Trade

“Pandemic!” Is the New “Trade War!”

By David Stockman  |  January 28, 2020

Scapegoating worked in practice while it still had religious powers behind it. You loaded the sins of the city on to the goat’s back and drove it out, and the city was cleansed. It worked because everyone knew how to read the ritual, including the gods. Then the gods died, and all of a sudden you had to cleanse the city without divine help. Real actions were demanded instead of symbolism.

– J.M. Coetzee, Disgrace (1999)

Editor’s Note: I hope by now you’ve had an opportunity to take in Michael Coolbaugh’s Delta Profit Summit. Click here to view the archived version. It’s well worth your time. – DAS

Equity indexes are back in the green today, and the coronavirus is already showing itself to be the new Trade War.

That is, Bubblevision needs to blame something when there are more sellers than there are buyers. It’s almost convenient, the timing between “protectionism” and the “unexpected” appearance of this global threat.

Should the latter reignite – though it was never really extinguished – China easily embodies the next scapegoat. (Oh, wouldn’t it be the end of irony if the virus was found to have jumped from goats to humans…)

Those who follow such things – epidemiologists and other public-health professionals around the world – already have enough information to forecast that this is going to be a long-term situation.

 

And, as Chris Scott notes in another fascinating entry in his regular Tuesday dispatches on U.S.-China relations, the appearance of what may already be a global pandemic actually only makes things a little more complex.

Here’s Chris, literally just back from the Middle Kingdom…

Inside the Hot Zone

By Chris Scott

There we were, about an eight-hour high-speed train ride from the central Chinese city of Wuhan, huddled around the television to hear the latest reports.

The real news was coming from a family member who worked for a Chinese social media company checking his smartphone. He could sift through individual accounts that were either censored or otherwise hard to come by.

By now, you’re all familiar with many details of the deadly coronavirus outbreak that originated in Wuhan. But as recently as when I wrote my dispatch last week, there was a significantly lower level of concern.

Suffice to say that, a week before, as my family made the final preparations to head to China, it sounded like so many other inconsequential news stories coming out of the country that so-and-so from such-and-such city had fallen prey to a mysterious illness.

Just the day after my article last Tuesday, the signs were clear enough that we would need to cut our three-week trip short and head home. Several days later, as we celebrated Chinese New Year with my wife’s family – eyes glued to the TV – we began to think that it was a mistake not to have taken the next flight out.

The delayed reaction on our part was thanks in part to a failure of the Communist government to get the word out. It wasn’t until Saturday, Lunar New Year’s Day, that top state newspapers and websites made the virus the top story.

That day, on the streets of my wife’s hometown, you could see in real time how people’s awareness changed. The day before, about 25% of people were wearing face masks. By Saturday morning, the proportion had reached 50%. It was 99% by the afternoon.

Considering the probability of contracting the virus where we were, I wouldn’t have panicked – after all, this was far from the true “hot zone.” That is, if it weren’t for having brought our five-year-old son and two-year-old daughter along with us. We were to be stuck in the city for another 36 hours before braving a flight to Beijing and then one to Washington D.C.

Now, we have to survive self-quarantine at our house in Baltimore, which is about as fun for young kids as being stuck on a Boeing Triple Seven.

Our next stop on the trip was supposed to be Shanghai, and then Beijing. I was looking forward to writing about what I saw and heard in those two cities. Talking on long-distance phone calls with old colleagues and friends just doesn’t cut it. I want to know what people are really thinking about China’s economy and politics.

From what I saw and heard in my wife’s hometown, as I intimated last week, people weren’t feeling anything close to a recession or downturn in the economy, and they were largely satisfied with the government.

Then the virus hit.

It will take time to know just how devastating this ordeal will be, both in terms of the blow to economic activity and trust in local and national government institutions.

As David wrote yesterday, to the extent China’s economic model is destined to fail of its own defects, it won’t take a virus to topple it. By the same token, the virus is likely not going to be the nail in the coffin.

But it is the latest in a string of events that, piece by piece, chip away at the Chinese Communist Party’s façade of legitimacy.

For the citizens of Wuhan who are on lockdown, trapped in a city without adequate healthcare resources like a scene from a Hollywood medical disaster thriller, there is no question that the government – and the system – has failed them.

The “People’s Leader,” President Xi Jinping will say though that changes needed should give Beijing more power, not give the Communist Party less. Local Wuhan leaders are already taking the fall for this, and, when this disaster is brought under control, Xi will take credit.

The question is, how much power can Xi consolidate before the blame for every single crisis is placed squarely on one man?

And then what?

The fact that Xi and his cadres in Beijing will use this event to accelerate an even greater centralization of power – and mark my words, they will – is terrifying.

It was not the local government’s fault that the People’s Daily – and every other state media outlet in Beijing – dedicated the entire front page to worshipping Xi last Wednesday. That was the same day I decided to hightail it home because private Chinese media and international news sources made the virus the top story.

That complete obliviousness to the priorities of the public was made crystal clear during the past few weeks.

A new hospital in Wuhan to deal with the coronavirus is taking shape after just four days’ construction. Source Agence France-Presse, Getty Images

The accomplishments China has made in terms of economic development are hard to even fathom. The new airport in Luzhou replaced a backwater landing strip I flew out of just several years ago; it’s bustling with activity.

This city has built a new downtown in just several years that is most reminiscent to me of Silicon Valley in terms of look and feel. The wide streets, lined for dozens of miles in each direction with gorgeous landscaping, are packed with luxury cars from Germany and Japan.

When I flew into Beijing for the first time a little over a decade ago, the first thing that struck me was that it was a developing country. That was compared to even smaller cities in South Korea, which already seemed then like the developed West in many respects.

Now, places like Luzhou are fast catching up.

But the future of cities like the one I just thoroughly enjoyed my stay in last week is increasingly in the hands of a few people who have proven themselves oblivious. Tragically, that means it’s just a matter of time before the next disaster strikes another city like Wuhan.

And the next one after that.

Make a Plan

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.

Here’s where I usually say, “Well, The Stockman Letter is made for times like these”…

And I can say that because we brought aboard Michael Coolbaugh to update our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

And he’s doing that. He’s also launched a complementary investment newsletter, Delta Profit Trader, that promises “higher frequency” engagement with markets.

Click here to view the “Delta Profit Summit,” where Michael explains his whole approach to investing in this environment.

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 Michael’s 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