When historians look back, they may identify this time period as something akin to the “Roarin’ 20’s”, with aspects of the 60’s mixed in. The underlying theme that doesn’t escape me is that nothing is real anymore. We have fake markets propped up the Fed, a fake impeachment that resembles a kangaroo court, and a fake trade deal with China that may or may not have been agreed upon. This is only in the past month. Is this what Orwell was describing? It sure seems like it.
Let’s start with “markets”. You recall that I called for hedging a little over a month ago. I stand by this as I rolled my contracts last night, and my moves are calculated in months and years, not in daily or weekly gyrations. Several weeks ago, the head analyst at Credit Suisse put out a research report describing the likelihood of an extreme liquidity crunch into the end of the year, or the “turn” as they call it. The Fed’s pre-emptive response was $500 billion in additional liquidity to be provided between Dec. 13th and Jan. 14th!! As a result, the repo crisis has subsided and markets are making new highs every day into year-end. Therefore if you are looking for an approximate trend turn date, one might look at mid-January when these “temporary” additional liquidity measures end.
Impeachment? This charade has been the epitome of a banana republic. Whether you like or dislike Trump, what is occurring now will have profound negative implications on our country for years to come. Why? Aside from that the phrase “abuse of power” is a bit vague, how do you justify an impeachment based on hearsay, opinions, and what you interpret is going on in someone’s head? It’s almost like pre-crime in the Minority Report. Even worse is they are impeaching this guy for asking to investigate corruption that occurred in the previous administration and involving the 2016 election. You can’t make this stuff up. Based on this precedent, you will see presidents continually get impeached if the opposing party gets the house, simply because they don’t like the person. The obstruction charge is even more laughable. How do you even remotely have separation of powers when an executive branch can not exert executive privilege? Therefore it is perfectly reasonable for the administration to ask the Supreme Court for relief. It is not the House that determines what is an obstruction between the executive and legislative branch. To put the cherry on top of all of this, Speaker Pelosi has delayed sending the articles to the senate until she is satisfied the senate trial will be a “fair” process. LOL. Banana Republic politics at its best.
The China trade deal. Where do I start with this one? To recap, basically here is what happened after months of negotiations and rumors:
- The United States will be maintaining 25 percent tariffs on approximately $250 billion of Chinese imports, along with 7.5 percent tariffs on approximately $120 billion of Chinese imports.”
- no new tariffs will be imposed on Dec 15
- China agrees to buy more Agri products
- Structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange”
- Phase II Negotiations will begin immediately
All is well? Not really. First, according to US trade representative Lighthizer, China has agreed to purchase USD 40 billion in Agricultural goods in the first year (with “best efforts” to increase that to USD 50 billion the year after), that there will be additional negotiations and the deal is expected to be signed in early January (at a ministerial-level – not Xi and Trump). Lighthizer confirmed that China’s expectation is that there will be further phases and further reductions in tariffs, and he confirmed that the agreement will increase US Trade to China by USD 200bln over 2 years. The only problem is that China would have to quadruple its Ag imports from current levels and double the previous high of approximately $25 billion. To give further context, the entire US Soybean crop is about $36 Billion! So basically the math doesn’t add up. Rumors are that China may attempt to meet these obligations by counting Hong Kong trade and re-starting ethanol purchases. Accounting gimmickry? You be the judge.
What is even more troubling is that details of the deal, which include the structural changes to be made by China, will never be made public. Therefore how does one know what we are enforcing and against what metric?
The way I see this is that Trump basically folded in order to avert a trade war escalation that would likely crash equity “markets.” At best it is a de-escalation, or truce if you will, with the can kicked into the future based on illusory promises of tariff rollbacks on the US side and increased Ag purchases and structural reform on the China side.
With that, Merry Christmas everyone!