May Newsletter

Chaos is currency. Tariffs are just one strategy. Think tanks oppose think tanks in a fight for dominant world hegemony. The democratic industrial nations are experiencing a growing existential threat from Chinese mercantilism.  A trade deal with China was never meant to be anything other than an armistice between two very different economic business models- now butting heads. The Thucydides Trap is false as the United States holds all the cards. China’s 5G-mercantile-surveillance-state strategy cannot succeed within the democratic industrial nations.      

Wow. That’s a mouthful; 7 pages. My comments this month are as different as they are important. I rarely integrate the ideas of mutual agreement by the Republican & Democratic Parties, President Richard Nixon, Mao Zedong, President Trump, Steve Bannon, Thucydides, Hegemony, the Chinese surveillance state and end with San Francisco as the solution set. Enjoy     

According to the latest numbers, U.S. citizens bought some $539.5 billion worth of goods from China last year or approximately $1,656 per U.S. citizen. By comparison, the Chinese population of 1.4 billion people purchased only $120.3 billion worth of our goods or roughly $7.14 per citizen per month.

Given the long history of developing vast sums of new inventions in the United States since the 1904 Saint Louis World’s Fair, inclusive of those items displayed at that event: the wireless telephone, the telautograph the precursor to early fax machine, the X-ray machine, the infant incubator, the airplane, and the model T, not to mention American inventions in the 21st century: 3-D printing, gene editing, electric cars, retinal implants, smart phones, online streaming, and touch screen glass-one would think China would be interested in buying more than soybeans from the U.S. So clearly the latest trade talks with China have more to do with putting a stop to intellectual property theft than the balance of trade.   

For years China has maintained enormous tariffs on U.S. made products. In the meantime the communist party of China has developed a business model that forces the transfer of intellectual property for companies seeking to do business with the massive Chinese population. When this doesn’t bear fruit, the internet of things has opened the world up to hacking trade secrets on a military industrial establishment level. This theft of intellectual property ala the State-Capital-System of China has put the democratic industry nations in a very unfavorable trading level. There are several singular words associated with this transfer of wealth. It’s called theft, cheating, unfair, merciless or merciful depending on your view of globalism-but it exposes Japan, Europe, Mexico, the United States and our trading partners to an existential threat-making it impossible for the U.S. to do business as usual with China. Those people advising the President of the United States believe how the U.S. responds now- will shape the world’s economies for the next half century.  

But before considering the next half century let’s consider how we got here. Back in 1971 after Secretary of State Henry Kissinger secretly met with Chairman Mao Zedong and the Chinese, President Richard Nixon was invited by the Chinese government to join in a friendly and diplomatic game of ping pong. Both nations recognized the importance of reducing tensions and of course both wanted something. Nixon thought it advantageous to develop a new trading partner. The corporatists couldn’t wait. The idea of a billion Chinese buying two Tylenol and a Band-Aid was more than Wall Street could imagine. The Chinese, ever mindful of a century of humiliation, recognized the opportunity to reset their smallish and backward economy after a cultural revolution that had left the nation’s intellectual base beaten, shamed, killed or in hiding. Mao Zedong’s feared and distrusted the Soviets. This too motivated China’s leadership toward normalization with the United States.

After Mao’s death, official Chinese sources put the number of people killed in Cultural Revolution or the so called Great Leap Forward at 16.5 million people. The year President Richard Nixon met with Mao Zedong the Chinese gross domestic product stood at just $99 billion. It now stands at $1.2 trillion or a growth of 12,233 percent! During the same time the U.S. economy has grown on 16 fold.

While it is true the Chinese economy started from a much lower base in 1971, the Chinese government’s policy to facilitate cyberattacks, intellectual property theft, forced technology transfers, and IP theft has facilitated China’s meteoric rise in GDP; producing over three and one-half million millionaires and 300 billionaires during a period in which U.S. wages have remained flat. This may be the logical backdrop that turned millions of Midwest farmers to vote for the current U.S. President in 2016. According to the Pew Research Center, while American paychecks are bigger than 40 years ago, the purchasing power, after tax and inflation, has remained approximately the same.  

Most recently, even according to the South China Morning Post, Chinese courts handled a 40% rise in intellectual property cases in 2018; a key area of tension in China’s relations with U. S. businesses.  

So returning to the present, in 2019 both the Republican and Democratic political parties in the United States agree ( what?) that we can either allow the Chinese to continue taking advantage of us, or we can stand up for ourselves.  Nevertheless, both the Democrats and the Chinese both want this President gone, making any progress on a cohesive strategy to fight this trade war less likely to occur. What’s a President to do?

From China, the retaliation of announced additional tariffs from the United States are already underway. Both countries will see these effects of tariffs as a bargaining tool before Xi and Trump meet in late June.

As of this writing, to review: On Wednesday, May 9th President Trump wrote, “They broke the deal”. Thereafter the President reported that China’s Premier Xi had written the President a “beautiful letter”.  Nevertheless the stock market, as represented by the Dow Jones Industrial Average dropped 449 points before recovering the same day. In addition, the NASDAQ dropped 147 points before recovering. It was reported that fear of a trade war with China caused technology stocks to be a drag as the market closed down some 6% for the week.   The real reason for the weekly decline may be that on Monday the sixth of May, Laurie Calvasina, Head of US Equity Strategy at RBC Capital Markets stated that confidence in stocks were about as high as they get prior to a sell off.  Ring the bell. The market sold off and has continued to correct as news of retaliation by the Chinese hit the news wires.

In retaliation the Chinese announced new tariffs on frozen, dried, smoked and salted beef, honey, frozen spinach, peas, beans & lentils, rice, corn, wheat flour, processed oats, spices, olive oil, peanut oil, soybean oil, coconut oil, sesame oil, soda and bottled water, alcoholic beverages, building materials, furniture, hats, watches and clocks, musical instruments, motorboats, canoes, railway equipment, hair dryers space heaters, TV broadcast cameras, audio equipment, natural resources such as chemicals, diamonds, rubies, zinc, metal ores, titanium, natural liquid gas, fertilizers, chlorine, iodine, sulfuric acid, dyes, tools, footwear, umbrellas, walking sticks, and lighting fixtures. This is a partial list. 

So at present China’s strategy is to push back on President Trump’s threats to raise additional tariffs on Chinese imports by fanning nationalism and fomenting ideas of additional retaliation. According to Marketscope Advisor, in regard to those who see a prolonged trade war, “We disagree and think a dragged-out trading discord would benefit neither side, since it would have negative implications on both global economic growth and President Trump’s re-election prospects. Indeed, we see the U.S. economy avoiding recession, allowing equity prices to regain their upward trajectory once this retrenchment has run its course.”  In fact, however, the stock market has not crashed. No recession is in sight. Free cash flows are growing and higher than total corporate payouts. Total earnings for the S&P 500 are expected to come in at some $168 this year; making an S&P 500 yearend value of 3,000 logical.

Chief Equity Strategist for CFRA Research, Sam Stovall writes, “Yet since we see a trade accord being reached in the not-too-distant future, we don’t expect the market to endure more than a short-lived spate of indigestion.

Meanwhile, the President provided hints that a multi-pronged strategy to stop China’s state-run-mercantilist-economic-model existed, saying on Tuesday, May 14, 2019, “We will know in the next three to four weeks.” Such a comment suggests several alternative strategies exist. Such a strategy may keep some tariffs in place while announcing a longer-term plan to provide tax incentives to U.S. corporations to move their manufacturing facilities out of China over a course of years. However, on Thursday, May 16 the White House announced that a ban on Chinese giant Huawei, a Chinese-state-owned IT giant that plans to use 5G technology to further expand and entrench the Chinese-surveillance-state worldwide.    Giving credence to the push back, San Francisco became the first major city in the United States to ban government agencies from using facial recognition to police its citizens.

 Best Regards,

Vaughn Woods, CFP, MBA

For most U.S. workers, real wages have barely budged in decades, August 7, 2018 Pew Research Center, by Drew Desilver

From tequila to TV Cameras…

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