As we have explained in Splitting Pennies - the global markets are not as they seem. As we are now all aware, Trump started a trade war which really is the equivalent of a pissing contest (as it mostly is just talk), however it seems as though Trump's heart is in the right place putting America first but he needs to hire better financial advisers as the Chinese are winning this round of the game. The chart to follow is this, as reported first on Zero Hedge (it seems the mainstream financial media is skipping over this huge glaring super important fact):
What the PBOC (The Chinese Central Bank) has been doing is artificially debasing their currency, thus offsetting any potential tariffs. Currency Wars are nothing new and they didn't invent anything with this move. It's simple really, the Yuan is a controlled currency (unlike others that freely float against other currencies) that means the PBOC can basically decide what it wants the rate to be, USDCNH. So for example if Trump enacts a 20% hike on Chinese imports via tariff or taxes, and the Yuan sinks 20% - for the buyer the product is the same and likely nothing would change. These buyers, like Home Depot for example, Wal Mart, and others - they are very sensitive about small thin margins. An extra 1% would cause them to shop the deal. Practically, there are hundreds of alternatives, but China has built their economy as a wholesale dumping ground where there are absolutely no labor laws, environmental controls, or other standards how their products are made, so that it really is cheap crap.
I'd like to use an example from the real world not connected to this China problem. Recently I visited a Gold Mine which is a tourist attraction in Georgia. They explained there is plenty of gold there - but due to environmental regulations it would cost much more (twice or more) the current Gold price to extract it, whatever the number doesn't matter but let's say it's 5,000 Oz from this mine, if we follow all the rules and regulations. In South Africa, in Russia, and many other places - they have no such rules. So they are poisoning the environment!! Those jerks.. but who can stop them? You don't see environmental protests in Red Square, liberals throwing red meat on Oligarchs as they leave posh hotels.
The point is - considering all these costs - what is the REAL Price of the iPhone? 5,000 ? If made in USA. Here's the problem with Trump's strategy. And this statement is not a solution it is merely intended to elaborate on how complex this issue really is.
The FANGs have built an entire business out of being able to build cheaply without rules. If we stripped away all that advantage, their stocks would look more like utilities. Perhaps that is as it should be. When investors buy Apple (AAPL) they think of technology, they think of innovation - they don't think of exploitation of child labor, forced slave labor, workers who commit suicide the conditions are so bad. They don't consider the environmental cost (which is also ironic considering their liberal leftist base).
In Trump's trade war, we are talking about leveling the playing field. We want to bring those jobs back home - back to Main St.
"Make it on Wall St. - Spend it on Main St." used to be the saying. But now it's more like "Make it on Wall St., spend it in China, Bermuda, anywhere but USA - just get the money out!"
Tax havens, cheap manufacturing bases, and other excuses have bled America dry of capital. QE and the policies of the Fed have made the 1% even more rich - but have done nothing positive, in fact have acted more like a leech - to the real economy. The banks didn't lend post crisis. The rich didn't spend (at least as to help the real economy) and were so greedy that with a few token exceptions they likely made the problems worse. This led to skyrocketing unemployment (now they are calling it 'underemployment'), opioid epidemics, explosion in crime, violence, roads and bridges in major need of repair, deterioration of schools and finally the creation of the mutant fakebook generation that has no skill other than posting to their wall. Yes, all the problems, the bankrupt cities, deterioration of institutions, civic society - can all be laid to blame on decades of economic policies that have made USA rotten from the inside out. Globalists have bought and sold all elements of American life and Trump is trying to reverse that. If successful, which in the best case can take many years, we can hope for the 50s and 60s but with the benefits of technology. Those who either are the 1% AND those who are too stupid to understand this economic analysis which you really don't need a high IQ or an economics degree to understand, represent the anti-Trump movement, and they will do anything to maintain their status quo.
The Elite have led a bad example, not to single anyone out but here's one Mayor that really shouldn't act like this: Bloomberg. Here's a guy who spends his free time in another country golfing and eating steaks. While the news agency that carries his name slowly deteriorates into a liberal political tool (from what was once the only unbiased business and finance media in the world) promoting the agenda of whoever pays the most, Bloomberg is the mayor of New York but spends his spare time in Bermuda. He's a public figure but the point is that most of the Elite are like this. They look at America as a cash cow, certainly it's not a place you want to spend your weekends. Why would you? Been to the Bronx in the summer lately? It's a heat island.
This is non-political economic analysis - the elaboration here is to demonstrate the forces at work here. Trump is trying to take back this unfair advantage which is being exploited by: Foreign Countries, US Corporates (some, not all), the Elite, Banks, et. al. But just like a gambler who has a winning ticket every day at the casino - if you one day tell him that his ticket is no longer a winner - of course he will react negatively, he'll sue your casino he'll do anything in his power to get back his winning ticket! So we can expect a real push back on such policies, the most logical and rational is the Currency devaluation promulgated by the PBOC.
We can't stop environmentally devastating Gold mining in Russia - but we can set economic examples for fair business that's pro-USA. In fact this laptop I'm writing on is made in Delaware (Eluktronics). The BMW you drive may have been made in Spartanburg, South Carolina. This move isn't about China vs. USA or "US vs. THEM" it's about restoring free trade to normalcy. USA is currently giving the rest of the world a free ride (or a considerably cheaper one).
The problem however is in the delivery.
Trump needs stronger economic advisors. Larry Kudlow is well represented in a Clownocracy which Trump has created in his reality show, but has little understanding of macro economics and is in deep need in lessons in Mathematics. They all have USA's interest #1 they aren't enemies they are just misinformed. Trump may be a master negotiator and a top actor in a TV show which makes him a perfect candidate to be President but he is not a Quant nor a Gekko. Where is Paul Volker? Why aren't interest rates above 10%? If Trump wants to SMASH China where it hurts all that needs to be done is raise rates.
As it stands, all of this commotion in Washington is being muted by PBOC manipulation of the USD/Yuan rate. In order to stop this, there is one simple order: Raise rates 5%. There are 2 sides to every coin. As a Global Reserve Currency it's not possible to play in Yen and deflate / debase your way into exporter heaven. For a strong country that wants USA first, aggressive rate hikes are the only way to stay ahead. That's not likely to happen. Of course there is an alternative route - lowering rates to ZIRP again allowing more cheap money to flow into the system (but it hasn't worked in the past and will not likely achieve anything).
This article is not meant to suggest economic policy, simply to elaborate that the Chinese are winning this round by simply devaluing their currency and they can continue to do so the higher the tariffs are raised. So if Trump enacts a 50% tax on Asian imports it will be irrelevant if the Yuan is devalued by another 50%. Capiche?
