Here Comes The Fake China Trade Deal, Part 2….

A bubblevision cheerleader hit the nail on the head this morning with respect to the Donald’s Trade War and the surely disconcerting news to Trump that notwithstanding his beloved tariffs, the US had posted a record $891 billion goods deficit with the world in 2018; and that $419 billion of that great big “losers” score was with the Red Ponzi alone.

Well, averred pom-pom girl Sara Eisen, why should that be ruining the fun on Wall Street? After all, she continued:

We didn’t care about the trade deficit. He did”.

Alas, the bolded “we” was not in the royal mode. What it referred to was the groupthink of all of Wall Street and most of Washington.

The underlying predicate is that the stock averages must rise everywhere and always, and that it’s the job of state policy—good, bad or indifferent—to make it happen.

Accordingly, three decades of the Fed’s pro-inflation, pro-debt, pro-financialization policies were accompanied by cheers on both ends of the Acela Corridor—even as they caused the off-shoring of a huge chunk of America’s industrial economy.

Needless to say, after 44 straight years of consecutive and rising trade deficits, they were not cheering in Flyover America. At length, and in desperation, former democrats and union members in the rust belt precincts of Pennsylvania, Ohio, Michigan, Wisconsin and Iowa put Donald Trump in the White House.

And they did so mainly on the strength of Trump’s virulent protectionist rhetoric—a patter that had been well-honed over a lifetime of observing the unmistakable pattern in the chart below.

To be sure, the Donald was no student of anything under the economic file. Nor did he ever have occasion to make acquaintance with the principles of sound money, free markets and fiscal rectitude.

So he had no clue that America’s trade disaster was the fetid fruit of Washington’s embrace of bad money after August 1971, and most especially after the ascension of lapsed gold bug, Alan Greenspan, to the helm of the Fed in August 1987.

But he did have the common sense to know that $15 trillion of cumulative trade deficits over four decades was not a case of “winning”; and he was also possessed of an ego so brimming with self-confidence as to believe that he could right the score via his own unsurpassed capacity for smart deal-making.

Stated differently, the Donald has always seen the US trade disaster through the eyes of a real estate deal-maker—not from the perspective of trade economics or the perversions of global central banking.

So without a shred of evidence—-and in the absence of any known study even addressing the topic—the Donald has simply asserted that the evident bad outcomes memorialized in the chart below were the result of bad trade deals and the stupidity of officials and presidents who had come before.

That gets us to why the Donald launched his Trade War with China and why he egregiously abused his statutory authority to impose monster tariffs under section 232 (national security) and 301 (unfair trade practices).

In slapping $30 billion of tariffs on $250 billion of Chinese imports last year, of course, the Donald took no mind of the economic effects.

That is that these tariffs would be paid by retail consumers and parts-importing businesses in Flyover America; or they would result in the resourcing of cheap Chinese imports to almost as cheap substitutes from Vietnam or Mexico, thereby merely shuffling the bi-lateral distribution of America’s massive trade deficit, not its aggregate size.

To the contrary, in his blissful ignorance, the Great Negotiator simply believed he was amassing bargaining chips for the big showdown with Xi Jinping.

Except, except there is no way for Xi to deliver anything remotely close to what the Donald wants. Namely, a drastically improved entry on the scoreboard of bi-lateral US/China trade, and in the very near future.

That’s because as we showed in Part 1, the problem is essentially $5 per hour labor in China versus $30 per hour fully loaded labor here. That yawning economic gap, in turn, is the product of 30 years of bad money and phony debt-fueled consumption on this side of the Pacific pond and even more egregious credit-fueled malinvestment in the Red Ponzi.

It goes without saying that Emperor-for-life Xi is not about to dismantle the massive subsidies inherent in the Red Ponzi–lest he and the politburo would soon find themselves hanging from the rafters in the Great Hall of the People.

Likewise, the only way America’s $526 billion of imports from China (2017) will decline materially is if US households are forced to pay down their staggering $15.6 trillion of debts by the economic pain of high interest rates, and thereby put themselves on a consumption diet to reverse decades of debt-fueled high living.

Needless to say, the one thing that Jay-the-Pivot and the Donald-the-MAGA agree upon is that nobody in America should have to face the honest, free market price of money—at least not on this side of the eventual crisis which will force exactly that.

In the immediate term, therefore, the Donald has essentially taken himself hostage by slamming a giant square tariff peg into a tiny round hole of negotiable improvements in the bi-lateral trade score between the US and China.

Specifically, he can’t give up his $30 billion tariff hammer without something that can be ballyhooed as a big win, but it is exactly that something being crafted by his warring advisors that will prove to be manna for the swamp creatures of K-Street, but of little value to the hard-pressed denizens of Flyover America who elected him.

Worse still, Wall Street’s silly assumption that the China Trade War will be put to rest once and for all at Mar-A-Logo in late March will soon by eviscerated by what actually materializes. To wit, a Rube Goldberg contraption of milestones, timetables and enforcement mechanisms and procedures that will be do little more than kick-the-can from one due date and enforcement showdown to the next and the next.

Moreover, the advancing calendar with respect to the 2020 elections is playing right into the hands of the swamp creatures and trade nannies who are circling in for the kill.

That is to say, not only did the Donald embrace the big, fat ugly stock market bubble that he so properly harpooned during the campaign, but he’s now succumbed to obsessing on the daily ticks of the S&P 500 as a report card on his performance and re-election prospects; and has even gone so far as to attempt to day-trade the futures market via well-timed bursts of trade talk optimism on his Twitter account.

As Bloomberg noted today, the Donald is now gunning for 3,000 on the S&P 500 to carry him into the election season:

President Donald Trump is pushing for U.S. negotiators to close a trade deal with China soon, concerned that he needs a big win on the international stage — and the stock market bump that would come with it — in advance of his re-election campaign. As trade talks with China advance, Trump has noticed the market gains that followed each sign of progress and expressed concern that the lack an agreement could drag down stocks, according to people familiar with the matter. He watched U.S. and Asian equities rise on his decision to delay an increase in tariffs on Chinese goods scheduled for March 1, one of the people said.Trump’s fixation on stock-market performance has shaped his assessments of his economic policies. Top White House staff know to be aware of how markets are performing  White House staff know to be aware of how markets are performing when summoned to the Oval Office to speak with Trump because the president often asks: ‘‘What’s happening with  markets”

So here’s how we believe the Donald’s trade hawks (Lighthizer and Navarro) and free traders stock market cheerleaders (Mnuchin and Kudlow) will attempt to square the circle in order to get a “deal” that the Donald believes will lift the flagging animal spirits on Wall Street one more time.

The free traders will get a commitment from China to increase its purchases of US goods by some giant number, say $1.2 trillion over 6-8 years. This massive purchase commitment is likely to be back-loaded, with initials targets of $40-$50 billion per annum rising to beyond $200 billion in the outyears—along with compliance tests and sanctions for shortfalls.

On the other side of the equation, the hawks will get an extensive laundry list of “unfair” Chinese state subsidies, laws, regulations and practices which are to be eliminated or substantially ameliorated according to a heavily detailed set of timetables, conditions and understandings—-also along with compliance tests and sanctions for failure or tardy performance.

What President Xi will get from the Donald in return is relief from the $30 billion tariff hammer, but in the form of phase-ins, incentives for accelerated delivery of the Chinese commitments and snap-back tariff penalties in the event milestones are not meet.

On the surface this might even sound like a reasonable and constructive compromise and a “deal to keep dealing” to casual observers, and most certainly to the denizens of the beltway puzzle palaces.

But as we will detail  in Part 3, it will actually turn out to be a horrible trap—-a managed trade tar baby that will only pull Washington ever deeper into a quasi permanent Managed Trade War with China, while paving the way for neocons and military hawks to escalate that conflict into something far more ominous.

Our confidence in that baleful prospect is based on the fact that in order to relieve the deep harm from too much state intervention in the functioning of American capitalism via Keynesian central banking, the Donald is now fixing to supplant free markets almost entirely via a whole new regime of Washington-run managed trade.

But that will lead to cronyism like never before. For example, the proffered deal to import $20 billion of LNG from Cheniere Energy Inc over the next six years enabled by China-subsidized increases in the capacity of the company’s liquefaction and export infrastructure would undoubtedly make a happy pay day for the company’s shareholders.

Managed Trade in the form of purchase targets by product category will also lead to a massive re-shuffling of trade flows internationally, causing, in turn, ricocheting conflicts with US competitors and US customers all over the world.

For instance, the single largest US export to China at the two-digit level is aircraft and related parts, which totaled $16.2 billion in 2017. But China’s total imports of aircraft that year amounted to only $25.4 billion, meaning that to move the needle meaningfully would essentially require displacing all of China’s current purchases from Airbus—a prospect that would ignite a ferocious political blowback from the company’s state owners in Europe.

Likewise, on the other end of the spectrum, the current $130 billion of total US exports to China consists heavily of agricultural, energy, raw and processed materials and even recycled wood, paper, plastics and other industrial waste. As we will also show, in almost all of these cases, more exports to China will simply mean less exports to current customers in other nations—with no improvement in the overall US trade balance.

In short, approximately 100 years ago Hayek brilliantly diagnosed what he termed the “impossibility of socialist calculation”.

The Donald’s new Managed Trade War is about to prove him right in spades, as we will essay further in Part 3.