Economy

Does Anybody Know This Is Nowhere

By David Stockman  |  November 19, 2019

Everybody seems to wonder
What its like down here
I gotta get away
from this day-to-day
running around,
Everybody knows
this is nowhere.

Neil Young, “Everybody Knows This Is Nowhere” (1969)

It’s hard to say what’s most ridiculous…

There’s the Donalds claim he’s produced the Greatest Economy Ever, of course.

And there’s the Wall Street meme of the moment, holding that our monetary central planners have successfully navigated a mid-cycle adjustment and markets are good to go from here.

Now, too, we have Nancy Pelosi’s attempt to render the Donald an aberration by turning over the mechanisms of impeachment to the foreign policy establishment.

What we do know is that this is surely the Mother of All Suckers’ Rallies.

The U.S. economy is an end-of-the-cycle mess. Both fiscal and monetary policy are far off the deep end and have nowhere to hide. Highly manipulated corporate earnings are heading for their fourth straight quarter of year-over-year decline.

Above all, though, the Trade War is essentially being institutionalized, not won or ended or even Phase Oned.

Chris Scott, in his regular Tuesday dispatch on the U.S.-China relationship, sheds good light on what’s really happening here.

And, folks, a trade deal is not at hand.

That hasn’t prevented an already horribly overvalued stock market from rallying time after time on tales of “trade war optimism. Its as if even the Chicoms have figured out that if they can induce the robo-machines and daytraders to push the stock averages ever higher into the stratosphere, they’ll have the Donald to kick around all over again.

Stalinism on Steroids

By Chris Scott

A few weeks ago in this space, I recounted a gloomy winter night in Shanghai. Instead of the Bible, a hotel catering to local Chinese kept copies of George Orwell’s 1984 in the bedside table drawers.

The seemingly small detail was a depressing reminder of the big hopes of a more open and free society that many Chinese held on to over the past few decades.

It’s impossible to understate how decisively those hopes have been dashed.

Fires rage in Hong Kong because the people there know full well that Mainland China is fast becoming the first living recreation of Orwell’s nightmare ever seen on Earth. A bill that would allow the extradition of Hong Kongers to the Mainland was all that was needed to push young people to risk their lives to preserve basic freedoms.

Twenty years ago, Bill Clinton sarcastically wished Beijing “good luck” in its efforts to control the internet. Doing so is like “nailing Jello to the wall,” he said.

He couldn’t have been more wrong. The Communist Party of China didn’t just control the internet. It harnessed the power of social media to masterfully mold public opinion of the world’s most populous country. Now, few young Chinese can empathize with fellow millennials taking to the streets in Hong Kong.

Eradicating Erroneous Thinking

But it gets much worse.

In China’s northwest region of Xinjiang, authorities have used artificial intelligence to track and target people whose views do not conform to party orthodoxy.

“Round up everyone who should be rounded up,” Xinjiang party chief Chen Quanguo ordered in a confidential 2017 government directive.

The “People’s Leader” Xi Jinping told his cadres to “show absolutely no mercy.” China’s Foreign Ministry didn’t even deny the authenticity of the trove of secret documents leaked to The New York Times.

What of the family members – including small children – of locals who were detained and taken to reeducation camps for showing signs of practicing Islam?

Officials were prompted to tell them to “treasure this chance for free education that the Party and the government has provided to thoroughly eradicate erroneous thinking, and also learn Chinese

and job skills.”

Students have been told that their own actions could affect the length of their family member’s detentions.

About That “Historic” Trade Deal

What does this have to do with our economy, our financial markets, and the failure of our own elites?

One obvious lesson here is that politicians in Washington as well as top executives in Corporate America were mistaken to believe that China would naturally evolve into a more open society simply due to the allure of individual freedoms.

The duopoly that has driven us down the wrong path domestically signed a Faustian bargain with a Communist government dressed in capitalist clothing.

But that’s old news, water under the bridge.

Now that the wolf has shed the sheepskin, politicians in Washington are finally waking up. Fortune 500 C-suites haven’t quite followed behind. But to the extent that companies lose or give up hope of gaining market share in the world’s largest consumer market, they will.

Indeed, after years of groveling before Chinese officials, Mark Zuckerberg finally threw in the towel and publicly rebuked China’s closed internet system.

The main takeaway here is that there is no fix to this relationship. There is no trade deal that will get China to “play by the rules.” They have their own rules.

The trendline of the U.S.-China relationship can only go in one direction for the foreseeable future: bad to worse.

So Much for the Monroe Doctrine

That means that the global economy as we’ve known it for a generation is no more.

Supply chains will continue to be redirected, and the tech economies of the world, whether it be social media, ecommerce or fintech, will fall under two different spheres of influence. Amazon will service the developed world, while Alibaba will build up supply chains in Southeast Asia, Africa and Latin America.

China’s Huawei has already landed deals to build next-generation wireless networks in Mexico and Brazil. So much for the Monroe Doctrine.

But there is another important point that is hard to square with the picture of an artificial intelligence-boosted Stalinist state on steroids. China’s economy is stronger and more dynamic than the Soviet Union’s ever was.

Yes, they have fueled poorly planned, state-directed development with mountains of debt. But – and in this regard I digress with David’s view – there are signs that China can navigate its economic pitfalls.

The Danger of Wishful Thinking

A state-controlled economic system will ultimately fail. China’s greatest successes, to this point, have been companies that are run like private businesses.

Chinese telecommunications giant Huawei is one example. Its founder may have links to the Communist Party, but the company has been run as a competitive independent venture – albeit likely with unfair access to cheap capital.

It has leapfrogged Western competitors in a variety of areas. Why else would close U.S. allies ignore the security risks and use its equipment in the face of escalating threats from Washington?

For decades we have been expecting China to collapse. But despite the mountain or risks that indeed may still bring the behemoth down any minute, in many respects it has gotten more stable and not less. Its leaders, well aware of the debt risks, have slowly begun to accept slower economic growth in order to deleverage.

Just this week there was more evidence that it’s succeeding in the difficult task of restructuring its economy from the t-shirt factory of the world to a developed domestic consumer-oriented economy.

Profits at Chinese companies grew 10% in the July-September period, beating the 2% growth rate analysts had predicted,Reuters reported, “boosted by Chinese shoppers who opted to buy at home than to travel abroad, as a weaker yuan inflated travel costs.

As Americans, we want to believe that a draconian Communist leadership will learn the error of its ways or fail tomorrow.

But so far that’s proven to be wishful thinking.

Get Grounded

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

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