Years from now, when the new generation (Y, Z or whatever random alphabet they use for them) go through their history books to see what caused the collapse of the 2009-2019 expansion cycle, it will not be hard to pinpoint one person solely responsible for accelerating the demise of the U.S. hegemony -- President Trump. Ironically, the man on a mission to "Make America Great Again" is actually going to be the one to end its dominance and give ammunition to its arch rival, China, to perhaps lead the new era of global economic dominance.
We all know the expansion of the last decade was fuelled by yet more debt and printing free money (aka quantitative easing), which really did not generate the productivity growth it envisioned. All it did was allow corporations to take the free money, use it to pay down their debt service costs and buyback their shares, inflating asset prices all around the world. This system is built on a very delicate house of cards with all asset classes linked. If one piece were to be rattled aggressively, it risks collapsing the entire structure. Trump knows this and so does the Fed.
President Trump is nothing more than a bully and someone who likes to gamble all his assets and going "all-in" to generate the desired result. One needs to just look at his "empire" and how his ventures have fallen into bankruptcy. Playing poker with the U.S. Treasury and economy is another bet altogether. We have left the world's largest economy in the hands of a "mad man" who is too stubborn and arrogant to think past his own gain, and yet they worry about extremists in other parts of the world.
Trump wants to re-lever the economy into oblivion and inflate asset prices, further lining the pockets of his supporters and himself. He wants the Fed to cut rates down to 0. How to achieve that? Cause enough of a shake down to show weak economic growth that will strong arm the Fed to stop quantitative tightening and embark on printing even more money. Mission accomplished.
As the Fed delivered a 25 bps cut this week and market rejoiced, Trump used this opportune time to introduce 10% tariffs on the remaining $300 billion worth of goods. So much for the theme of "talks are going well." As central banks around the world are devaluing their currencies by cutting rates and easing monetary policy (one wonders why they have Ph.D's when they know nothing else), China is patiently sitting back -- and perhaps smiling.
The PBOC has made it clear it will not be cutting rates. But then again China, with all its control, can support asset prices in its own way. Regardless, as bond yields fall globally, Chinese 10-year yields are still above 3%. It knows all too well that the U.S. does not have enough ammunition to keep cutting rates to stimulate the economy. It knows that 225 bps of rate cuts was not enough to stem the 2007 demise. Once timing is right, they can embark on a modern monetary theory (MMT) path of easing on a scale the world has never seen and support their markets as everyone collapses around them.
Trump imposing tariffs on China will really do no more damage than convince China to pursue a strategy of moving away from the U.S., which it has already started. China imports from the U.S. were never more than 1% of total imports; the U.S. is easily replaceable. Even its crude imports from the U.S. amounted to about 466,000 barrels per day back in May 2018 vs. their 10 million barrels per day consumption -- a small dent. They can easily get their imports from other countries.
Now the U.S. is another matter altogether. Trump's claims that "we do not care if China does not trade with us" will backfire, as the U.S. needs China's market a lot more than China needs the U.S., and is perhaps not that easily replaceable. Now that all goods from China are taxed, U.S. consumers will certainly bear higher prices for basics. How much longer will these U.S. companies shield their customers from higher tariff costs?
Welcome to world of stagflation.
The Red Dragon cannot and will not be coerced into submission. The Fed is easy, on the other hand. For Trump to get what he wants, he will tariff nations and cause an economic shock just to get the Fed to cut rates all the way down to 0. But before that happens, asset prices and markets will need to fall to play catch up. Stay in cash and wait till the dust settles. There will be an opportunity to buy domestic companies with no China exposure at much lower levels. Commodities and commodity-related equities (oil, copper, iron-ore) will all get derated till the dollar stabilizes or growth troughs.
And to think I thought August would be boring, hmmm.