Buying puts before 10 am tomorrow?

[orthopa]

There is no reason to give in to China and honestly you wont see Congress act. Because this needs to be done. Where is everyone speaking out against this? Dems? Repubs? No one. This needs to be done. Plain and simple. Trump has tied himself to the market but volatility is a necessary price to pay at this point. Raise em again if you have to, crush the fucking Chinese.

[SharperDingaan]

The reality of course is that the 2 largest economies need each other.

China needs the US to buy their goods, and the US needs China to finance its deficit. However, just as in a bar fight, there comes a point when the smartest thing is to just let them slug it out - until only one is left standing. Most would think that per the pending election, if this continues, it will be the Republicans/Trump leaving the ring.

 

In the meantime ... let the trading gifts continue.

Per those 100 year bonds, we need the market YTM driven to zero. Cut that fed rate baby, cut!

 

SD

 

[meiroy]

The reality of course is that the 2 largest economies need each other.

China needs the US to buy their goods, and the US needs China to finance its deficit. However, just as in a bar fight, there comes a point when the smartest thing is to just let them slug it out - until only one is left standing. Most would think that per the pending election, if this continues, it will be the Republicans/Trump leaving the ring.

 

In the meantime ... let the trading gifts continue.

Per those 100 year bonds, we need the market YTM driven to zero. Cut that fed rate baby, cut!

 

SD

 

Nonsense.  What a bunch of bollocks.

 

Not only the US does not need it to "finance its deficit" it should tax capital inflows.

 

If treasuries are sold, either there's no impact on the US or there's a positive impact.

 

Either that or all the surplus countries, including Germany and Japan increase local demand via adjusting local regulation (this is the reason for the imbalances, suppression of local demand via local regulation). This is not going to happen, of course, any time soon.

 

 

 

 

[DooDiligence]

The reality of course is that the 2 largest economies need each other.

China needs the US to buy their goods, and the US needs China to finance its deficit. However, just as in a bar fight, there comes a point when the smartest thing is to just let them slug it out - until only one is left standing. Most would think that per the pending election, if this continues, it will be the Republicans/Trump leaving the ring.

 

In the meantime ... let the trading gifts continue.

Per those 100 year bonds, we need the market YTM driven to zero. Cut that fed rate baby, cut!

 

SD

 

Nonsense.  What a bunch of bollocks.

 

Not only the US does not need it to "finance its deficit" it should tax capital inflows.

 

If treasuries are sold, either there's no impact on the US or there's a positive impact.

 

Either that or all the surplus countries, including Germany and Japan increase local demand via adjusting local regulation (this is the reason for the imbalances, suppression of local demand via local regulation). This is not going to happen, of course, any time soon.

 

Once again, in plain English.

[Cigarbutt]

The reality of course is that the 2 largest economies need each other.

China needs the US to buy their goods, and the US needs China to finance its deficit. However, just as in a bar fight, there comes a point when the smartest thing is to just let them slug it out - until only one is left standing. Most would think that per the pending election, if this continues, it will be the Republicans/Trump leaving the ring.

 

In the meantime ... let the trading gifts continue.

Per those 100 year bonds, we need the market YTM driven to zero. Cut that fed rate baby, cut!

 

SD

Nonsense.  What a bunch of bollocks.

 

Not only the US does not need it to "finance its deficit" it should tax capital inflows.

 

If treasuries are sold, either there's no impact on the US or there's a positive impact.

 

Either that or all the surplus countries, including Germany and Japan increase local demand via adjusting local regulation (this is the reason for the imbalances, suppression of local demand via local regulation). This is not going to happen, of course, any time soon.

Once again, in plain English.

Since this remains an open-ended question, in relation to the chicken and egg confusion, here goes.

Does the trade imbalance come from the rest of the relevant world saving too much and not consuming enough (saving glut, Bernanke 2005 ®) and therefore dependent on the ultimate currency or does it come from the US consuming too much and not saving enough and therefore dependent on the rest of the relevant world to finance the private and public deficits?

 

This is a bilateral dependency but my take is that it is not symmetric (in terms of causes and outcomes) and I side with SD on this one because I think meiroy falls into the now widely defined trap of focusing on the financial aspect of a transaction over the substance of a transaction.

 

In plain English, here's a biased example that hopefully may help.

Let's say one has developed a consumer dependency of some kind, let's say an opioid dependence. Let's assume that one has entered the stage where one consumes more than one earns, and one represents the biggest client of the dealer who, somehow, has to accept one's currency and where the dealer has lent one back the currency in order to allow one to continue to consume and the situation has reached a stage where it is felt that the consumption trend is unsustainable.

 

How to deal with this?

 

-The tariff solution

Someone figures that the best way to curb the inflow of the currency is to point a finger and to make the drug more expensive.

 

-The meiroy international tax on capital inflows

Someone figures that you could point a finger and unilaterally devalue the currency once it has been spent.

 

-Me thinks that diving interest rates will help to extend and pretend but one should do a root cause analysis and deal with the internal saving-consumption imbalance.

 

In all fairness and to balance the biased example above, some 'analysts' whom I respect a lot tend to agree with meiroy.

https://carnegieendowment.org/chinafinancialmarkets/79641

[SHDL]

There is no reason to give in to China and honestly you wont see Congress act. Because this needs to be done. Where is everyone speaking out against this? Dems? Repubs? No one. This needs to be done. Plain and simple. Trump has tied himself to the market but volatility is a necessary price to pay at this point. Raise em again if you have to, crush the fucking Chinese.

 

I for one don’t share your hatred towards China but there is probably something to this.  If Trump’s only goal is to win in 2020 and he anticipates running against a Democrat who also supports the China tariffs then he basically has nothing to fear.  We should be prepared for a big disaster in that case.

 

 

[John Hjorth]

The Emotion Machine - Steven Handel [July 24^th 2009] : “Gam zeh ya’avor” - This Too Shall Pass: A Lesson In Impermanence.^[1]

 

- - - o 0 o - - -

 

[1] To me, very well written - but at times not easy to practice.

[meiroy]

Cigarbutt,

 

Pettis is not an analyst.  He is one of the best economists in the world with an amazing macro view on things. He's out there with Druckenmiller and Soros.  He does have a certain blindspot which distorts his timing, but other than that, he is the best... and for sure, it is not he that agrees with me. At best, it is little me who is trying to understand what he teaches.

 

 

[DooDiligence]

The reality of course is that the 2 largest economies need each other.

China needs the US to buy their goods, and the US needs China to finance its deficit. However, just as in a bar fight, there comes a point when the smartest thing is to just let them slug it out - until only one is left standing. Most would think that per the pending election, if this continues, it will be the Republicans/Trump leaving the ring.

 

In the meantime ... let the trading gifts continue.

Per those 100 year bonds, we need the market YTM driven to zero. Cut that fed rate baby, cut!

 

SD

Nonsense.  What a bunch of bollocks.

 

Not only the US does not need it to "finance its deficit" it should tax capital inflows.

 

If treasuries are sold, either there's no impact on the US or there's a positive impact.

 

Either that or all the surplus countries, including Germany and Japan increase local demand via adjusting local regulation (this is the reason for the imbalances, suppression of local demand via local regulation). This is not going to happen, of course, any time soon.

Once again, in plain English.

Since this remains an open-ended question, in relation to the chicken and egg confusion, here goes.

Does the trade imbalance come from the rest of the relevant world saving too much and not consuming enough (saving glut, Bernanke 2005 ®) and therefore dependent on the ultimate currency or does it come from the US consuming too much and not saving enough and therefore dependent on the rest of the relevant world to finance the private and public deficits?

 

This is a bilateral dependency but my take is that it is not symmetric (in terms of causes and outcomes) and I side with SD on this one because I think meiroy falls into the now widely defined trap of focusing on the financial aspect of a transaction over the substance of a transaction.

 

In plain English, here's a biased example that hopefully may help.

Let's say one has developed a consumer dependency of some kind, let's say an opioid dependence. Let's assume that one has entered the stage where one consumes more than one earns, and one represents the biggest client of the dealer who, somehow, has to accept one's currency and where the dealer has lent one back the currency in order to allow one to continue to consume and the situation has reached a stage where it is felt that the consumption trend is unsustainable.

 

How to deal with this?

 

-The tariff solution

Someone figures that the best way to curb the inflow of the currency is to point a finger and to make the drug more expensive.

 

-The meiroy international tax on capital inflows

Someone figures that you could point a finger and unilaterally devalue the currency once it has been spent.

 

-Me thinks that diving interest rates will help to extend and pretend but one should do a root cause analysis and deal with the internal saving-consumption imbalance.

 

In all fairness and to balance the biased example above, some 'analysts' whom I respect a lot tend to agree with meiroy.

https://carnegieendowment.org/chinafinancialmarkets/79641

 

The Carnegie article is very interesting.

 

I had never thought about the effects of inflows.

 

I feel like there's a very influential human factor which also contributes to the low US savings rate.

We are constantly being sold to & our hot buttons have been pushed so hard that they are stuck.

 

"You'll be happy if you buy, buy, buy."

 

I constantly feel the need to buy a bunch of crap but, like many here on CoBF, have developed a filter

and prefer the "feel good" of saving over consumption.

 

CNBC & the like are constantly pushing a similar set of buttons with, so called, investors.

 

"Can't stand still. Bye bye savings."

 

I've mentioned Frederic Pohl's "Midas World" before & believe it's the best satirical illustration of consumerism run amuck.

 

---

 

Back to the Carnegie piece.

 

If we restrict capital inflow, China will invest heavily in Brasil or India, for example, & create another huge consumption based economy?

 

Seems to me that if China were to keep more capital in their own economy they would accomplish the same thing at home, yes?

 

Why don't they do this?

 

---

 

My limited understanding inclines me towards the authors arguments in favor of restricting inflows

but I do not believe the present administration would understand the authors proposals.

 

They don't present any obvious pain points & he seems to enjoy inflicting pain.

[SharperDingaan]

All credit to the Carnegie Institute, but where's the piece on the capital outflow?

 

If I'm a foreign (China) capital contributor and getting taxed on new US investments, why can't I ....

1) Simply route my US investment through a 3rd country? (invest the capital in a UK/German company; that in turn, makes the US investment). A very old smugglers trick, that apparently wasn't considered by the Carnegie Institute.

2) Just let my US treasuries mature and move the capital to some 'Other' country (not China)? US rates rise, as the US now has to 'crowd ' the market to raise enough to roll my maturing bills, and the US/Other 'FX' rate distorts as I sell US and buy Other.

3) But if the 3rd country, and 'Other', are the same country .... there will be minimally affect on the US/Other FX rate (ie: not a trade manipulator), but US rates WILL increase.

 

I can plausibly claim, and prove, that I'm not a currency manipulator - the US is  ;D

Of course I may very well be a currency manipulator, but I'm just better at it than the US is !

 

In todays age of crypto currency, there are a number of far better ways of handling capital transfers between nations.

If the US is going to impose a tax on US capital inflows, there is little reason for a non-US oil exporter to price oil in USD, and pay tax on petrodollar recycling. The exporter simply prices in SDR's, Euro, or Yuan/Renminbi instead; and devalues USD by reducing demand for it.

 

It would appear that the end-game is devaluation of USD ....

Nothing wrong in that - but there are a lot smarter ways of doing it.

 

SD

 

 

[DooDiligence]

All credit to the Carnegie Institute, but where's the piece on the capital outflow?

 

If I'm a foreign (China) capital contributor and getting taxed on new US investments, why can't I ....

1) Simply route my US investment through a 3rd country? (invest the capital in a UK/German company; that in turn, makes the US investment). A very old smugglers trick, that apparently wasn't considered by the Carnegie Institute.

2) Just let my US treasuries mature and move the capital to some 'Other' country (not China)? US rates rise, as the US now has to 'crowd ' the market to raise enough to roll my maturing bills, and the US/Other 'FX' rate distorts as I sell US and buy Other.

3) But if the 3rd country, and 'Other', are the same country .... there will be minimally affect on the US/Other FX rate (ie: not a trade manipulator), but US rates WILL increase.

 

I can plausibly claim, and prove, that I'm not a currency manipulator - the US is  ;D

Of course I may very well be a currency manipulator, but I'm just better at it than the US is !

 

In todays age of crypto currency, there are a number of far better ways of handling capital transfers between nations.

If the US is going to impose a tax on US capital inflows, there is little reason for a non-US oil exporter to price oil in USD, and pay tax on petrodollar recycling. The exporter simply prices in SDR's, Euro, or Yuan/Renminbi instead; and devalues USD by reducing demand for it.

 

It would appear that the end-game is devaluation of USD ....

Nothing wrong in that - but there are a lot smarter ways of doing it.

 

SD

 

Comment by the author,

 

"Until an actual bill is passed there's no way to know how it will be gamed, but there will certainly be attempts to do so. Most derivative obligations will include the tax in their pricing (selling a derivative abroad and hedging it will result in the purchasing of a US dollar asset by a foreign account), so that shouldn't be a problem. more likely is the development of a secondary market abroad for ownership in short-term US assets, but this is probably something the regulators can figure out. Capital controls are never perfect, after all, but they can nonetheless be effective."

 

"It could make reserve management more complex, but the Fed can easily cut deals with individual central banks in cases in which it does not believe the central bank is manipulating the currency, or is willing to allow it."

 

"Unless you believe in a mysterious and beneficent god that manages every country's trade and capital accounts so skillfully that they are always and exactly in balance, Dan, then there must be a direction in which causality flows. My point is that those who argue that trade accounts are always where the primary imbalances lie, and capital accounts simply balance trade, which is what most people assume, are simply assuming an obsolete condition. This is nowhere implied in the accounting identity. In which case you should ask yourself: do you really believe that international capital flows mostly consist of trade finance?"

 

"As for whether limiting capital inflows will drive up interest rates, that is easy to test. Just look at the relationship between US interest rates and the US current account deficit. If you believe reduced capital inflows should raise interest rates, then you would expect that higher current account deficits are always associated with lower interest rates."

 

"Here is a comment I made elsewhere to someone who is sympathetic to this idea but thinks it works by weakening the dollar, which worries him: "A lot of people believe that a tax on capital inflows works by weakening the dollar, Marshall, but I think that’s a mistake. It works by forcing up the US savings rate or, more technically, by preventing capital inflows from forcing down the US savings rate. While causing the dollar to appreciate is one of the ways capital inflows force down the US savings rate, I think it is among the least important. As an example, consider how German capital flows after 2004-05 affected Spain, Italy, Greece, France, etc. The euro prevented any currency adjustment, and yet savings in all of those countries collapsed in an explosion of debt and wealth effects driven by asset bubbles. To me the main impact of an American tax on capital inflows is to reduce American reliance on household and fiscal debt to drive growth.""

 

---

 

I'll stop here as it's probably better to read these in context with comments other than the authors.

[Spekulatius]

The secondary market for US debt exists, it’s the Eurodollar market. The US Fed has no control over it. Like it or not, the US is the main reserve currency. That pretty much guarantees a negative trade deficit in my opinion.

[SharperDingaan]

"As for whether limiting capital inflows will drive up interest rates, that is easy to test. Just look at the relationship between US interest rates and the US current account deficit. If you believe reduced capital inflows should raise interest rates, then you would expect that higher current account deficits are always associated with lower interest rates."

 

.... If you need to roll a 1B treasury issue at maturity, and you only have bids on the table for 600M - you have to raise the yield enough to attract another 400M; that's just the way auctions work. If you have net capital outflow, you just have to raise the yield even further; 'cause you're the 'ugly' at this ball (as per your net capital outflow) - and I need a lot more 'benjamins' to 'hide' your imperfections! Hence, its hard to see how rates do NOT go up.

 

... Every country also believes that reserve currency status (regional or global) lasts 'forever', until they find out it doesn't.

More recent examples have been the UK pound, and the gold standard. Additionally, the penalty for reserve status is the 'Triffen Dilemma' which seems to have been conveniently forgotten. https://en.wikipedia.org/wiki/Reserve_currency

 

We live in interesting times.

 

SD

 

 

[Spekulatius]

Yeah, interesting that the Triffen dilemma is brought up. I heard about it,  it never looked up what it means., until now. The US$ can’t be reserve currency with the US running a trade surplus at the same time. The US needs to export US$, or cease to bet the reserve currency of choice , presumable this can be achieved via debasing it. I knew that a reserve currency tends to be overvalued (the GBP in the 19 century had this issue)  which is really the same thing.

 

https://en.m.wikipedia.org/wiki/Triffin_dilemma

[Cardboard]

I think was is missed by Orthopa and others on this need to put China at its place is the coming impact to Main Street.

 

1- Costs for imported goods are going up due to tariffs. These can't be made cheaper here either by the way.

 

2- We are at full employment which is very beneficial to the poorest folks. They are the first ones to be unemployed when the economy slows or when uncertainty mounts.

 

3- The banking sector is not globally cured and is still interdependent and global debt level is high. It would not take much in terms of credit default to trigger a crisis. Argentina could be the first event. As we saw in 2008-2009 it was the poor who lost their homes.

 

So if we get a deep economical crisis because we want to strike a trade deal with China by using this tit for tat approach it probably won't be worth the human cost in the end.

 

My personal view is that the Chinese leadership do not care about their own people and care only about retaining and increasing their power. This makes striking a deal via economical tarrifs very difficult unless it makes them lose internal control. General unrest in China seems unlikely especially as they control the media and will simply try to portrait the U.S. as the enemy + instigator and try to raise Chinese pride to stand behind current leadership.

 

Seems to me like the U.S. and Trump failed to understand that they are dealing with a dictatorship/communist regime and the only thing they understand is force.

 

Cardboard

 

 

[SHDL]

I agree with the above.  There is way more than just a little market volatility at stake here.  And for what?  The risk/reward here is terrible IMO.

[RuleNumberOne]

Likely, there will never be a trade agreement. Once the market realizes this and the uncertainty leaves the room, stocks will go up. China is not Japan or Germany. Both Japan and Germany run trade surpluses with the US, but their retired generals don't urge the sinking of US aircraft carriers.

 

https://www.wsj.com/articles/has-xi-jinping-stirred-a-backlash-11565968019

 

"The latter group includes retired generals who have recently urged Beijing to take an even more aggressive approach, including invading Taiwan and sinking U.S. aircraft carriers. In a June speech at a conference attended by his U.S. counterpart, Chinese Defense Minister Wei Fenghe vowed that Beijing wouldn’t succumb to American pressure.

 

As trade tensions with Washington intensified this summer, many editorials in Beijing’s government publications zeroed in on so-called “capitulators” who argue for a softer stance toward the U.S. and a less assertive foreign policy, accusing them of lacking faith in China’s abilities and of betraying the country’s national interests. “Yes, the elites are being cautious—but if you talk to people on the street, that’s very different,” a senior Chinese military official said. “They want more.”"

[RuleNumberOne]

If you look at what Chinese retired generals are saying (i.e. sink US aircraft carriers), it matches what Trump and Kudlow are saying (US companies should leave China)

 

Kudlow is a trade dove, but even he is asking US companies to leave China.

 

The markets should just move on. There is really no uncertainty here. It has been laid out in black and white.

 

[meiroy]

This is how I'm looking at it now, perhaps more practical:

 

This is a market disruption, in the sense that Amazon disrupted retail.

 

It's not a trade war, it's the inevitable decoupling which will outlive Trump.

 

The US has a local market, it has Mexico and Canada, and Brazil and India if it wanted to. Big enough. More than enough.

 

American people will be better off. 

 

The only issue is the disruption process, some industries would have to pay.

 

 

 

 

[DooDiligence]

This is how I'm looking at it now, perhaps more practical:

 

This is a market disruption, in the sense that Amazon disrupted retail.

 

It's not a trade war, it's the inevitable decoupling which will outlive Trump.

 

The US has a local market, it has Mexico and Canada, and Brazil and India if it wanted to. Big enough. More than enough.

 

American people will be better off. 

 

The only issue is the disruption process, some industries would have to pay.

 

I think this is an oversimplification.

[meiroy]

This is how I'm looking at it now, perhaps more practical:

 

This is a market disruption, in the sense that Amazon disrupted retail.

 

It's not a trade war, it's the inevitable decoupling which will outlive Trump.

 

The US has a local market, it has Mexico and Canada, and Brazil and India if it wanted to. Big enough. More than enough.

 

American people will be better off. 

 

The only issue is the disruption process, some industries would have to pay.

 

I think this is an oversimplification.

 

It's a concept.

 

You want something more, go read a book.

 

[Cardboard]

"I think this is an oversimplification."

 

Very much so especially when you go around the house and look for the label: "made in China".

 

Supply chains have evolved for multiple decades to be as they are today. I can't see how unwinding all that will be more efficient/cheaper and make people better off.

 

What is really odd in this whole thing and likely part of the solution are currencies. Both China and Germany benefit from devalued currencies and large trade surplus. If you want some trade "reversal" it seems to me that you need a weaker USD vs Yuan and for Germany to have its own currency.

 

Cardboard

[meiroy]

5 years max.

 

Tax capital inflows.

 

Better.

 

Much.

 

 

 

[SharperDingaan]

The reality is that the US is not an island, it has to deal with the rest of the world - whether it wants to or not.

Every time China/US make something for trade, they use in part - the resources of other countries; components, oil, labour, etc. Reducing the volume of trade (via tariffs) between these two countries, also reduces the volumes for everyone else - tipping the globe into recession.

 

Today we have SDR's, which are quite capable of settling capital flows between nations, and have long been touted as a solution. We now also have the technology to make these transactions both visible to all (within the private network), and tamper proof. Joint develpment, as a face saving escape for all warring parties, has to be on the table at some point.

 

Agreed this is market disruption, it will outlive Trump, and it is going to be bruising.

A very good thing in the long-run .... just not so much in the short, or medium term ('cause we could all end up dead!).

In the meantime, all we can do is flow with the river .. and position ourselves accordingly.

 

SD

 

 

 

 

[Castanza]

I think there are two separate issues that some on here are conflating.

 

Global Trade

 

and

 

Free Trade (Free Market System)

 

The first is important and it easily can be elaborated on with the short skit "I Pencil".

 

 

The second is something that does not currently exist and is the current motivation behind the tariffs. At the end of the day we are fighting government intervention with more government intervention. It's been a long time coming and the chickens finally came home to roost.