $1 billion after Election Day; he was counting on stocks falling out of bed after Trump’s victory, and instead we got the “Trump bump.” Payback’s a female dog…

“The sky is not falling for development-stage biotech,” assures Ray Blanco on the science-and-wealth beat.

As noted here yesterday, Trump hit out at Big Pharma during his press conference this week, suggesting that Medicare start negotiating bulk discounts with drugmakers. The Nasdaq Biotech Index took an instant 3.6% hit on Wednesday.

“Let me tell you the kind of pharmaceutical companies that would be hurt most by a potential change in our drug pricing regime,” says Ray. “They are companies exploiting regulatory loopholes to protect old, out-of-patent drugs that should be allowed to face generic competition. This includes exploiters like ‘pharma bro’ Martin Shkreli, who used regulatory and marketing sleight of hand at Turing Pharmaceuticals to legally jack the price of a 63-year-old drug up by more than 5,000%.”

But for the companies Ray follows, it’s largely irrelevant: “We are all about innovative new drugs. And these new drugs will command premium prices even if Medicare is allowed to negotiate pricing.

“New drugs often save money even if they are expensive. A powerful new pharmaceutical can eliminate the need for surgery or around-the-clock care. I anticipate many more new drugs — and many more opportunities to profit on clinical and regulatory events the future.”

“I have been a member for some time now,” says an entry in our mailbag, “and I have found most of your information valuable and interesting when it relates to the markets, new technologies and Jim Rickards’ thoughts.

[We’ve been at this long enough to anticipate the “but”…]

“I must admit that over the past six months, I have stopped looking forward to The 5 and stopped reading The 5. I am not interested in your personal feelings about President-elect Trump and your continual assault on him. Your attempt on Wednesday give some credibility to the BuzzFeed fake story about Trump is ridiculous. You should have written that the story was fake, as it has been proven, and stomped on BuzzFeed and CNN for publishing it. Instead, you continue with the rumors because of your own personal bias against Trump.

“You have made The 5 min. Forecast a crusade against Trump! I did not subscribe to this subscription to read about your issues with him. I will not be renewing my subscription to Technology Profits Confidential. Soon you will realize that your business model will suffer.

“If I might suggest that you stop bashing Trump and get on board with supporting your president, The 5 Min. Forecast will be much more enjoyable to read.”

The 5: OK, we relent. All those Goldman Sachs appointees, including the two new ones yesterday? We’re sure they have only your best interests at heart.

Seriously, are you trying to troll us from the opposite side of the “Manchurian candidate” reader who wrote in on Monday?

In case you’re not… did you even read our reply to yesterday’s complainer?

The stakes are as high today as they were when we broached the subject on Wednesday. As Matt Taibbi writes in Rolling Stone, “We’re either learning the outlines of the most extraordinary compromise to date of an incoming American president by a foreign power, or we’re watching an unparalleled libel and media overreach.”

If you could see past your own leader-worship, you’d know from our musings since September we’re darn near certain it’s the latter. To say nothing of a concerted effort by the Intelligence Community to undermine Trump.

But no, we will not “get on board with supporting our president.” In the best spirit of the Founders, we will never cease to be suspicious of, and vigilant against, all who presume to exercise power over our economic and financial lives.

That’s not a matter of “personal feelings” against any one politician; it’s a matter of financial survival in the face of all politicians… and in the face of Washington and Wall Street realities.

In the end, the swampy-drainy stuff of 2016 won’t work out any better than the hopey-changey stuff of 2008. If you don’t know that now, you will soon enough…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. We’re back as usual tomorrow with our Saturday wrap-up, 5 Things You Need to Know… but we’ll be away on Monday while the markets are closed for Martin Luther King Jr. Day. The weekday edition of The 5 returns on Tuesday.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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