Economy

The Great Disconnect

By David Stockman  |  November 5, 2019

The promise of easy money forever and eternal Trade War optimism continue to lift markets so far this week, despite the fact that incoming data point harder and sharper in the direction of recession.

Indeed, the consensus forecast was for factory orders to continue to decline in September. But the actual 0.6% month-over-month drop was more than expected. That put the year-over-year slide at 3.5%, the worst reading since July 2016.

Meanwhile, the Bureau of Labor Statistics index of aggregate labor hours for September also showed a year-over-year decline.

Ironically, the upward bulge in manufacturing labor hours during late 2017 and 2018 reflected the fact the Xi Jinping cranked up China’s credit machine to celebrate his coronation as Emperor for Life at the 19th Party Congress in October 2017.

A few months after that, the Tweeter-in-Chief and his GOP enablers enacted a $1.8 trillion draw on Uncle Sam’s credit card to reward those that have so faithfully filled their campaign coffers.

Of course, these policy-induced surges have now vanished completely.

And, as Chris Scott reminds us in a resonant entry in his Tuesday series, the late 20th century, early 21st century U.S.-China symbiosis is going the same way…

China’s Rulers Lead the World into Chaos

By Chris Scott

It was raining on that cold February night as I rode a taxi from downtown Shanghai across the mouth of the Yangtze River.

I was escaping a forsaken city, local Chinese having returned to their hometowns for Lunar New Year celebrations, while foreigners used the break to travel to exotic locales in Southeast Asia.

I’d chosen to stay in the deserted financial hub and spend the holiday with a family that ran a small restaurant on the corner near my apartment. For the year and a half that I helped American businesses rent office space in Shanghai, I moonlit as a prep cook for chef Wang as a hobby.

But the endless rounds of Chinese whiskey and Mahjong – obligatory exercises during the seven-day Chinese New Year marathon – got to be too much by day three. After the ninth shot of the fermented sorghum poison, a clear liquid that somehow smells like French cheese yet tastes like West Virginia moonshine, I barged out of the door into the pouring rain.

I was vaguely aware of a resort island known as a pleasant day trip spot for upper-middle-class locals and also as where taxi drivers hang their hats… Shanghai’s Long Island, if you will. The perfect place for a bored chauffer to send me.

It Didn’t Have to Be an Orwellian Nightmare

I was soaked and chilled to the bone when I found a little hotel on the main commercial strip of the beach town to check into for the night. Sitting down on the bed I opened the bedside table drawer, expecting instinctively to find a copy of the bible.

In place of the good book, the proprietors of the hotel provided what I can only imagine must represent a bible of sorts to them. There were two copies of George Orwell’s Nineteen Eighty-Four, one in English and one in Chinese.

This was the kind of surprise I had up until that point become accustomed to seeing in the country. People unfamiliar with the China of the late 2000s warned me before I arrived not to debate politics for fear I would be targeted by Communist authorities.

By the time I could read enough Chinese to ask a newsstand owner to recommend a paper, she immediately chose the one with a lead front-page story about the most violent atrocities committed during the Cultural Revolution.

The explicit criticism of Mao Zedong and the Communist Party didn’t come until the last paragraph on page A12, but, nonetheless, the story gave me hope about the direction China was headed.

Alas, that was way back in 2009, the year after the Beijing Summer Olympics catapulted this developing country onto the world stage.

Just a few years later, following the ascent to power of Chairman Xi Jinping, as I sat like a wet dog looking out the window of the hotel at the dull glow of the fluorescent lights shrouded by fog and driving rain, everything had changed.

As it turns out, the warning given to guests of the hotel in the form of Orwell’s nightmarish fantasy was lost on China’s leaders.

There Is No Turning Back

The great tragedy of the Chinese Communist Party’s decision to become the closest facsimile of George Orwell’s dystopia the world has ever seen – thanks to advances in artificial intelligence and supportive tech companies – is not just that it will fail China. It will also help lead the world into chaos.

There is no way for open and free societies to have healthy, constructive, and fair relationships with a closed authoritarian one.

In order to maintain control, China cannot allow foreign technology companies to operate freely in its home market. Likewise, because of the threat to our privacy and freedom of speech, we will reject China’s technology companies. These technology companies represent the goods and services of the future.

This dilemma cannot be resolved. No matter how many tariffs we impose, it can’t change the fact that freedom lost in China.

We can already see the chaos in Hong Kong, but the trend line is only going in one direction.

“The blood-dimmed tide is loosed, and everywhere the ceremony of innocence is drowned,” William Butler Yeats lamented in his most famous poem, two decades before World War II.

Like the collapse of the Ottoman Empire before Europe descended into chaos last century, American hegemony is waning. Nationalism is rising, and this is true in China more so than anywhere else.

Beijing’s claims to territory occupied by other governments (Taiwan, the South China Sea, the border with India) are rooted in an intense thirst to avenge the century of humiliation that saw its power and prestige crushed by the West and Japan.

Trade Deal Purgatory

All of this is why the trade talks between the U.S. and China are just a sideshow. There is no ultimate resolution, only perhaps a chance for China to bide its time.

Like Bill Murray’s pitiful character in the early 1990s classic “Groundhog Day,” we relive the same headlines about a trade deal day after day.

As I have repeatedly explained here, the “phase one” agreement on the table (but not finalized), is now all but confirmed to be everything officials in Beijing had hoped for, taking us back to square one.

“U.S. Considers Rolling Back Tariffs as Part of Deal” and “Wilbur Ross Says Licenses for U.S. to Sell to Huawei Coming Soon,” are the latest stories to scroll across our screens.

The Injured Dragon Recoups Its Strength

If the deal goes through, it means that our Dear Leader, hailing now it seems from Florida and not New York, has kowtowed submissively to Beijing in exchange for purchases of American soybeans ahead of the 2020 election.

I agree wholeheartedly with David that the Donald’s “policy” of indiscriminate, unilateral tariff buckshot is not the most effective way to challenge the Communist regime ruling over the Middle Kingdom.

But we are now without a grand strategy to enlist (comparatively) free market-oriented democracies around the globe to ally with us in a campaign against China’s increasingly Stalinist system.

Absent such a plan, backing down in this fashion will embolden Beijing’s autocrats in a way they could have only dreamed of before a sea of MAGA hats swept across our heartland.

More Good Reading…

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…

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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