Stock Market

What Price? What Victory? What Now?

By David Stockman  |  December 5, 2018

Détente does not mean the end of danger. Improvements in both the tone and substance of our relations have indeed reduced tensions and heightened the prospects for peace. But these processes are not automatic or easy. They require vigilance and firmness and exertion. Nothing would be more dangerous than to assume prematurely that dangers have disappeared… Détente is not the same as lasting peace.

– President Richard M. Nixon, Fourth Annual Report to the Congress on U.S. Foreign Policy, May 3, 1973

The Donald has already called it “incredible.”

But there’s little substance in this agreement. It’s particularly flimsy given the forceful headwinds facing entrenched interests, deep as they may be.

We’re talking about the very structure of the Middle Kingdom’s economy. And there are implications for that country’s reputation around the world as well.

Finally, there is the authority of the Communist Party of China.

It’s telling that, as the Tweeter-in-Chief touts his short-term “win” and turns his thumb back to Prosecutor Mueller, Xi Jinping has gone quiet.

“Détente” is just a big word, here and now more than ever.

Here’s the key to understanding the particular emptiness of this “truce,” courtesy of Bloomberg:

Negotiations have long been stuck over U.S. demands for deep structural reforms such as stopping forced technology transfers, enforcing intellectual property rights and ending state subsidies for strategic industries – all of which China sees as an American strategy to thwart its rise as a global power.

There was no real progress on these issues during the Trump-Xi dinner. And if there’s no progress on these issues, there’s absolutely zero point to this Trade War from an American perspective.

Michael Every is the top Asia financial markets strategist at Dutch multinational Rabobank. He said he’ll eat his hat if this “deal” comes to anything substantive: “Neither side is fully ready for the war, but neither side will budge.”

But, just like that, the Trade War is over…Not even Wall Street believes it’s that simple. The Dow Jones Industrial Average was up as many as 440 points. And the S&P 500 Index was up more than 1%.

But nearly a third of the S&P’s gain was due to (Nasdaq: AMZN). And the Dow’s given back more than 200 points…

It’s an unimpressive rally.

We’ll explore some of the “second-order” issues regarding U.S.-China relations in the December issue of The Stockman Letter, which we’ll publish Friday afternoon, December 7.

Here’s a preview:

The total value of China’s bank balance sheets amounts to more than 600% of gross domestic product (GDP). And that total has doubled in terms of percentage of GDP in the past several years.

That’s not a healthy development.

Indeed, our friends at Condor Capital forecast the ratio of “non-performing loans” to explode in China. And it could translate into credit losses of $2.7 trillion to $3.5 trillion for China’s banks.

That’s for China all by itself; it assumes no “contagion.”

Remember, total losses for the whole system in the aftermath of the Global Financial Crisis were about $1.5 trillion…

This is another side of the Mother of All Yield Shocks…

Memories of Imperial Washington…

In 1981, when I was working for Ronald Reagan in the White House, Senator Howard Baker, the Republican Majority Leader, called the administration’s tax-cut legislation a “riverboat gamble.”

That first Reagan tax cut is a very model of fiscal rectitude compared to the Christmas Eve Tax Cut of 2017, emanating as it does from the modern GOP’s bogus theory that “tax cuts pay for themselves.”

They don’t.

But, again, it’s a matter of timing. And this fiscal debauch happened right around the point when the Federal Reserve decided to get back to “normal” monetary policy.

Now, as far as our central bankers are concerned, it’s “normalization” now, “normalization” tomorrow, “normalization” forever. That’s because the Fed is concerned with the Fed and the Fed’s power.

This combination of a reckless tax cut plus an unprecedented experiment in bond market supply-demand manipulation is sure to lead to higher market interest rates. And that’s what people pay: not the “target federal funds range or rate.”

It’s all going to create volatility – the kinds of short-term fits of buying that generate thousand-point intraday swings. That can be frightening… for “buy and hold” investors.

I have a different approach. And its strategy and tactics are flexible enough for the Mother of All Yield Shocks.

Our “survive and thrive” plan includes specific asset types and allocations by percentage. But it’s built to suit your approach to the market.

The Stockman Letter is about protecting wealth and profiting opportunistically.

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P.S. Interested in a deeper probe into the Deep State? David Stockman’s Contra Corner is the place to go.

Contra Corner is an independent, original, facts-figures-and-charts-based take on the ongoing corruption of American Liberty by Wall Street and Imperial Washington.

And it’s all based on my 40 years working at both ends of the Acela Corridor. Click here to learn more…

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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