By Christian Takushi MA UZH, Macro Economist. 11 May 2019 – Switzerland (public partial release 12 May 2019).
(we are also currently writing a report on “Central Banks under Siege” and the “Battle for Latin America – look out for it. Our assessment clearly deviates from consensus at the moment)
The USA has begun to impose higher tariffs on China. What few have noticed is that it is planning to do so on European cars as well this month. Most observers had said it is unlikely this dispute could really get this far since a Trade War would produce only “losers”. This prevalent consensus view in academia, banking & media is flawed.
Tougher stance on trade makes sense for America .. now
Why is that? Not only are China and the EU much more dependent on Trade than America, both China and the European Union are in a very vulnerable position. Europe is a stagnant over-regulated block, whose main growth engine is “exports” and availability of cheap labor, .. while China is propping up her economy with ever more debt. The EU was able to support companies’ margins by taking ever cheaper labor force into the Schengen Area – This was the main purpose of the aggressive territorial expansion of the EU into the East. But that has reached its limits with the serious erosion of political stability in the EU and Russia‘s reaction to her encirclement. In China the outstanding non-performing loans (along under-utilisied factories and ghost towns) have reached system-threatening levels at a time when Beijing is also tightening its grip on power and the surveillance of its citizens. The timing of America’s pushback is almost brilliant and couldn’t be worse for Beijing. But that is the short to medium term view.
We have long held that these trade frictions are coming and that – to some extent – it makes sense for the USA to reassert its super power status and contain the trade deficit through them. Additionally, Washington is laying the ground for an election year.
With very limited real wage growth in the USA, companies won’t be able to pass on all higher import prices unto consumers. Washington is thus curbing consumers’ appetite for foreign goods – part of the strategic effort to rebuild the manufacturing base. After years of growing margins & profits thanks to China outsourcing, many firms will have to cede part of their massive economic rent.
Thanks to China and Mexico the economic rent shifted dramatically over the past two-three decades from workers & consumers to corporations. Investors are not pricing in this paradigm shift.
America’s short term – China’s long term
US, Chinese and European corporate profits are all likely to suffer under the trade tensions. This connects with one of the main conclusions from our research in recent years: the restructuring of supply chains is overdue. Companies that think long term will benefit from this. The highly globalised supply chain – which has been responsible for significant damage to the oceans – will see one challenge after the other. Unsustainably low transport and travel costs will need to include all “costs” in the future. What trade disputes will test, the next Middle East conflict (possibly a war) will simply overwhelm. Let me be clear: The Sea-Lanes connecting China and Europe will shut down soon or later.
The lack of strategic foresight of political and business leaders will be exposed. Most corporations joined the drive along the marginal cost curve, assuming the fragile geopolitical paradigm of the post Cold-War period was permanent.
Still, I believe China is likely to overcome the upcoming economic crisis. Long term, China’s state-controlled economy is likely to outrun Western nations, whose democracies and market economies are already fading away. The two pillars of Western civilisation, freedom of speech and competition are disappearing fast. Capitalistic competition has been seriously eroded by Western oligopolies and monopolies. The West has simply waken up too late. Although the USA is currently fighting back at China, China has long outsmarted the West. The West shifted its global production base to China, practically without conditions – i.e. without Beijing having to introduce democracy and giving up its tight control of the economy. Sadly, Western companies for the most part simply accumulated the gigantic profits, and failed to pay taxes and to invest those windfall profits in the labor force. That opportunity has come and gone. Western infrastructures are outdated and the stable middle classes – the basis for Western political stability – have disappeared.
Western leaders were confident that with growing trade and rising living standards, China would become a more open & democratic society. The opposite has happened and I don’t blame China for being smart and thinking long term. China is simply advancing her national interests thanks to Western profit shortsightedness.
This is the current state of our analysis – We cannot rule out that an exogenous shock or systemic failure could cripple both China and Europe during this vulnerable period, extending America’s supremacy way into the future.
The EU and China defied America .. prematurely
While many are tempted to put all blame for Trade Tensions on the current US administration, truth is the European and Chinese leaders drove their respective economies into this malaise. After the Great Financial Crisis (GFC), political and business leaders in both Europe and China believed the USA was down and out. Against the advice of many Chinese thought leaders, President Xi Jinping unleashed an unprecedented “power grab” at home and openly declared China’s supremacy aspirations. Berlin, Paris & Brussels quickly embraced China and US rivals such as Iran. But why should the USA continue to unconditionally protect and prosper Western Europe?
Unlike Europe, where very few thought leaders dared to voice concerns a decade ago, many thought leaders in China expressed concerns about the the new tough course at home and abroad by Beijing.
As soon as the USA recovered from the GFC, it moved to reassert her global super power status. We have said this years ago, long before Mr. Trump even entered politics. It is too easy to blame it all on President Trump. But EU and Chinese leaders have to look at their own lack of strategic foresight and their miscalculations. There is indeed barely any trace of self-responsibility or ownership among EU leaders for their flawed strategic decisions. Elections won’t bring any clarity as meanwhile a majority of European voters rely on the state for their news, jobs, rents and the regulations that support their industries. While Europe, America and China are all in trouble, America has the advantage of having several competing centers of power, while China has the advantage of near total control. Washington’s never ending drama is many ways a blessing in disguise.
America strikes back
America is effectively using all tools and means at her disposal as geopolitical weapons to reassert order and supremacy on the global stage. And even some Democrats are supporting this. This week’s toughening stance by President Trump was driven by Democrats in Congress, not by the White House.
The USA is in fact using her monetary, trade, economic, defence, currency and other policies as geopolitical tools to protect her national interests again. And no nation on earth has as many policy tools in its arsenal as Washington.
European capitals and Beijing are experiencing a bitter reckoning: The USA is not down and out.
The European Union is particularly disappointed and bitter about the fact that China has not been able to stand up to the USA and has even entered secret negotiations to protect her own strategic interests. Brussels realises now, that Beijing is looking after her own survival and own national interests first. Not after European interests. Making matters really worse: EU leaders went on an emotional and almost unfair bashing of China earlier this year. EU leaders blamed China, their once staunch ally, of wanting to take over Europe. Did Beijing change behaviour in 2019 or did EU leaders see what they refused or failed to see during 10 years or else? EU leaders should have done their homework, I think Americans can forgive & forget if the business deal is right, but China won’t forget. North East Asians have historical reasons to be cautious in dealing with Europe.
Europe has cornered itself in a situation where it has lost the unconditional trust of America and that of China as well. I sincerely believe, that EU leaders have not served the best interests of EU citizens. Behind all the smiles and hand-shaking on the stage, Europe has never been so vulnerable and isolated since WW2. I have said this before. European leaders need urgently sound and most of all independent strategic advice.
Europe is next ..
In less than two weeks the United States could be raising tariffs on European cars. Does it make sense for America? Probably yes. Nearly half of the gigantic US deficit is from car imports – The other half is China-related.
This gigantic deficit has many economists and political leaders in Congress very alarmed. Thus, unable to change the consumption habits of American consumers quickly, the only effective measure to reduce the deficit without shocking the monetary system (and the USD value) is to curb it with tariffs. At the same time, the USA is using the high vulnerability of China and Europe at a time when the USA economy is relatively strong. America will be hurt by those tariffs, but America can survive a trade war much better than China or Europe. America’s timing to strike back at a defiant Beijing and Brussels makes perfect sense from Washington’s perspective.
What should concern investors is that this is happening at a time, when the car industry in Germany is under siege. Most German parties have joined a popular wave of hostility against the car industry. Over the coming 12 months the resilience of the European Union and the European economy are likely to be tested. The formidable German export industry is the backbone of the German economy. Should Germany go into crisis, the EU could implode quickly. The exit of Britain will leave anyway a massive “vacuum” in EU finances. A weakness of German car exporters is something Europe cannot afford.
From a strategic perspective, Europe should seek a reset with the United States and to some extent also with China. Since the regulatory drive is unlikely to be rolled back, a vulnerable Europe cannot afford to defy the USA nor China. On a military level, a European Union without an army cannot even afford to defy Russia. Europe needs time to get back in shape and into a position of relative strength.
The reckoning: Washington is not down and out, actually Washington is on the driver seat.
Wrong-footed investors, where to be short and long?
Few investors heeded the many warnings and I see the real possibility of them heading for the exit on fully-priced risk assets simultaneously. They may end up overreacting too. As is often the case most investment firms only deal with geopolitics/politics after the events and tend to lose money – prey to financial media coverage.
The convergence of multiple geopolitical-political issues is likely to weigh on both developed and emerging markets over the next 17 months. But although there are many victims, there are also some beneficiaries. Those that have been heeding our warnings should not miss to cover their shorts proactively as the next 17 months will not be a straight downward correction, but rather a roller-coaster.
Main asset classes that could see demand are US treasuries and the USD, followed by Gold and the Japanese Yen. The Swiss Franc is also likely to benefit short term, but longer term this currency is losing its Safe Haven potential since the Swiss economy is being absorbed into the EU. Swiss foreign policy is already limited to what the EU permits Bern to say or do. Thus, once neutral Switzerland is equally exposed to the Middle East conflict as the EU after the latter took sides in the Shia-Sunni conflict.
The following markets with high inflation and high levels of foreign debt will be very vulnerable: Turkey, Br ..
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By Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist. 11 May 2019 – Switzerland (public partial release 12 May 2019).
Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
Our broad approach to geopolitical research is distinct & independent
(a) All nations & groups advance their geostrategic interests with all the means at their disposal
(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers
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(d) Independent time series data aggregation & propriety risk models
(e) We only issue a report when our analysis deviates from Consensus