Below, we look at this weekend’s G20 Summit in Argentina, with particular attention given to the so-called “China Trade Deal” struck between Presidents Trump and Xi.
The G20 Summit in Argentina
The great leaders of the world met over the weekend in Argentina at the G20 summit to take photos, eat steak and stare at the Saudi Prince, who in addition to potentially murdering US journalists, has a charming smile.
The German Chancellor arrived a bit late; her plane wouldn’t start. As for the French, there were as many cars being set on fire in Paris Saturday as there were sirloins grilling in Buenos Aires for President Macron.
But then again, politicians are good at smiling and dining in nice buildings while their economies are burning slowly to the ground.
I adore Argentina. The people are passionate, the horses beautiful and the landscape is wild. It’s economy, however, is slowly burning as well… The weather is hot this time of the year—it’s almost summer. But like so many debt-soaked lands, its facing an inflationary winter.
But nowhere is one likely to find a better steak dinner. For any who have enjoyed a cold bear and steak at an asado argentino, be it in Cordoba or B.A., the memory will not soon be forgotten.
Buying Time and Steak—Solving Nothing
But as for the “Trade Deal” struck this weekend between Trump and China, I can’t say that it’s worth remembering.
In the nation’s capital, Presidents Trump and Xi enjoyed sirloin steak, a vegetable salad with a basil mayonnaise sauce, and caramel rolled pancakes.
But other than satisfy their appetites, not much other than buying time was accomplished. Of course, this will not likely stop the markets from rallying this morning on the “good news.”
After all, the US stock market, which is little more than a craps table run by robo machines (rather than humans), loves a tailwind, even if there’s no wind at its tail.
Headlines are often all it takes to create a temporary bid and more market dice-rolling.
Like nearly everything about today’s markets and news—from GDP figures, “soaring earnings,” record high employment and targeted inflation, what came from this historic steak dinner in Argentina between Xi and Trump is little more that pumped-up headlines, political face-saving and reality-can-kicking at its finest.
As I recently wrote, the philosophical cowardice of our fiscal anti-heroes would almost be fascinating, if it was not otherwise so tragic.
The current range and tenor of myopic self-interest at the expense of national responsibility and financial candor is becoming increasingly troublesome.
That is, our great public media of bubble-heads and market cheerleaders presents us with yet more re-assuring front pages, as if this alone is enough to hide the perfect debt storm gathering right above us.
Stated otherwise, as our Titanic-sized debt crisis steams en course for its inevitable rendezvous with iceberg-cold reality, our national common sense is slipping beneath the waves as facts are replaced with photo opps.
The China Deal?
But for those brave few who prefer substance over form, let us roll up our sleeves and consider the almost tragic comedy of the recent G-20 Summit and the so-called “China deal” that emerged therefrom…
First, the only “achievement” Saturday in Buenos Aires was a pause-button, not a break-through.
That is, the current “cold war” of $250 billion of US tariffs against the $110 billion of Chinese tariffs remains in full effect.
All Trump agreed to in Argentina was to temporarily back off his chest-puffing threat of a much hotter war—that is, 25% tariffs on all $526 billion of Chinese imports.
This tactical pause, it is hoped, will help soften the mood for further, and some believe, pointless, negotiations going forward.
But why pointless?
Perhaps it’s because China, a $40 trillion pyramid-marketing-scheme of unsustainable debt, is led by what is effectively a dictator for life in President Xi, and is an even bigger house of cards than the US economy.
But a tyrant such as Xi, like most tyrants, is simple to predict. That is, he will not surrender control easily. Xi knows his country lives on credit—i.e. debt. If he curtails his debt expansion, he loses power.
Tyrants hate to lose power.
Like the US, China needs to keep its country on a steady, credit-card, borrow and spend course. That’s the new world economy: without borrowing, there can be no spending, and without spending there can be no economy.
Of course, one can only borrow for so long…In the old days, we used to produce, not borrow. Imagine that?
The US Pickle
Meanwhile Trump, who having admitted to never reading a book, most likely never consulted any history or economic texts on trade policy.
For if he had, instead of tweeting about how the Chinese “steal” from us via a $390B trade imbalance (we import about $525B from China and export only $130B to China), he and his team of financial wiz-kids would stop blaming the WTO, prior presidents or bad trade deals and call out the real fool in the room.
Because after years and years of the Fed’s promiscuous money printing (to the tune of trillions) and artificially (rather than market driven) interest-rate repression, American companies got greedy on debt and lazy on productivity.
They also became quite skilled at paying their executives based on share-price inflation rather than improving US production.
That is, we created a wonderful merchandise market and demand for all our great American products—you know, everything from blue jeans to IPhones.
Only there’s one terrible catch to this: nearly all of that US “merchandise” is made in China…
Because it’s cheaper for US companies to pay for production in China (whose labor force is just one foot out of the rice paddies) than to pay for production in the US (whose labor force is two-feet out of college and looking for a minimum wage at multiples considerably higher than what it costs to pay workers in Asia).
In short, America is importing American merchandise made in China because American executives like second homes far more than they do American workers.
It’s Not About Tariffs
Needless to say, Tariffs are not gonna change this unspoken reality.
In fact, they only make it worse, which may explain why Trump this weekend is easing off escalating the very trade war he began—one which is big on chest-puffing headlines but very light on economic intelligence.
It’s actually almost comical how we got ourselves in this pickle.
I mean, just think about it for a second: given the fact that the vast majority of American products are ironically made in China, putting a tariff on Chinese imports to the US is effectively the same as putting a tariff on ourselves—the American purchaser.
We are literally shooting ourselves in the feet.
Again, the ironies do abound…
The Only Way Out is Down
So how do we get out of this mess? How do get out of this admittedly appalling trade imbalance with China?
First, it might help if we actually focused on making things in America again…But that costs more and takes far greater time than the instant gratification (and headline-making attention) of declaring a useless and self-inflicted trade war.
Secondly, the US, like China, has to accept the consequences (i.e. economic Karma) of years of living off debt (inspired by printed money and low rates), which means: an inevitable recession.
Of course, politicians in the US, like tyrants in China, don’t like recessions. It makes the masses in places like Beijing stand in front of tanks or the voters in places like the US elect new soothsayers.
Or stated more simply: bear markets kill political careers.
This means elected egos will do almost anything to avoid reality and stay in office—which is why Trump in lambasting Powell not to raise rates.
He wants to keep the debt party going and his stay in the White House extended.
It’s what Obama did.
But as these two lengthy pieces of market history confirm here and here—postponing recessionary forces just to stay in office, always ends in disaster for the very Main Street and the Middle Class that put these folks in office.
Nixon, for example, won by a landslide in 71, but gave his voters the crushing stagflation of 76 after he had left the White House (and the gold standard)…
It’s Too Late Baby
But here’s the rub folks. No one—not Trump or even Santa Clause–can save the US economy or markets from the debt sins of its past.
We’ve crossed the Rubicon of debt and nothing about these meaningless headlines over the weekend can alter the path we are now on.
As I’ve explained numerous times in the bond section of this media bar, low rates bought us the current bubble, and rising rates are gonna kill this bubble—and this market.
To make this even more clear, I published a blog that explains this in one simple chart. I highly recommend you read it.
In short folks, nothing wonderful happened this weekend. As with so much that gets tossed our way in the financial and main stream media, most of it is surface shine.
But for those who look under the hood, the real problems are obvious.
Today, our real problem is debt.
And as von Mises warned long ago, the bigger the debt, the bigger the recession that follows.
We sit upon the biggest national and global debt bubble in the history of capital markets.
This means the recession (and market collapse ahead) will be equally historical.
If this worries some of you, and it should, it might be wise to get out of the way of the iceberg looming off our economic bow.
For subscribers, we show you how to do this. We tell you how fast it’s approaching and what steps to take.
We hope to see the rest you before you are scrambling for a lifeboat.
In the interim, and as always, be careful out there.
December 03 2018