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2018-04-11 07:00 by Karl Denninger
in International , 167 references
[Comments enabled]  

Well well.

It seems that Xi can actually perform arithmetic.

China tried to play "tough guy" in trade with threatening tariffs on $100 billion in US imports and ran into a problem -- that's just about all the imports that there are!

Meanwhile the US imports far more from China.

Further essentially none of what we import is necessary.  Oh sure, China could try to get nasty about rare earth metals, for example, but we have an answer to that -- we have lots of them, but they're mothballed due to thorium being contained in the same mines.  A bunch of screaming-harpy "proliferation" folks managed to do that, which for reasons I've pointed out before is stupid -- while thorium isn't proliferation proof  it is quite proliferation resistant because the fissile material it tends to produce contains isotopes that cause serious problems for anyone trying to make weapons -- but are of no importance at all to someone simply interested in energy production.

Not only could we cut that stupid out quite-easily we could then use the thorium as I've advocated for years, and in fact spent a whole section in Leverage on it, as it's the singularly most-accessible means of adding real nuclear energy output to the American energy picture and becoming independent of foreign fossil fuels permanently at the same time.

I've written repeatedly on this with arguably the most-comprehensive article on-point being here.

The other side of this, however, is that much of what China imports is necessary.  Specifically, food.  Historically-speaking food shortages have a nasty record of producing riots, civil unrest and worse.  Simply put empty bellies motivate people to pick up weapons and use them on the ruling class when said empty belly can be blamed on those rulers.

Then there's the potentially-larger problem for Xi as well -- China's credit situation is already massively over-levered and arguably on the verge of blowing up all on its own.  Screw the public's ability to eat and the odds of their banking system going prompt critical is very high.  That's very bad for the rulers (and those privileged by them) as well.

So for those who claimed "China won't blink", well, he just did.

But don't take this as being all that positive.  It's not.  The so-called "concessions" are tiny compared to the abuses; addressing a couple of percent of an issue doesn't move the needle.

The market loves it, but as usual it's put exactly zero scale into the evaluation -- although it should.

I'm not only skeptical I see this as nothing more than handing a barking dog a steak laced with rat poison.  I suspect that Trump is too smart to eat it but the stock market was more than willing to gobble it all up.  The most-important take-away, in other words, isn't the materiality of the concessions -- rather it's that all those who claimed China would "not blink" and that their "pride" made the use of the tariff card unwise or even counter-productive are and were dead flat wrong.

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2018-04-06 09:45 by Karl Denninger
in International , 391 references
[Comments enabled]  

China has threatened to "resolutely" respond to our tariff moves.

I say "meh."

First, our trade balance is ridiculous.  They would be hard-pressed to find $100 billion of goods and services to tariff in response and any such act would go directly against their own people's ability to eat since a very large percentage of what they could try to levy is in fact basic food staples for which there is no fungible alternative on the world market.  Simply put there's not enough free world capacity to meet their demand should they actually do it.

That's very dangerous as food shortages, especially intentional ones caused by a government, have a history of leading to severe social instability including the possibility of violent uprising.  People who are hungry sometimes reach for sticks, pikes.... and guns.

What else can China do?

Well, there are claims they could "harass" US businesses selling there (e.g. Apple.)  Go ahead and give Apple a reason to move their phone assembly.  How many jobs would that cost the Chinese, never mind the capital flight?  Uh huh.  Be my guest, Mr. you're-gonna-get-lynched Xi.

Then there's the bond issue.  China owns well north of a trillion of our bonds.  The problem is that the only reason they own them is that they have these large trade surpluses, which they must absorb through non-market operations or the currency moves that result from said surplus will stanch that red ink.  They've abused the market in this regard for a couple of decades and one way or another, if we address the trade balance that ends.

So who cares, really, if they sell bonds?  They can't continue to be a material net buyer into the future with trade normalizing anyway, so let 'em do it.  If they try to threaten the stability of the treasury market not only will they do no more than slightly move the long end of the Treasury curve the capital loss they will take in doing so will be enormous.

Remember that the net present value change of a bond is change in interest times remaining duration, mostly.  So if you've been buying long-term Treasuries and move the rate 1%, and there's 10 years remaining on them you screwed yourself instantly out of approximately 10% of their value.

In short the Chinese "threat" is sort of like a man standing in front of you with a gun who points it at his own head and threatens to spray you with blood.

Well sure, he can do that -- but if he shoots he splatters his brains all over the wall while you can calmly walk into the next room and take a shower.

So go ahead, ****head Xi -- blow your own brains out.  I double-dog-dare you, *******.

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