With the trade war ramping up, according to GaveKal, the US has a nuclear option if China starts dumping US Treasuries.
“Ahead now, I think you’ll see the big nations shrink back into their own corners of the world. I’m not saying we’ll see no international trade, but it will be nothing like the conveyer-belt from China to Wal-Mart that we’ve known the last few decades. And the prospects for conflict are very, very high.” — James Howard Kunstler, American author, social critic, public speaker, and blogger
The US Has A Nuclear Option
June 25 (King World News) – This is a portion of today’s note from Jeffrey Saut at Raymond James: It was back in November 2010 when James Howard Kunstler first wrote the aforementioned quote. We recalled that quote while spending last week in Nashville seeing institutional accounts and speaking at events for our financial advisors and their clients where the question du jour was, “What’s going on with the potential trade war?” In fact, one particularly clever client said, “Who cares about the price of tea in China!” Well, with what’s going on, everyone should care about what’s going on with China and the escalating rhetoric between the U.S. and China…
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Speaking to the current spat, our friends at the brainy GaveKal organization penned a terrific white paper last week explaining things, which was titled “The Trouble With Trade Retaliation,” and written by Tom Holland:
So if China can’t impose countervailing tariffs, won’t devalue, and can’t dump its holdings of US debt, Beijing will have to look for another means of retaliation. The most obvious would be to target the businesses of large US companies operating in China.
So why can’t China impose “countervailing tariffs?” Well, it’s actually quite simple. If President Trump slaps another $200 billion in tariffs on China, with the threat of another $200 billion, that would bring the total to some $250 billion, consequently the math just doesn’t compute. Consider this, last year the U.S. imported roughly $500 billion of goods from China, yet China only bought $130 billion worth of U.S. goods. Given this mismatch, China can’t really retaliate in kind because it just doesn’t buy enough goods from the U.S.
As we surmised last week in one of our missives, “We doubt that China will devalue its currency.” Indeed, if China did so, it would cause massive outflows of capital from China’s financial system and likely impinge the renminbi’s credibility of one day becoming the world’s reserve currency, something Beijing has aspired to for a very long time.
Selling U.S. debt also should not work given the numbers. It is believed that China has ~$1.2 trillion of U.S. debt instruments. If China were to sell all of that at one time, it would surely raise rates in this country, but such a move is easier said than done. However, if they did, the buyer of last resort would be the Federal Reserve, who could obviously soak up the selling. Moreover, as the good folks at GaveKal point out:
In the event, however, it is likely that Trump would invoke the 1977 International Emergency Economic Powers Act, which gives the US president all the legal authority he would need to freeze Chinese-owned treasury securities held by US custodians.
As for “targeting the businesses of large U.S. companies operating in China,” that appears to be the course China would attempt to take if provoked. Verily, in last week’s Global Times there was the mention of countermeasures against U.S. large cap companies that populate the D-J Industrial Average. Worth mentioning is that China has done this before by boycotting Japanese goods in 2012. Hereto, however, such actions could create even more problems for China. Again, as the good folks at GaveKal conclude:
In short, China has few attractive options. Retaliatory measures against US companies might damage their targets, but they will also destroy jobs, degrade competition and reduce productivity at home. That won’t stop Beijing pursing retaliation—it has done so before against Japanese and Korean companies. But the effectiveness of such retaliation will be limited, and the costs high.
As we wrote in last Friday’s Morning Tack, “Our D.C. contacts remain convinced China and the U.S. will work the Trade Tiff out over the coming months.”
KWN has just released the remarkable audio interview with London whistleblower and metals trader Andrew Maguire and you can listen to it immediately by CLICKING HERE.
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The KWN audio interview with Dr. Stephen Leeb discussing China’s 20,000 tonnes of gold and their plans for a gold monetary order has now been released and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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