Buying puts before 10 am tomorrow?

[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

 

 

[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.

[Cigarbutt]

This situation may be better approached more from a resiliency than a power point of view, in order to prevent outsized short-term disruptive unintended consequences. But the long term starts now.

 

An interesting blueprint to navigate between war and appeasement is the containment strategy.

https://www.amazon.com/George-F-Kennan-American-Life/dp/0143122150/ref=sr_1_1?keywords=George+F.+Kennan%3A+An+American+Life&qid=1566825726&s=gateway&sr=8-1

Interestingly, Mr. Kennan came up with an evolving strategy based on an intimate knowledge of opposing forces. He was also a critical force behind the Marshall Plan in order to build effective alliances and understood the importance of potential internal disunities.

The containment strategy came with some costs but we did very well overall. It did not rest on the primacy of the leader's power but more on its resilience and its enduring capacity while internal weaknesses and contradictions become manifest.

[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.

 

It's a concept.

 

You want something more, go read a book.

 

Thanks for another oversimplification.

[HJ]

The economists deal with efficiency, the politicians deal with the consequence of that efficiency.  I watched "American Factory" on Netflix over the weekend.  The pain of the Midwest manufacturing base is palpable.  At some point, the question becomes whether the incremental efficiency achieved is worth the pain that it induces, whether in the form of income inequality or social cohesion of a community.

 

And the election of Trump is a statement that we are at that point.  It's one thing to be the beneficiary of lower costs of consumer product, and comment how low skilled labor need to upgrade their skill set.  It's another to be fired and told to upgrade your own skillset, especially for those over the age of 45.

 

 

[Jurgis]

China tariffs won't rebuild Midwest manufacturing. Manufacturing will just move to other cheap countries. The only effect is going to be price increases for US customers that will mostly hit the same low income households.

 

It's interesting to see how propaganda works. Majority of people (even on CoBF) had no issue with China 3-4 years ago. Now everyone's anti-China with very good arguments for it.

[abitofvalue]

China tariffs won't rebuild Midwest manufacturing. Manufacturing will just move to other cheap countries. The only effect is going to be price increases for US customers that will mostly hit the same low income households.

 

It's interesting to see how propaganda works. Majority of people (even on CoBF) had no issue with China 3-4 years ago. Now everyone's anti-China with very good arguments for it.

 

+1

[HJ]

China tariffs won't rebuild Midwest manufacturing. Manufacturing will just move to other cheap countries. The only effect is going to be price increases for US customers that will mostly hit the same low income households.

 

It's interesting to see how propaganda works. Majority of people (even on CoBF) had no issue with China 3-4 years ago. Now everyone's anti-China with very good arguments for it.

 

The argument for some form of trade tariff isn't specific to China, which just happen to be the biggest trading counterpart with the most impact.  So sure, it will go somewhere else, but should be taxed too.  The argument is to slow down the structural changes that deeply impact people's livelihood, so they will have time to adjust.  Years ago, Buffett proposed some form of import voucher to lessen the U.S. trade deficit at that time, which would have much more draconian impact than just a tax.  And critics have long complained about the lack of a coherent U.S. industrial policy.  So this argument isn't made simply because of Trump.  He's an ass, but as Munger would say, he's not wrong on everything.

 

It's also not true that the same low income people are impacted.  Different people are impacted differently.  How else do you explain the coast / inland political divide!  The argument was always there, and regardless of who the next administration is, it will no longer be easily dismissed, as it shouldn't be. 

 

 

 

[Jurgis]

China tariffs won't rebuild Midwest manufacturing. Manufacturing will just move to other cheap countries. The only effect is going to be price increases for US customers that will mostly hit the same low income households.

 

It's interesting to see how propaganda works. Majority of people (even on CoBF) had no issue with China 3-4 years ago. Now everyone's anti-China with very good arguments for it.

 

The argument for some form of trade tariff isn't specific to China, which just happen to be the biggest trading counterpart with the most impact.  So sure, it will go somewhere else, but should be taxed too.  The argument is to slow down the structural changes that deeply impact people's livelihood, so they will have time to adjust.  Years ago, Buffett proposed some form of import voucher to lessen the U.S. trade deficit at that time, which would have much more draconian impact than just a tax.  And critics have long complained about the lack of a coherent U.S. industrial policy.  So this argument isn't made simply because of Trump.  He's an ass, but as Munger would say, he's not wrong on everything.

 

It's also not true that the same low income people are impacted.  Different people are impacted differently.  How else do you explain the coast / inland political divide!  The argument was always there, and regardless of who the next administration is, it will no longer be easily dismissed, as it shouldn't be.

 

You probably have the heart in the right place, but I don't think the Trump gang does.

 

The argument for some form of trade tariff isn't specific to China

 

But it is applied specifically to China. And likely won't be applied to (m)any other countries unless they get in fight with Trump for whatever reason.

 

Furthermore, if the goal was Midwest industrial revival and if the method to achieve this goal was tariffs (I still think the method would not work, but hey), surgically aimed tariffs that are aimed to specific products across the globe and not to wide variety of products from single country would have a better chance to work.

 

I also think that the situation with manufacturing in US is way more complicated than the simple China-screwed-us narrative proclaims. You should look into the manufacturing statistics in US rather than just watching Netflix documentaries.

 

Even if after looking at statistics you still think that manufacturing in US is in trouble and should be supported, you'd probably should ask yourself what happens when that supported manufacturing all goes automatic and still does not employ the 45 year olds who were fired. And how much of the Midwest trouble and income inequality was caused by automatization and industry shifts vs. China.

 

In other words, you and the populace are being mind f**ked by Trump and co.

 

* This thread belongs in politics section long time ago.

** How nice I'm probably the only free trade person left. Gonna get hit both from the newly nationalist right and from the left.

*** That being said, yeah "Screw China!". But because of Hong Kong. Not because of Trump's p371s.

[Spekulatius]

China tariffs won't rebuild Midwest manufacturing. Manufacturing will just move to other cheap countries. The only effect is going to be price increases for US customers that will mostly hit the same low income households.

 

It's interesting to see how propaganda works. Majority of people (even on CoBF) had no issue with China 3-4 years ago. Now everyone's anti-China with very good arguments for it.

 

I agree they the manufacturing they went to China won’t come back. Vietnam is a joke, because their economy is running hot already and it’s basically a Chinese colony economically. I do think that Mexico could be a major beneficiary, since it is a friendly state.

 

The biggest thing about China is theft of IP, by means of forced Jv’s which are basically forced IP transfer. Just concentrating on the IP issue, getting Europe, Canada and Japan behind it would have been a way smarter way to conduct, with much less risk, imo.

 

Interesting side note - Trump talks about “fair trade” now, not “free trade”. He is a neo mercantilist.

[HJ]

 

Even if after looking at statistics you still think that manufacturing in US is in trouble and should be supported, you'd probably should ask yourself what happens when that supported manufacturing all goes automatic and still does not employ the 45 year olds who were fired. And how much of the Midwest trouble and income inequality was caused by automatization and industry shifts vs. China.

 

In other words, you and the populace are being mind f**ked by Trump and co.

 

* This thread belongs in politics section long time ago.

** How nice I'm probably the only free trade person left. Gonna get hit both from the newly nationalist right and from the left.

*** That being said, yeah "Screw China!". But because of Hong Kong. Not because of Trump's p371s.

 

You should watch American Factory which is produced by the production company of the Obama's.  It has very little to do with Trump, but simply lay out the experience of a Chinese glass maker trying to build an American factory making glasses fo cars.  It highlights the differences, and concludes with the implications of automation.  If the argument is simply that this is technological progress, let it run its course, and maybe even use government incentive to bring it about sooner, there will be consequences, quite a lot of it unintended.  The communism ideology was born very much as a reaction to an earlier period of rapid technologically driven social changes, and as history shows, it easily gets high jacked by political opportunists.

 

I understand the desire not to be political.  But the 2 simply can't be divorced. We are suffering precisely from the political consequence of free trade.  In a sense, through free trade, China was able to export a large part of its own political problems, and the US imported it. 

 

 

[orthopa]

Fair trade is the issue here. Not global trade. Once tariffs are maxed out next should be more limiting of companies able to do business ie Huawei. On top of that is reciprocal forced transfer of technology, mandatory partnerships or joint ventures etc, cyber theft etc.  What is good for the goose...

 

Anyone have any examples of fair trade with China where Trump is going wrong?

 

China has given the WTO and the world and big middle finger, everyone ok with that?