The red dragon does not give up on Trump

White house despair against Beijing

August 11, 2019

In recent days, the US-China economic dispute has reached its climax. The dispute is heightened when US President Donald Trump has failed to take action against Beijing during his two and a half years in the White House. At present, China has been able to respond well to Trump's anti-Chinese economic policies. This has led even some traditional Republicans to criticize the White House's policies toward Beijing.

By Saeed Sobhani

Here's a look at the latest analysis and news on the US-China economic dispute:

Powell Speaks, Trump Tweets, China Reacts, Markets Freak. Repeat

As Bloomberg reported, The ups and downs of asset prices on any given day are being determined, more and more, by the words and actions of three men.

First, of course, is Donald Trump, who has rediscovered his power to send markets soaring—or into a tailspin—with less than 280 characters on Twitter. Then there’s U.S. Federal Reserve Chairman Jerome Powell, who repeatedly finds himself on the receiving end of nasty Trump tweets for abiding by his mandate to do what’s best for the U.S. economy, which isn’t necessarily always the same thing as what’s best for the sitting president. And in Beijing, it’s Xi Jinping, the president of China who sits atop a Communist Party in which politicians and central bankers famously sing from the same hymnal, at least when the audience is outside observers.

The financial markets have been like a mosh pit where these three players bang against one another. Powell, under pressure from Trump to cut interest rates aggressively, sent markets reeling by signaling the central bank’s rate cut last month was a “mid-cycle adjustment” and not the start of an aggressive loosening of monetary policy. The very next day, Aug. 1, Trump exacerbated the sell-off by saying he would place tariffs on practically any U.S. imports from China that don’t already have them, starting in September. The response from Beijing on Aug. 5 caused the biggest waves in global markets, as the People’s Bank of China allowed its currency to depreciate by the most since 2015 and reach more than 7 per dollar, a threshold it had prevented the yuan from crossing in recent years. China also asked state-owned companies to suspend purchases of U.S. crops, renewing pressure on the beaten-down prices of American corn and soybeans.

With each of these collisions, the fragility of the global economy and markets is exposed. It seems increasingly possible that something big and important is broken. Investors who’d believed U.S.-China relations were stabilizing, if not improving, were caught on the wrong foot when tensions abruptly escalated. The prevailing assumption that President Trump won’t allow the trade war to continue through the 2020 presidential campaign season is being reconsidered, as the two sides appear further apart than ever. Economists at Goldman Sachs Group Inc., for example, no longer expect a trade agreement before the election and see the Fed cutting its benchmark interest rate two more times this year in an effort to counteract the economic damage that will be done by the impasse.

The constant whiplashes in expectations can be seen in an index that measures how often news stories mention uncertainty surrounding U.S. trade policy. It almost tripled in June to a 25-year high, before dropping by more than half in July after a comparatively uneventful stretch. The drama of August isn’t yet reflected in the index, which is calculated monthly.

As troubling economic data pile up, the question being openly debated on Wall Street is whether lower borrowing costs will be enough to fend off a recession. An Institute for Supply Management index for the U.S. manufacturing businesses that Trump’s policies were meant to support dropped to an almost three-year low of 51.2 in July. A similar gauge of the service industries had dropped from 60.8 in September to a three-year low of 53.7 in July. For both indexes, readings below 50 are a sign that economic activity is shrinking. In Europe, whose factories are caught in the crossfire between China and the U.S., manufacturing barometers already point toward recession. Growth in U.S. corporate profits, which the tax cuts put on steroids last year, has all but halted, and forecasts for the timing of a rebound keep getting deferred.As the trade war morphs into a potential currency war—in which countries race to devalue to get a competitive edge for their exports—there are whispers about how and where the tensions could escalate further. Could the U.S. thumb its nose at China and sell F-16 fighter jets to Taiwan? Or could Washington signal support for the anti-Beijing protesters who’ve paralyzed Hong Kong this summer? And what could be at risk among more than a quarter of a trillion dollars of U.S. investments in China since 1990?

All these questions are arising in the dog days of summer, a time of year when Wall Street’s vacation calendars are jammed and markets seem especially easy to rattle. Measures of stock market volatility tend to rise on average in August, and some of the ugliest swoons in equities over the past decade have occurred in this month. The S&P 500 index has shed about 6% from its last record, in late July, leaving it below the peak it reached in January 2018 at the height of optimism surrounding Trump’s corporate tax cuts. Even the most reliable big spenders in the market these days—corporations themselves—have had trouble keeping share prices afloat. Shares of Google parent Alphabet Inc. surged almost 10% after the company announced a $25 billion share buyback plan on July 25. The stock proceeded to lose almost all of that gain in the following week.

Before the latest swoon, there were signs that some investors were getting nervous about the balance of risk and reward offered in the market. Some measures of valuation look high. Warren Buffett’s preferred metric, the ratio of the total market value of U.S. stocks to gross domestic product, is at about 1.49, higher than it was just prior to the financial crisis. The cyclically adjusted price-to-earnings ratio, based on the last 10 years of earnings, is about 30, well above the 50-year average of 20. Both measures capture roughly the same thing: how much it costs to buy a piece of the wealth that businesses are generating. Neither number can tell you when the market is about to turn, but they both suggest prices are high.For Buffett, there doesn’t seem to be much worth buying at current valuations. The latest earnings report from his Berkshire Hathaway Inc. showed the holding company sold more stocks than it bought in the second quarter, and its pile of cash rose to a record $122 billion. He’s not the only one sitting on the sidelines: assets in money-market mutual funds—the mattresses investors tuck money under when other choices look too risky—have climbed to an almost 10-year high of $3.3 trillion.

The recent rush into safe havens sent gold to a five-year high and triggered a rally in Treasuries that pushed 10-year yields to their lowest since Trump was elected in 2016. (Yields drop when prices rise.) At the same time, rates on three-month Treasury bills were higher than those on 10-year bonds—a phenomenon known as a yield-curve inversion that’s widely considered a reliable warning of an impending recession. The lower long-term yields signal that markets expect interest rates to come down in response to weak economic growth.

“We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the U.S. and China,” tweeted Larry Summers, Treasury secretary under Bill Clinton and economic adviser to Barack Obama. One might detect a partisan edge in that comment, but there’s no doubt markets are trying to see their way through a lot of potential chaos. Bulls may hope that Trump will tweet about a breakthrough with “his good friend Xi,” and stocks will be off to the races again. But for now the cacophony in the mosh pit just seems to get louder and louder.

US-China trade war is hurting farmers, but they’re sticking with Trump!

As CNBC reported, Donald Trump may be a resort-dwelling real estate magnate who entered politics via golden escalator, but even a trade war with China hasn’t tarnished his image as a champion for an unlikely group: farmers and ranchers.

Farmers are one of the most visible casualties of the U.S.-China trade war, which escalated sharply this week as both sides landed blows that could hold potentially devastating consequences for U.S. agriculture.Yet farmers appear to be sticking by Trump — not just the Republican they largely supported in the 2016 election, but the trade warrior who has put their industries in China’s sights. And while they’re far from the largest group in Trump’s corner, farmers could prove to be a crucial voting bloc in the 2020 election.The Purdue Center for Commercial Agriculture’s latest producer survey, which was conducted last month and released Tuesday, showed a record-high 78% of farmers said they believe the trade war will ultimately benefit U.S. agriculture. That roughly matches Trump’s overall approval rating of 79% among farmers, according to a Farm Pulse survey conducted around the same time.That data was collected before this past week, however, when Trump said he would impose on Sept. 1 new 10% tariffs on the remaining $300 billion in Chinese goods.

Trump tweeted the announcement just after the two countries had restarted trade talks in Shanghai. He claimed China had broken its promises to buy “large quantities” of U.S. agricultural products and stop selling fentanyl.China swung back on Monday, taking the severe step of canceling all purchases of U.S. agriculture products.

That’s no small loss: The U.S. made $9.2 billion in agricultural exports to China last year according to the Department of Agriculture, making that country the fifth-largest U.S. agricultural export market.The Treasury labeled China a currency manipulator late Monday.“My heart sunk a little bit” after China’s announcement, said Mary Kay Thatcher, a fifth-generation Iowa farmer and current farm lobbyist on Capitol Hill, in an interview with CNBC.“That’s a hard hit for us, it’s going to make life difficult,” she said. “Farmers are still a bit stunned about the announcement that they’re not gonna buy anything.”

Farmers aren’t the only ones affected. Trump’s battle with China over trade deficits, alleged intellectual property theft and forced tech transfers has repeatedly spooked investors around the world. And polls show that his biggest moves in the trade war — namely, slapping tariffs on billions of dollars’ worth of Chinese goods — aren’t especially popular with the broader public.

But U.S. soybean, pork and dairy farmers in particular have seen their revenue from China evaporate as China scaled up its own tariffs on U.S. imports, now worth $110 billion.Chinese buyers imported $19.5 billion in U.S. farm goods in 2017, a number that was more than halved the following year as the tariffs made U.S. agriculture products more pricey, The Wall Street Journal reported.The U.S. currently leverages 25% tariffs on $250 billion in Chinese goods. And Trump has shown no indication that he’s willing to back down against Beijing, though his surrogates have suggested that the White House is willing to be flexible on the new tariffs, depending on what happens in the next round of trade talks, scheduled for September.

rump, who has dubbed himself a “tariff man,” has often asserted that China bears the brunt of the tariffs and that the U.S. is taking in “tens of billions of dollars” from the import taxes. But while tariffs make Chinese goods more expensive for Americans to buy, U.S. importers are the ones who directly pay the taxes.The 2020 field

Farmers aren’t a huge constituency: There were only about 3.2 million U.S. farmers in 2012, according to the Agriculture Department, a decline of 3% from 2007. But they could still prove invaluable to Trump’s reelection campaign.While he lost the popular vote in 2016, Trump eked out narrow victories in key battleground states where just a few thousand votes made all the difference. Thatcher said that farmers can be counted on to turn out to the polls.

“They’re the ones showing up at these town hall meetings ... they’re very politically active.”

Recent census data also shows that many of the expected toss-up states export relatively little to China — some of the biggest exporters, like Texas, reliably vote for one party or another in presidential contests.That could effectively shield Trump from taking a hit in the electoral college even if the trade war worsens.Pennsylvania-based Democratic strategist Aren Platt said that farmers may wield an outsize influence for Trump’s conservative base.“The farmer represents this idealized rural life. And I think that a trade war with a foreign country who has an incredibly strong economy is something that rural America, rural Pennsylvania wants to see,” Platt said.Whether or not the trade war pans out in America’s favor, political analysts don’t foresee farmers wavering on Trump any time soon — let alone voting against him in the 2020 presidential election.

More than 75% of rural farmers voted for Trump in his successful campaign against Democrat Hillary Clinton in 2016, according to The Washington Post. They’ve largely remained supportive of Trump even as the trade war weighs on their industries.“They are sticking with him,” Thatcher said, adding that they largely “look at Mr. Trump as still being the better option” compared to the current slate of Democrats running for president.

“Most farmers in the rural parts of the U.S. have conservative values” and align with the GOP, said Republican political strategist Ray Zaborney. “Between their values and the president standing up for them, they’re willing to give him some leeway” on the trade war.It also doesn’t hurt that the Trump administration has authorized billions of dollars in subsidies for farmers harmed by retaliation from China. A total of $28 billion has been either authorized or handed out since last year, the Journal reported.Zaborney said that many farmers see Trump’s strategy with China as a long game. But Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, believes that’s a “huge mistake.”

“Trump has shown many times over that he’s acting on pure impulse and that he doesn’t have a coherent long term plan,” Bernstein said.Bernstein recognized that farmers “still believe he’s got their backs, even when they face significant costs.”

But “there’s a bailout in there too. We can’t forget that,” he added.

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