Who’s Playing Whom?

By David Stockman  |  December 3, 2019

Lord, what fools these mortals be!

– William Shakespeare, A Midsummer Night’s Dream (1595)

Well, you can’t have a “Trade War Rally” without a “Trade War Selloff,” so there’s that. Sometimes, it happens intraday…

As we note in the current “outro” at the bottom of each issue, “This is the most politicized market in history.” And it all starts with the Donald, whose impact on the market has already inspired the creation of one index related to U.S. Treasury yields.

The Federal Reserve is just another of his playthings. There’d be no impeachment without him. And this is his Trade War.

We haven’t even touched on the 2020 election, which promises to resemble no era so much as it will the season of 1860. The consequences this time won’t include civil war; it’ll be more like another revolution…

But, for today, let’s pull back for a broader take from Chris Scott on the U.S.-China situation. It’s important to understand what’s driving these huge market swings. So, let’s get to it…

The Greatest Trick the Devil Ever Played

By Chris Scott

It is now officially a running gag, not a trade negotiation.

I didn’t want to read headlines on Tuesday to check for updates on U.S.-China trade before I sat down to write this because I know there’s no real progress to be made anytime soon.

But I did. And, right on schedule, our nation’s finest purveyors of ad-lib journalism hailed that “stocks (fill in the blank) on trade war (fill in the blank)!”

Just keep in mind that the “phase one” trade deal, if consummated, will, in effect, be Chinese President Xi Jinping successfully getting the Donald’s boot off his neck. The U.S., as Beijing has demanded, will not just need to cancel future tariffs. It will also have to roll back tariffs already in place.

That is, if the would-be savior of our heartland wants to get the biggest buyer of American soybeans to start loading up shipping containers with crops before the voters go to the polls in 2020…

The most boring and drawn-out episode of “Trade Deal or No Trade Deal” aside, today I want to talk a bit about the distressing state of affairs inside China.

Make no mistake, though: Internal pressures will not drive Xi to desperately agree to an “historic” deal with Tariff Man.

When a Chinese official told Reuters last week that “it’s Trump who wants to sign these deals, not us – we can wait,” he wasn’t bluffing. I speak with policy advisors in Beijing on a regular basis and they are not eager to sign anything with Trump.

At the same time, China’s leadership is pretty confident they can string along a distracted U.S. president until after the 2020 election, in hopes of dealing with someone else.

Cracks in the Armor

But anyone, even the elites convening at the headquarters of the Chinese Communist Party – a former imperial garden next to Tiananmen Square – can see the cracks in the awakened dragon’s scaly armor.

When mountains of debt and an aging population collide with slowing economic growth, unrest will follow. Not yet, but eventually…

I want to take you back to 2012, the year Xi Jinping ascended to the top position of leadership, before he proceeded to turn it into his throne.

I had just arrived in the airport in Taipei, Taiwan, on an excursion away from the pollution of the mainland. My favorite thing to do when I arrive in Taiwan is to head to the airport bookstore to find exposés on top Communist Party leaders, along with an endless array of Chinese-language critiques of everything Beijing is doing wrong. It’s another breath of fresh air to go along with the literal blue skies of the picturesque island nation.

I dove into an editorial comparing China to an overloaded bus, a depiction that still rings true:

“China today is like an oversized passenger bus careening through driving Typhoon rains on a rocky road winding along the precipice of the tallest mountain. Ten times the size of a normal bus, the vehicle’s suspension is so overloaded by the 500 passengers on board that the chassis scrapes against the rubble as it veers precariously back and forth above the abyss below. The engine is overheated. The fuel gauge shows less than 20% left in the tank, but the GPS shows the next stop is more than 100 kilometers away…

“When the lone driver notices passengers’ growing anxiety he issues a reminder: ‘navigating the road ahead is far too complex for you to understand; trusting the driver is the only way.’”

Convincing the Public He Didn’t Exist

There is, however, one key difference between the China that Taiwanese columnist Fan Chou described in that passage and the China of today.

Xi Jinping and some diabolically brilliant bureaucratic chiefs in charge of propaganda, censorship, and technology policy have managed to do the impossible. They have tamed the internet and harnessed the power of social media to mold public opinion to their will.

A decade ago, conversations in cafés and beer gardens across bustling metropolises such as Beijing would invariably be filled with expressions of anxiety and anger from the figurative bus passengers.

“China is game over, man,” was a common refrain. “I love my country, but I hate my government,” went another.

But, just as Americans exist in echo-chambers of pro-Trump and anti-Trump memes and hyper-partisan editorials, Chinese now exist almost exclusively in an echo chamber that sounds like the bus driver: “Trusting the driver is the only way.”

The brilliance of it is that now it appears that that message is coming from one’s own friends and social circle, not from the government. The driver has disappeared.

There’s Still Some Gas Left in China’s Tank

As I said two weeks ago, we should be aware of ways in which China might surprise us. And we should be wary of any hint of wishful thinking creeping into our assessment of the situation.

So many of us want the flagrant disrespect for human rights and basic personal freedoms to be punished by economic failure, just as it was last century. That is, after all, the only way to shatter the Chinese people’s faith in their government.

Things may in fact be falling apart for Xi Jinping in his effort to reboot authoritarianism. But in this century’s clash of economic and political systems, America’s dictatorial foe has assembled an array of massively successful tech giants such as Alibaba, Tencent, and Huawei, already proving they can rival their U.S. counterparts.

It took several generations before the final nails were hammered in the coffin of 20th century communism. Don’t expect China’s 21st century version to go out with a whimper in its infancy.

Chinese consumers leapfrogged American shoppers in their adoption of mobile payments and fintech, among other things. Five years ago, living in Shanghai, I had more conveniences at my fingertips with my Chinese-made smartphone and Chinese-developed apps than I did stateside with my iPhone.

Nonetheless, the world’s second-biggest economy is already slowing, as economies do when they mature. And its population is aging.

The bus will eventually run out of gas.

Let’s Get Serious

I’ll say it again: 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.

Please click here to learn more about The Stockman Letter and what comes next…

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