Since early 2017, investors and the C suite have dealt with a perpetual series of dizzying trade war escalations and treaties. Just this September alone, Trump raised duties on China on the 1st of the month. Then on the 11th he announced a list of exemptions to those very same tariffs. Then, on the 25th he attacked China viciously at his UN speech, saying: “"For decades the international trading system has been easily exploited by nations acting in very bad faith. Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale,"
The very next day, Trump said that a deal with China could come "much sooner than most think." Then, on September 27th, Bloomberg reported that the White House threatened to ban the listing of Chinese companies on US exchanges. Businesses simply cannot adequately plan capital expenditures under such unstable circumstances.
The US and China meet on October 10th &11th to decide the future of trade between the two nations. Tariffs are set to increase on Oct.15th on $250 billion worth of Chinese goods to 30%, from the current 25%. There is no appetite on Wall Street for the continued ambiguity of this trade war any longer.
The Fed’s broken models have caused it to fail to grasp the debt-disabled condition of the developed world. China can no longer boost global GDP because it cannot significantly add to its $40 trillion debt pile without cratering the yuan. Also, fiscal and monetary policies are already extremely stretched and are unable to easily pull the economy out of its malaise.
Global growth is faltering, and US GDP growth has shrunk from over 4% last year, to under 2% in Q3, according to the Atlanta Fed. The most important part of the yield curve remains inverted. There is illiquidity in the Repo market. D.C. is in utter turmoil and annual deficits have vaulted over the trillion dollar mark. The Q3 earnings report card is about to arrive, and it will receive an “F.” And global central banks are virtually out of ammo. Meanwhile, the stock market sits at all-time record high valuations.
The pressure on Mr. Trump is now immense. A trade deal must be reached in a matter of days that abrogates future tariffs and rescinds most, if not all, existing duties on China. Any other type of agreement will not be nearly enough to turn the global economy around or fool Wall Street any longer into thinking that it will.
The sad truth is, even a comprehensive trade deal won’t fix the massive debt and asset bubble imbalances that must inevitably implode. Which means, real interest rates should be setting record lows in the near future.
