Macro Perspectives

Thursday 23 July 2020

The news of the day wasn't about China, the virus or earnings. It was this headline: "White House officials and some Senate Republicans are discussing a short-term extension of unemployment insurance while they negotiate a broader stimulus package."

I talked about this huge issue on Tuesday (the unemployment subsidy) and the looming expiration of that benefit, which has created leverage for the Democrats in new stimulus negotiations. The economic recovery would evaporate on August 1, IF the gridlock on Capitol Hill were to result in the expiration of the Federal supplement for the unemployed. Whether it be the current $600/week or some other form with improved incentives to return to work, it has to continue.

Hopefully, we get the latter.  Nonetheless, the prospects of having that continued, without the necessity of an agreement on broader stimulus is very positive news.

Let's talk about China … If you've listening to Pompeo, it seems increasingly clear that he's setting the table for a large-scale confrontation with China, and, not coincidentally, we'll likely see something materialize before the election.

Incumbent Presidents, when they’ve actively sought a second term in war time, have a 6-0 record. Back in May (May 30 2020) I discussed  the likelihood of escalation with China.

"This is all beginning to look like China will be put in the trade penalty box, not just by the U.S., but in coordination by the global democratic powers.

In the near term, this confrontation with China will further disrupt global supply, which is already feeding into a formula for higher prices, which will soon be followed by higher wages.

In the medium term, a globally coordinated hardline penalty for China would force the movement of the global supply chain sooner, rather than later, and force the restructuring of economies (for the better) of the United States, Europe and Japan.

The question is, how would China respond to an economic penalty box? Likely with aggression. The CCP can't politically withstand the suffocation of exports." 

With the above in mind, Pompeo has been out alliance building. This collision course has been in the making for a long time. Again, it's no coincidence that it's all culminating ahead of the election. As bifurcated the outcome might be for the U.S., domestically, based on the election outcome, the outcome has even more extreme polarity for China.

China has spent the past 40 years executing on a plan to rise to a global power. The chinese currency was its primary tool. By massively devaluing the yuan in the 1980s through the early 1990s, and then keeping it artificially cheap through a variety of managed peg strategies for the past 25+ years, China became the exporter to the world. The Chinese economy exploded in size, growing 37-fold since the early 80s, while the U.S. economy has grown just 3-fold. This has put China on the footsteps of its goal of global leadership.

Trump's economic plan (demanding that China play by the same rules as its trading partners) has derailed it all. If Trump wins, and they abide by a trade deal, the Chinese economy falls out of the race for global power.  If Trump wins, and they don’t play ball, but get put into the penalty box by global trading partners, they also fall out of the race for global power. The stakes are extremely, extremely high for China (and the world).