- China trade talks break down. Trade war is next…
- Winners and losers in a U.S.-China trade war
- After the trade war comes a shooting war
- Magazine calls for breakup of tech giants… just as Amazon does another deal!
- Dollar sinks again, gold rises again… where are the recommendations?… calling a market top with the help of the Fed… and more!
Jim Rickards’ outlook for the next 12 months: a trade war with China now, a shooting war with North Korea later. And it’s all tied together.
The mainstream reports that annual U.S.-China trade talks have just ended in Washington with no agreement, nor even an agenda for next year’s talks. Scheduled press conferences were cancelled — a marked departure from the Obama and Bush administrations.
The Wall Street Journal trotted out a think-tank type for “expert” commentary: U.S.-China relations “are very uncertain and subject to very high risks,” says Nicholas Lardy from the Peterson Institute for International Economics.
Heck, that’s not even half the story…
This morning we stand on the verge of “the most intense trade war the U.S. has waged since the notorious Smoot-Hawley tariffs of the 1930s,” says Jim Rickards.
As if to underscore the gravity, Jim reminds us, “That currency war has been blamed as a cause of the Great Depression ever since.”
Recall Donald Trump threatened to label China a “currency manipulator” on “day one” of his administration, while slapping steep tariffs on Chinese steel and other exports.
That didn’t happen… because there was something Trump wanted even more than trade and currency concessions. “What Trump wanted was help convincing North Korean leader Kim Jong Un to stop his nuclear weapons and missile development programs,” Jim explains. “If China could use its clout with North Korea to convince Kim to give up the weapons programs, a war could be avoided. That was worth some delay on tariffs and currency sanctions.
“Trump made the ask in person when he met Chinese President Xi Jinping at Mar-a-Lago on April 6, 2017.
“President Xi asked for some time to hold up his end of the deal. Trump said, ‘Fine, I’ll give you 100 days.’”
Those 100 days were up last Saturday. Nothing has changed.
We pause briefly here to review some recent history.
Trump is the fourth consecutive U.S. president to labor under an illusion about China and North Korea.
In a recent interview with our acquaintance Scott Horton, foreign policy scholar John Feffer explained how every president going back to Bill Clinton has expected China’s government to somehow lean on the dictatorship in North Korea to do Washington’s bidding.
Time and again, China has been unable to deliver. But America’s foreign policy “geniuses” continue to act as if the regime in Pyongyang is China’s “little brother” instead of an independent actor with its own interests separate from those of Beijing’s.
Just so you know in one sense, anyway, none of this is new…
Back to the present moment: “Trump now has a free hand when it comes to a currency war and trade war with China,” says Jim.
“You can look for the currency manipulator label to be applied to China by the U.S. this November. Before then, the U.S. will impose tariffs and countervailing duties on Chinese steel to compensate for Chinese dumping.”
[Not just steel, either. Solar panels are in the cross hairs. If you’ve given any thought to going solar in your home, best pull the trigger soon.]
“Even move damaging, the U.S. will impose sanctions on Chinese banks that facilitate North Korean weapons development and other financial transfers in violation of U.N. resolutions.
“China will not take these sanctions lying down and will impose their own sanctions on U.S. investment in China and U.S. exports to China.”
Trump’s advisers have been laying the groundwork for months — including investment banker-turned Commerce Secretary Wilbur Ross. “I’ve met Ross on a number of occasions,” Jim tells us. “He’s one of the toughest and most seasoned negotiators in the world; he taught Donald Trump the art of the deal. Trump’s nickname for Ross is ‘Killer.’ Wilbur Ross will be one of the most formidable political adversaries the Chinese have ever encountered.
“The U.S. is set for the most aggressive trade sanctions and negotiations since Ronald Reagan in the 1980s, and before that, the 1930s,” says Jim.
“Every trade war has winners and losers. The losers will clearly be Chinese steel manufacturers who will find that the U.S. market dries up for them.
“The winners will be U.S. steel manufacturers who will supply steel to the U.S. and world industry at higher prices and higher profit margins once Chinese steel dumping stops.”
There will also be American losers. There always are. As we’ve related before in The 5, Bush the Younger imposed steel tariffs in 2002, hoping to shore up Republican congressional candidates in the Rust Belt. Researchers at the Institute for International Economics found the tariffs saved 3,500 steel jobs. Unfortunately, the tariffs also destroyed up to 43,000 other jobs in industries dependent on cheap imported steel.
Meanwhile, “the U.S. is on its own when it comes to dealing with North Korea, which makes war very likely in 2018, if not sooner,” says Jim.
This is not a new forecast of his. But it’s worth reinforcing today now that the aforementioned 100-day window has come and gone.
Last month, Defense Secretary James Mattis told Congress what that war might look like. “I would suggest that we will win,” he said, before adding, “It will be a war more serious in terms of human suffering than anything we’ve seen since 1953.”
North Korea has scads of artillery aimed straight at Seoul, the South Korean capital — metro population 25 million. “It would be a serious, a catastrophic, war,” Mattis went on, “especially for innocent people in some of our allied countries, to include Japan most likely.”
That prospect seems not to bother some in Washington. As Sen. Lindsey Graham (R-South Carolina) cavalierly observed in April, “It would be terrible but the war would be over [there], wouldn’t be here.”
The market impact? Talk about a flight to safety: Great for gold, terrible for stocks — with the exception of one already-hot sector, of course.
After record closes yesterday, the major U.S. stock indexes are pulling back ever so slightly. Really the movement is so slight the numbers aren’t even worth mentioning.
Interestingly, it’s bonds and gold catching more of a bid today. The 10-year Treasury yield is now 2.25%. And gold is at another high for the month at $1,246.
Gold’s rise coincides with another tumble in the greenback; the dollar index has sunk to 94.2, the lowest in 11 months, after the latest European Central Bank meeting. ECB chief Mario Draghi did his level best to give the impression he’d keep his foot on the monetary gas pedal… but with growing signs of inflation in Europe, traders don’t believe him and they’re bidding the euro up.
We love ironic timing here at The 5, and the cover of the next issue of Businessweek — er, excuse us, Bloomberg Businessweek — delivers:
Early this morning, the magazine posted its latest cover story online — positing that government should step in to break up Google, Facebook and Amazon.
Suddenly this has become a thing. On Monday, Judge Andrew Napolitano mused over the possibility on Fox Business in regard to Amazon: “Does the government want that kind of power, market power, in the hands of one entity? And that’s what the Justice Department, the antitrust division of the Justice Department, would look at if this attitude that Amazon is too big gets a little stronger.”
As if to issue all its critics a giant middle finger… hours after Bloomberg posted its story, the preeminent 21st-century retailer announced a deal with the preeminent 20th-century retailer.
Amazon will start selling Sears’ line of Kenmore appliances, equipped with Amazon’s Alexa voice technology. We’re not sure why anyone would want an always-on web-connected microphone attached to their dishwasher, but that’s just us. (Besides, you still have to, you know, load the dishwasher.)
The Street is going berserk on the news: Sears, which has been circling the bowl for years, is suddenly up 19% this morning. Meanwhile, Lowe’s and Home Depot are each down about 3%. For a long time it was thought the home-improvement chains were impervious to the “Amazon effect,” but here comes Amazon ready to horn in on one of their significant lines of business.
Anyway, we suspect there’s something to this growing anti-Amazon backlash. We’re going to stay on top of it…
[Amusing aside: We forget what a force Sears was back in the day. The story goes that on the campaign trail in the 1930s, Georgia’s legendary Gov. Eugene Talmadge was fond of saying, “Y’all got only three friends in the world. You got the Lord God Almighty, you got the Sears Roebuck catalog and you got Eugene Talmadge. And you can only vote for one of them.”
The Sears catalog ceased publication in 1993 — two years before Amazon started selling books online.]
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“I am quite disappointed,” says another. “You send all these emails and all I find is someone asking for money to subscribe to another publication. You have not given us any information on which stocks to purchase or invest in.”
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“Dave, hopefully the Senate health care bill is dead — and buried too, if we’re lucky,” writes one of our regulars.
“Obamacare Lite neither repeals nor replaces the Affordable Care Act. It just provides more subsidies and bailouts for the insurance industry, while rationalizing them with more lies.
“Meanwhile, Sen. Rand Paul’s proposed Obamacare Replacement Act is worth a read. This document is brief (only four pages) and remarkably lucid and pragmatic. The ideas it outlines aren’t perfect, but they could fix many of the problems in our current system. Of course, this is why we’re not hearing much about it from elected ‘leaders’ or the MSM. It may be in our best interest, but not theirs!
“Now President Trump is repeating his nonsense about letting Obamacare fail, after which the congressional Republicrats will get together and come up with a plan. But the pending mayhem doesn’t seem to concern them very much.
“Thanks as always for the great work you and your team do!”
The 5: Sen. Paul’s bill looks like a Band-Aid to us. Indeed, it might have the effect of cementing many of the industry’s cartel-like practices by granting it an exemption from federal antitrust laws.
Nothing is going to get better with health care — and in fact it’s destined to get much worse — until costs come back to where they were in the 1950s (adjusting for inflation, of course). Only a genuine free market with transparent prices will bring that about.
Absent that, the entire system is going to break down, and catastrophically…
“Dave, I read your reader’s comments recalling the Bernanke quotes prior to the housing bubble bursting as well as the single Yellen quote from June about not having another crisis in ‘our’ lifetimes and think he might be onto something.
“I was wondering — one from Yellen but five from Bernanke. I was wondering how many optimistic quotes came out of Alan Greenspan even as the dot-com bubble popped?
“If it’s close to five, then we have a baseline from which to predict the next crash — Yellen needs to come up with four more, and we can keep our long positions until then before going short.
“Might be a good indicator. Maybe Jim Rickards or David Stockman can do something with it?”
The 5: Hmmm… Let’s try this.
Remember Greenspan warned about “irrational exuberance” in the stock market in December 1996 — when the Dow was roughly 6,450. The Dow topped out around 11,700 in January 2000. So a little over three years to the peak.
Almost no one remembers now, but early in her term Janet Yellen made her own failed attempt to talk down the stock market. It’s right there in The 5’s voluminous archives, July 15, 2014: “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.” Like Greenspan’s irrational-exuberance speech, it didn’t do much good: The Dow has sailed up from 17,100 then to 21,600 now. (And Facebook is up 137%.)
Percentagewise, we’re nowhere near the magnitude of the late-1990s leap. But in terms of time frame… we’re coming right up against that three-years-and-change mark.
The 5 Min. Forecast
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