The Sentient Investor

By David Stockman  |  November 12, 2019

As has been stated above, it was pointed out long ago by Goltz that the brainless frog, if allowed to rest in water the temperature of which is gradually raised, behaves wholly unlike the normal frog under the same circumstances. The normal frog leaps away, or, if confined, becomes violent in his attempts to escape as soon as the temperature of the water reaches 30° or thereabouts, while in the same vessel the brainless frog sits motionless until death supervenes.

– W.T. Sedgwick, “On Variations of Reflex-Excitability in the Frog, Induced by Changes of Temperature,” published in Studies from the Biological Laboratory of Johns Hopkins University (1888)

Our monetary central planners are pumping fresh liquidity into equity markets, lifting short-term sentiment gauges along with the major indexes.

That the S&P 500 Index made a new all-time intraday high can’t obscure a darkening bigger picture.

Here’s Bloomberg with details on the Red Ponzi at the center of it all:

In a fresh challenge to the ability of global central banks to revive inflation, China’s slowest growth in almost three decades and cheaper energy costs have left manufacturing prices declining since July…

“Inflation is increasingly driven by global factors, and in particular, by waves of disinflation emanating from China,” according to Stephen Jen and Joana Freire at Eurizon SLJ Capital. “This is related to China exporting its overhang of capacity” which has been exposed by weak domestic demand, trade tensions with the U.S., and lack of economic stimulus.

Meanwhile, financial asset values continue to float ever higher, “disconnected,” as Sven Heinrich notes today, “from the actual size of the underlying economy.”

And it’s all flowing to the 1%, who now hold almost as much wealth as the middle- and upper-middle classes combined.

It looks like this is the status quo they’ll try to maintain through 2020 or until the bubble bursts…

Meanwhile, Chris Scott, in his weekly dispatch on the U.S.-China relationship, provides some compelling nuance to the story at the center of the global economy right now.

The Nature of Asymmetric Competition

By Chris Scott

Another week, another series of tweets and presidential utterings about trade.

When you’re a journalist with nothing else to write about, why not explain tiny moves in the stock market with the simplest cause you can find. To recap the latest episode…

  • China walked back from agreeing to a “phase one” deal, unless existing tariffs were rolled back.
  • The Trump administration, apparently, was ready to do this (cue the “trade optimism” headlines…).
  • The Donald denied having agreed to anything of the sort.

If you’re on the edge of your seat waiting to see who’ll “win” the Trade War between Washington and Beijing, you’re missing the real contest.

There are a series of consequential competitions between the great power and the rising one. The bilateral trade relationship just is not one of them.

Sure, we should fight for greater market access in China to sell our goods and services. But far more importantly, America must continue to dominate the high-technology industries of the future.

There is no longer any chance in the short term – maybe even in our lifetimes – that policymakers in Beijing are going to open up their closed internet to U.S. companies. That ship sailed years ago.

The internet, and the “internet of things,” is what commerce will be. And, so, the world is now sliding into two separate spheres. Everything will be connected. Americans won’t abide our things being connected by Chinese equipment and services. China has already banned ours.

Picking Sides

For now, the countries caught in between this rivalry are mostly free to play friend to both sides.

But America’s closest Western European friends, in fact, are outright refusing to choose us over China in one important battle.

Chinese telecommunications equipment maker Huawei is building Europe’s mobile networks. Why, you ask? To put it quite simply, their equipment is not just cheaper than Ericsson’s or Nokia’s gear, it’s better.

That’s what industry executives in Great Britain, France, and Germany say. Industry experts I speak to in Washington concur that it’s not even close. Huawei puts out a better product and will unload a boatload of engineers at your door to service it.

The United States, meanwhile, has no company that manufactures the mobile telecoms equipment needed to build out ultrafast networks. Absent one, there is talk of the U.S. funding the competitors in Scandinavia.

China Can’t Innovate?

What Huawei has succeeded at is not just stealing and copying. It did that first. And then it succeeded at one type of innovation.

Innovation does just mean you’re first. That kind of first-to-the-world innovation may be the most exciting. But it’s not the only kind.

When she was still a viable 2016 Republican presidential candidate, former Hewlett Packard CEO Carly Fiorina perfectly summarized a widely held view:

“I have been doing business in China for decades, and I will tell you that yeah, the Chinese can take a test, but what they can’t do is innovate,” she said. “They are not terribly imaginative. They’re not entrepreneurial, they don’t innovate, that is why they are stealing our intellectual property.”

If that were the end of it, there would be no cause for concern.

But if not being able to innovate is why a country steals intellectual property, then why did the Founding Fathers feel the urgent need to do the same during the First Industrial Revolution.

The Federalists didn’t just prioritize manufacturing, they believed that theft of British IP was a necessity to ensure the success of the fledging American project. It wasn’t just Alexander Hamilton; George Washington was aboard that train, too.

They did steal, for instance by incentivizing immigration of Brits and giving them immunity from prosecution for illegal copyrights. It worked. And after our manufacturing industry stole market share from overseas competitors, they had the capital to invest in improving.

Even our publishing industry was built on counterfeits of Old World greats.

My point is not to minimize our country’s success, but to point out that there are types and stages of innovation.

Just because you aren’t “first” doesn’t mean you can’t eventually be the best. Think Apple and the smartphone.

First-to-the-world innovations aren’t the only ones. America has learned that the hard way in the past and our complacency risks us learning it again now.

Perceive… Reason… Think

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