Blain’s Morning Porridge, Submitted by Bill Blain

“If you waste time to get people to love you, you’ll end up the most popular dead man in town.”

In the Headlights :

• Saudi Arabia: Global condemnation mounts (must be serious if even the French pull out of The Conference), and secondary effects – see Softbank going flaccid on its second Vision Fund – mount.
• Bond Markets: Market commentary increasingly focused on corporate bond illiquidity across EM, Hi-Yield and Investment Grade. What happens to Bond ETF’s in a liquidity squeeze – a moot point as investors seek to exit.
• The Fed: Trump blames Fed for hiking rates. Fed is going to stay its course, and points out if anything will power down US growth, it will be trade issues.

Meanwhile, back in Westeros UK

I’m frankly surprised how long it takes Game of Thrones author George RR Martin to dream up his plotlines. They say he used the English War of the Roses for the original books. He might look at the current Brexit negotiations for the final chapters:

The tottering British PM struggles to hold together a fraxious coalition of the unwilling against The White Walkers from Brussels, who know all the have to do is drag it out, collapsing her government and its likely replacement by an anti-everything Labour government. Chaos results. House Scotland attacks from the North while London is distracted, (its been our historical speciality), while the mad-men of Northern Ireland do something spectacularly bad. A second referendum plunges what’s left of the UK into de-facto political civil war. The White Walkers from Brussels tightens their grip on their unwilling allies House’s Gaul and Proosia, secure in the knowledge they have removed the threat from the west through internal subterfuge – and declare an economic Jihad against Club Med.

Or something like that. How to play it? (Or does May have a Dragon egg somewhere?)

China vs US  

Meanwhile… let us cast our minds far to the East where the real story is probably China. Lots of stuff in the press about China and debt… and much of it casting doubt on the sustainability of China’s economic miracle – including its ability to continue as the major economic partner across Asia, Africa and the Middle East. 

But first, a diversion… I got taken to task by a US chum yesterday for being pro-Trump in recent comments. Harsh. Whatever I think of him is immaterial. It’s the political process that got him there, the geopolitical forces disturbed by his actions, and the real market effects he creates that matter. Loathe him or loathe him… he’s creating winds that move markets. Markets are about politics.

During the late summer we were treated to an American Aircraft Carrier (the USS Harry S Truman) moored in the Solent at the foot of our garden. A Nimitz class CVA is a great example of power projection. But, historically, the American’s don’t achieve their decisive victories through military muscle. Where they attempt to do so – in Afghanistan, Iraq and Vietnam, for instance, they proved the ineffectiveness of using a multi-billion dollar missile against an AK47, and that motivated guerrillas will win every time.

It’s very interesting to compare and contrast Trump rhetoric. In the last few days he’s pulled back from criticism of Saudi prince/thug MbS. He’s unapologetically told the American people that Saudi is a very important source of big defence contracts creating US jobs – therefore he will deal with them. Saudi is not a real threat. At the same time, he’s saying nothing about US jobs he’s willing to trade-off thru his Economic campaign against China.

Where America wins is in terms of economic muscle. The Japanese knew that before Pearl Harbour 80 years ago, the Russians learnt it in the 80’s. And now the Chinese are being treated to a similar lesson today.

The US can withstand declining energy exports to China far longer than Xi can withstand real growth tumbling from the Party’s mandated 7% to closer to 5.5% (or whatever it really is). The government are combating weakness by letting the currency fall – courting further Trump anger at perfidious currency manipulators.

Analysts are looking at a potential cascade crisis in China: falling growth, declining house prices, rising personality cult of Xi, increasing unrest, demographic crisis, nascent corporate debt crisis, banking weakness, and loss of confidence in stock markets. Some of them conclude it’s a binary game China is bound to lose – and a collapse in China will have catastrophic effects on the global economy.

Today the main headlines are about burgeoning China debt over the past years – how much hidden regional government lending is hidden within the financial system and how much has been squandered. Its also about unreported corporate debt linked to regional government and how overextended banks and domestic lenders are to companies now facing slowdown. As the Chinese economy relies heavily on corporate investment for growth, any slowdown caused by a banking crisis or even retrenchment creates a perception of weakness. As I’ve said before, debt is needed to fuel growth, but when it takes over.. its never a good thing.

A China in crisis plays well for Trump, demonstrating the success of his economic campaigns. Sure, he can afford a few job losses, or, who blinks first? Xi knows China won’t win an economic battle with Trump’s US. What other cards does Xi hold?  Not enough. Yet.