Fake MAGA, Fake Market (Part 1)

Fake MAGA, Fake Market (Part 1)

We don’t put a lot of stock in the CNN/MSM running meme that the Donald is a fount of endless lies.

Most of what they call “lies” are debatable facts and factoids about propositions they don’t like—such as the truth that the Russia Collusion/Meddling story has not only been bogus from day one, but was actually an attempt by the Dems and their Deep State apparatchiks to unconstitutionally reverse the outcome of a presidential election. But there can be no doubt that the Donald let loose a Whopper on Monday morning when he saw the futures market deep in the red, thereby continuing the 800-point carnage from his Friday exercise in Trade War lunacy.

So to stem the tide of red (and the near certainty that important chart points would have been violated), the Donald claimed from Biarritz, France, that “China called last night” and indicated a desire to resume trade talks, later elaborating that two “high-level” Chinese officials had reached out to the White House essentially begging to restart the stalled negotiations.

Not surprisingly, the Chinese immediately denied the claim, but by then the robo-machines had already hit their ignition keys and have spent the rest of the week attempting to erase Friday’s wounds.

That’s the Fake Market part of the story, which we will elaborate upon in Part 2.

But it is now also abundantly clear that the alleged Chinese calls never happened, and that the Donald had engaged in a grotesque level of market manipulation that any CEO or other corporate insider would have been indicted for in a heart beat.

As Zero Hedge noted this morning, even White House insiders have now confessed the ruse: And now, according to a CNN report, White House aides “conceded the phone calls Trump described didn’t happen they way he said they did,” and “instead, two officials said Trump was eager to project optimism that might boost markets, and conflated comments from China’s vice premier with direct communication from the Chinese,” precisely as we said had likely happened on Monday morning. Our point here, however, is not to pile on the Donald with the rest of the “gotcha” crowd.

The real sin here is not that the Donald employed some bright white lies to talk his book. The real problem is that his book (MAGA) is a crock and the stock market he is continually trying to levitate is a testament to decades of monetary madness at the central banks, not an endorsement of the Donald’s toxic mix of Trade Wars, Fiscal Debauch and ultra-Easy Money.

So it needs be said again: The Donald is an economic half-wit whose views on trade, debt and money are a clear and present danger to prosperity. And he is bullying them into the policy arena at an exceedingly fraught time when the rotten economic fruits of 30 years of debt eruption and egregious money printing at the Fed are coming home to roost.

As to the matter of our rogue Keynesian central bankers, Trump outdid himself recently, showing that the ship of fools domiciled in the Eccles Building can’t hold a candle to the Donald’s monetary mind-melt: Our Federal Reserve cannot “mentally” keep up with the competition – other countries. At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually “getting paid” to borrow money – ZERO INTEREST PLUS! No Clue Fed! Sorry, folks. This is buck naked gibberish.

And it’s also a reminder of why the Donald doesn’t give a whit about the nation’s hemorrhaging fiscal accounts. During his first 31 months in office—and at the very top of the longest business cycle in history—he has added $2.7 trillion to the net public debt, yet he thinks it’s just ducky that the German government is getting paid to borrow money.

To the contrary, the race to the interest rate bottom is a historic financial catastrophe in the making, not some kind of international sports contest the Donald is losing; and if the other G-7 leaders were actually “giddy” about the slow-motion destruction of their bond markets and banking systems wrought by the ECB—then Drunk would be a better term for their mental condition.

After all, anything less than alarum about these 10-year yield quotes from today’s bond ticker is the same thing as failing the financial breathalyzer test. Apparently, all of the G-
7 did—most especially the Donald.
Germany…….-0.71%
Belgium……..-0.38%
Netherlands..-0.58%
France………..-0.44%
Italy…………….0.98%
Spain…………..0.05%
Portugal………0.09%
Greece…………1.57%

​What the above ludicrous yields imply is that speculators and fools have driven bond prices to well above par and, therefore, to huge guaranteed capital losses on redemption or market correction.

The Italian 10-year, for example, was issued recently with a 3.0% coupon, meaning that today’s buyer will get whacked for a 65% loss upon redemption. Likewise, one year ago the Portugal bond was trading at a yield of 1.87% and the Spanish bond at 1.46%—again implying massive capital losses for speculators coming in at today’s tiny yields.

Needless to say, if the ECB is foolish enough to restart QE and drive its deposit rate even lower than the current absurd -0.40%, it will cause the European financial system to literally implode—with Deutsche Bank leading the way down the drain.

Yet the Donald wants the Fed to emulate that madness because by the dim lights under the Great Orange Combover the Fed is “clueless” and “mentally” incapable of keeping up with the monetary arsons elsewhere around the planet.

When it comes to the trade file, of course, the Donald is even more out to lunch, and his Trade War escalation with China last Friday left no room for doubt.

By pushing the tariffs to 30% on the $250 billion of Chinese imports already being taxed plus the 15% promised for the remaining $300 billion, the Donald has literally leapt beyond the bounds of any semblance of rationality.

To wit, when the whole enchilada become effective on December 15—and we have little doubt that’s where things are heading—-the Donald will have single-handedly imposed a $122 billion tax, or 22%, on the annual inflow of $543 billion of goods from China.

This is so over the top that we can say with absolute confidence that no occupant of the Oval Office or high level economic or trade advisor has ever contemplated something even remotely this crazy in their most agitated moments. In fact, no one in the current White House—other than the Donald and perhaps the certifiable whack job, Peter Navarro—ever contemplated this level of mindless economic warfare.

The fact is, this is sui generis. It’s the freakish doing of one man’s unchained ego and simple-minded notion that the $18 trillion global trading system is nothing more than an outdoor contact sport where the refs are crooked and America is robbed blind. Even Nixon’s 10% tariff on all imports after Camp David in 1971 was far, far less unhinged, as stupid as it was. It was designed to force foreign government to revalue their FX rates against the temporarily (sic!) floating dollar, but was quickly abandoned after the Smithsonian Agreement established new, albeit short-lived, FX parities a few months later.

Moreover, the Nixon tariff was across-the-board, not a thermonuclear missile aimed singularly at America’s largest trading partner. Yet the latter aspect is what makes the Donald current tariffs so threatening to the entire global economy: It is monkey-hammering complex supply chains which terminate in finished goods exported from China, but are comprised of raw materials, parts, components, semi-finished goods and all variants in between which are originated in countries all over the planet.

Thus, in order to generate $543 billion of exports to the US last year and $2.49 trillion to the entire world, China imported $2.13 trillion of stuff.

This included $342 billion of semiconductors, parts and manufacturing equipment, $175 billion of other electrical machinery, $202 billion of mechanical machinery and $102 billion of optical, photographic, measuring devices and related highly engineered capital goods.

It also imported $348 billion of petroleum, coal and other fuels, $202 billion of iron ore, alumina, nickel and other metal ores and $83 billion of soybeans, cereals, fruits, meats and other agricultural products.

Needless to say, this prospective 22% tax wedge against Chinese finished products versus those of all of their global competitors has triggered a frenzied melee of re- sourcing actions designed to relocate the country of origin for finished goods to any and all low wage venues other than uber-taxed China. These include Vietnam, Indonesia, India, Malaysia, Cambodia, Thailand, Bangladesh, Pakistan, Brazil and Mexico, just to name the obvious ones.

In the process, of course, supply chains will be massively roiled, sunk investments in the current China trade routes will be depreciated and uncertainty and business indecision will become rampant.

And exactly when is the global economy being put into this kind of unprecedented economic meat-grinder?

Well, at the very time that it has become buried under $250 trillion of debt— reflecting a $100 trillion eruption just to bail-out the last crisis; and when the central banks have driven the global bond markets into subzero land and are therefore out of dry powder.

That is to say, they have little room left to cut rates and any return to massive QE will kill whatever remains of yield and therefore rational price signals in the world’s bond markets.

So this time there will be no central bank rescue or quick reflation like after March 2009. The Great Trumpian Recession will spread to the four corners of the planet and last for years to come—-even as the massive government, household and business debt that has been accrued since 2007 triggers bankruptcies and impairments of magnitudes never before seen.
So the question recurs: Why in the world is the Donald risking the Great Trumpian Recession in his unhinged trade war on China?

A four-fold answer is usually given, but each of these “reasons” amount to hogwash on steroids. They include:

1. the Warfare State’s phony beef against China’s alleged technology threat;
2. the K-Street chorus of crybaby complaints about purported Chinese commercial theft of trade secrets and patents;
3. the Fortune 500 whining campaign about how their investments are badly treated when they voluntarily choose to put assets and operations on the ground in the Red Ponzi; and
4. the yawning bilateral trade imbalance, which saw Chinese imports of $543 billion during 2018 dwarfed by the mere $120 billion exported to China by US domestic companies.

Suffice it here to say that complaint #1 is a blatant case of the pot calling the kettle black. The overwhelming source of hostile cyber-intrusions in the affairs of other countries— and most especially their military and related technological sectors —is the $80 billion budget of the so-called US Intelligence Community (IC).

Whatever defensive or even counter-attack measures may be attributed to the likes of Iran, Russia and most especially China are small potatoes by comparison. The cause celeb of the moment, the alleged “backdoor” spy-gear in Huawei products, is actually just the opposite: China’s #1 technology company simply refused to implant cyber- intrusion capacities demanded by the CIA and NSA–so the company was declared a national security threat by the IC.

As to the alleged Chinese theft of commercial trade secrets and patents, it only needs be recalled that something like 15,000 patent infringement suits are filed in US courts each year.

That’s because replicating, rearranging and reverse engineering other companies’ products is what competitive businesses do as a matter of course. And if they come too close to the protected intellectual property inside the four corners of the patent in question, they lose the lawsuit and have to pay damages—some times massive ones. But here’s the thing. The cost of intellectual property protection is a cost of doing business in today’s world of global commerce.

It is not the job of Trade Nannies in Washington to function as corporate America’s no- cost litigator and enforcement agent. And most especially, it is not the function of the state to take $21 trillion of GDP and the jobs and livelihoods of tens of millions of consumers, workers and businesses hostage in a Trade War in order to enforce the patent infringement complaints of a relatively small handful of domestic companies. ​Likewise, the answer to the whining of Fortune 500 CEOs about being forced to enter joint ventures and share technology when they choose to invest and operate in the Red Ponzi is quite simple: Just don’t!

Needless to say, it is actually an outrage to sacrifice the $21 trillion main street economy so that corporate CEOs can go on bubblevision and brag about their China “growth strategies” while not having to put up with the inconvenience of living by the Red Rules. As it turns out, therefore, the only real issue involved in the bilateral trade relationship with the Red Ponzi is actually the $423 billion trade deficit that has the Donald on his high horse.

He’s dead right about the problem, but dead wrong about why it exists and what to do about it, as we will address in Part 2.

And by your way, today’s dead cat bounce in the stock market was just the chart- monkey’s attempting to regain the 50-DMA on the S&P 500 at 2947.

They didn’t make it.

By David Stockman

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