A Slice of “Small-Town” China

By David Stockman  |  January 21, 2020

November’s presidential election is now the biggest risk investors face in 2020, as Trade War tensions have seemingly eased with execution of a “phase one” deal.

That’s according to a Bank of America Global Research survey of 249 fund managers.

Of course, we’ve been saying for months that “this is the most politicized market in history.” Some signatures on a piece of paper haven’t changed that.

Indeed, this “phase one” deal is totally insignificant. At the same time, it papers over a U.S.-China relationship that continues to deteriorate.

In fact, today, in his regular weekly commentary on U.S.-China relations, Chris Scott has a fascinating firsthand account on what’s happening in one town deep inside the Middle Kingdom.

As for this “phase one” deal, there’s no point in mincing words: It’s nothing to do with MAGA, more jobs, or restoration of middle-class prosperity in America.

It bears no relationship whatsoever to traditional ideas of free-market-and-sound-money-based policy. Statist and mercantilist through and through, it brings trade nannyism to the heart of the U.S. economy like never before.

It is, after all, a deal struck between communist apparatchiks and K Street lawyers, neither of whom has a clue that real wealth-creation if a function of enterprise, not bureaucrat-concocted gosplans.

And this is a two-nation gosplan if there ever was one.

It’s about the elevation of politics and the diminution of free markets – the diminution of freedom.

It renders the GOP an agent of Big Government aggrandizement, and it assures that America’s ongoing slump into stagnation will accelerate.

Meanwhile, here’s Chris with a stirring travelogue…

China’s Tragic Miracle

By Chris Scott

LUZHOU, Sichuan – I’m back in the People’s Republic of China for the first time in nearly five years.

I can’t overstate the personal importance of this trip. My wife and I flew to the U.S. six months after my son’s birth in Shanghai, and he hasn’t been back since then. For him, China has been a thing of storybooks until now.

Before we left in the summer of 2015, we visited my wife’s hometown of Luzhou, a bustling city situated about 75 miles upstream the Yangtze River from the megalopolis of Chongqing.

Six-months-old Francis was able to meet his great grandfather, a warm, six-foot-tall Korean War veteran who passed away shortly after we arrived in the States. On his deathbed, thinking of his granddaughter and her new family abroad, he asked family in the hospital room to “call America.”

We’ve started our return visit where we left off, in Luzhou, just in time for Chinese New Year celebrations.

The Party Is Still Raging

Officially, this city that you’ve probably never heard of had more than 5 million residents as of three years ago. That count of registered residents is far below the actual number of people who live here, and the official number has grown swiftly and steadily since then.

Outside of New York City and Chicago, there’s no city in America where you can see economic activity quite like what you see here in terms of density, extending for dozens of miles in each direction.

And this is no longer the type of informal economic enterprise you picture on the streets of India. Five years after my last stop here, the city looks many degrees closer to what Tokyo looks like than it does to a stereotypical developing country.

It’s all powered by a technology revolution that has seen cash replaced by mobile payments at a speed so dizzying that my in-laws struggled to pay for parking as we drove out of the brand-new airport.

Before I even got into the city, the airport itself caught me off guard. It was emblematic of the dramatic changes I’ve seen these past two days. When we left Luzhou several years ago, we walked out of a tiny building, scarcely bigger than a Hertz car rental branch, to board a plane directly from the tarmac. Flying in this time from Beijing, we unloaded from the aircraft into a gate that felt like an extension of the grand Beijing Capital Airport.

The parking lot was full, every third car an Audi, BMW, or Mercedes. There were a few Porsches sprinkled throughout too. I saw gobs more would-be status flaunted than at Dulles International, from where we departed, a fact that probably says more about how recently the drivers here became “rich” than how rich they actually are.

This party is paid for by debt-fueled real estate and infrastructure projects (like Luzhou Yunlong Airport). And that makes it tempting to mistake everything you see in China today for a Potemkin village.

This Is Just the Beginning

I can’t shake a deep sense of tragedy and missed opportunity.

The carefree mood of this place betrays its obliviousness to machinations on a macro scale, such as the ticking debt time bomb, that threatens to turn this economic dream into a nightmare.

Am I coping with a case of cognitive dissonance, trying to explain away the success of authoritarian state capitalism by predicting it will fail? To be sure, there’s no way to experience China without suffering some form of cognitive dissonance.

But it seems more likely that Beijing’s policies are the real coping mechanisms, an attempt to square the circle of maintaining a dynamic economy while backsliding on the very reforms that made this miracle possible.

They’re finding that addiction to debt is as hard to quit as cigarettes for a smoker, even once it’s become clear that they cause cancer.

And, as I discussed last week, the tragedy here goes far beyond economics. You can’t ignore the politics that have made the painful divorce of the world’s two largest economies a foregone conclusion.

There’s no reconciling an authoritarian, big-brother system with the rule of law and democracy enjoyed in Taiwan, and to a decreasing extent in Hong Kong.

It didn’t have to be this way, just as the United States and China didn’t have to go separate ways following World War II.

Mao Zedong’s decision to send troops, including my grandfather-in-law, to the Korean Peninsula was unnecessary. It is also, by many accounts, the very reason Taiwan is not part of the People’s Republic of China. Mao did it to cozy up to Stalin, at a time when President Truman was hoping to cut ties with the nationalists running Taiwan.

Ultimately, Mao would have a falling out with the Soviets, leading to China’s eventual détente with America – a warming of relations that reached its warmest only a few years ago.

But the damage was done, and it’s being done again by President Xi Jinping.

Xi decided that instead of learning from the successes of Taiwan and Hong Kong, he would offer them a lesson from the long-discredited textbook of Marxism.

The people who tell you that the U.S.-China relationship can be stabilized to prevent a further spiral downward “because it’s in both countries interests” don’t understand the domestic politics at play.

The consensus in Beijing is that the efforts by Imperial Washington to get Beijing to play fair in trade and to respect basic human rights are an attempt to sabotage its rise. The consensus in Imperial Washington is that we need to turn the screws even harder.

This is going to get a lot worse before it gets better.

What’s Next

The 2020 election has replaced the Trade War as the primary risk for investors. That’s because, as we’ve been saying for some time now, this is the most politicized market in history.

And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market… and we’re here to help you do that.

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR