REVEALED: The Trade of the Decade

This post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

Dear Reader,

Yesterday we snuck into the future… and smuggled out a worrisome vision:

The S&P will end the decade 50–60% lower than where it began the decade.

Our snooping revealed that “mean reversion” will run down the elusive stock market at last.

That is, the long arm of statistical law will finally collar its man.

Yet as we wondered yesterday: Can a “trade of the decade” lock in your wealth?

Can it be your Rock, your anchor against stock market catastrophe?

If so… what can it be?

Today we rip the wrapping paper off the trade of the decade.

But first, what other visions did our adventure into the future reveal?

Here is a brief sketch of the 2020s as we saw them, a tour of the horizon…

The Next Two Presidential Elections

President Trump will retain his throne this November.

The economy will gutter along before sinking into woeful recession in 2022 or early 2023.

The Federal Reserve will leap to action. Interest rates will go to zero — and yes, below zero.

Quantitative easing on the scale of the Marshall Plan you will see.

But all attempts will be vain.

The Federal Reserve will stand discredited, embarrassed, helpless.

In the 2024 presidential election, the American people will invite in a “progressive.”

He/she/hir, we could not identify the winner — the haze was thick, the picture grainy — will sign into law some version of Modern Monetary Theory (MMT).

It will differ vastly from the Federal Reserve’s quantitative easing. Quantitative easing was contained within the banking system. It largely prospered Wall Street… and largely bypassed Main Street.

The American people were left to scratch by on the leavings.

But MMT promises to pour money directly onto Main Street — and Maple Street and Oak Street and Pine Street and Birch Street.

Everything for Everyone

The print press will go into fantastic and ceaseless operation. It will promise to fan a roaring whirlwind of prosperity.

Off the presses will fly the wherewithal for Medicare for All, universal college education, guaranteed employment at $15/hour, a Green New Deal, etc.

It will give a good original impression. The economy will jump, thrill and excite… after dozing lo so many years.

And the authorities will finally have their 2% inflation, sustained.

MMT will receive a highly favorable press. What ogre, what misanthrope, what dastard could be against it?

But a paper prosperity is a false prosperity. It is the eternal quest to lunch for free… and the immemorial dream of cranks.

That world has no existence… at least not upon this Earth.

MMT will give an overall increase of the price level — but without a corresponding increase in goods, products and services.

The Stirrings of Inflation

After decades of muted (official) inflation, inflation’s initial gurglings and bubblings will catch the American people off their guard.

But after some hard experience, they will recalibrate their expectations. They will begin to hunker in against the expectation of rising prices.

A chance spark will light an inflationary brush fire. It will soon jump the perimeter. Before long it will spread like prairie fire… carried along by the gusting winds of sentiment.

And so MMT will ultimately kindle a fine inflationary blaze.

The authorities will be eager to get water on it. But they will discover it rages beyond all control.

Can it happen so fast? Yes, it can happen so fast.

Explains Jim Rickards:

MMT advocates also seem to think inflation can be dialed back or tweaked at will. Maybe they’ll say we’ll only spend $90 million on a Green New Deal instead of $97 trillion. They think they can dial it down. But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a nonlinear system.

It’s like moving the control rod in a nuclear reactor. If you get it wrong by just a little, you can melt the reactor down and kill a million people…

Inflation is not a linear phenomenon but a nonlinear phenomenon that can spiral out of control before you can do anything about it.

The fiscal authorities will truly have a tiger by the tail. But what can they do?

No Good Options

They can kink off the oxygen feeding the fire. That is, they can turn off the print press.

But a paper prosperity requires ever-increasing amounts of paper. Shutting down the press would murder it.

The late-lamented Paul Volcker put down inflation in 1981 by lifting interest rates to 20%. But the debt level then prevailing was a trifle — a pimple against today’s Matterhorn.

Today’s creaking, debt-addled economy may not withstand 5% rates… much less 20%.

But if authorities let the fire run, it may burn until nothing remains to burn.

What will they decide?

It is at this point — 2027 or 2028 — that our vision of the future turned to static.

And perhaps it is just as well, given the hell-mouth scene we report.

‘It Can’t Happen’

You may laugh the preceding out of court. The “experts” certainly will.

But did the experts foresee the 2001–02 dot-com smash-up? Did those same experts holler about a subprime mortgage crisis beforehand?

And how many would have told you this in 2007?

That negative interest rates would soon become reality… or that “quantitative easing” would soon become a household term?

Indeed… how many would have told you Mr. Donald J. Trump would one day be president?

Yet they came to be, all of them.

Do you wish to peer around the next bend? Do you wish to steal an unauthorized glimpse of the future?

Then you must range out ahead of the herd. You must venture out upon the thin, spindly branches, risking a fall. You must shoo away consensus.

And you may need to fall in with disreputable company. As our co-founder Bill Bonner recently reminded us:

To find the new truth, we have to go far out on the knowledge spectrum to the edgy part… the shady and speculative part… where the kooks, geniuses and gurus are.

Come we now to the “trade of the decade”…

The Candidates

Is the trade of the decade some promising, youthful technology company?

Is it a manufacturer of driverless autos, or artificial intelligence?

Is it a wager on China — or a wager against China?

Is bitcoin the trade of the decade — or a rival cryptocurrency?

None of these is the answer. Then what is the answer?

Colleague Byron King recently sat at a business meeting where Mr. Bonner was likewise sitting.

During the proceedings Byron cleared his throat, faced Mr. Bonner… and requested his trade of the decade:

“Well,” he said…

“When I look at what’s going on with the world, with the U.S. dollar, politics, everything…”

The room was silent. You could hear a pin drop. You could detect the vibe of grinding vertebrae as people strained their necks to pick up on Bill Bonner’s latest Trade of the Decade…

Mind you — gold was Mr. Bonner’s trade of the previous decade. It was also his trade of the decade prior.

Did gold satisfy its advertising?

“If you followed Bill Bonner’s Trade of the Decade for 2000–09,” Byron reminds us, “you more than tripled your money, in terms of dollars.”

Plenty handsome. But what about the decade just vacated?

“If you bought into Bill’s Trade of the Decade for 2010–19, you went from $1,100 to just over $1,500, or a 36% gain… admittedly with a ride.”

The Trade of the Decade

So what is Mr. Bonner’s trade of this freshly hatched decade? Has he found an alternative to gold?

In Mr. Bonner’s own words:

I’d have to say stick with gold. I can’t think of anything else that’s as well set up to hold value and deliver gains.

Thus you have your trade of the decade — gold — ancient, fusty, unresponsive, unglamorous gold.

Gold will provide you a potent antidote to the monetary toxins above described. And if the stock market is knocked flat this decade?

Gold should help keep you upright.

Thus we speak our piece for gold.

Might we report a faulty vision of the future?

It is entirely possible. Our eyes have failed us before.

If erring, we find solace in this one supreme fact:

We face no consequences for our botchwork.

On Jan. 3, 2030 — 10 years from today — no living soul will recall a single word we wrote this day.

But if proven correct, we will be certain to remind you…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

REVEALED: The Trade of the Decade

This post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

Dear Reader,

Yesterday we snuck into the future… and smuggled out a worrisome vision:

The S&P will end the decade 50–60% lower than where it began the decade.

Our snooping revealed that “mean reversion” will run down the elusive stock market at last.

That is, the long arm of statistical law will finally collar its man.

Yet as we wondered yesterday: Can a “trade of the decade” lock in your wealth?

Can it be your Rock, your anchor against stock market catastrophe?

If so… what can it be?

Today we rip the wrapping paper off the trade of the decade.

But first, what other visions did our adventure into the future reveal?

Here is a brief sketch of the 2020s as we saw them, a tour of the horizon…

The Next Two Presidential Elections

President Trump will retain his throne this November.

The economy will gutter along before sinking into woeful recession in 2022 or early 2023.

The Federal Reserve will leap to action. Interest rates will go to zero — and yes, below zero.

Quantitative easing on the scale of the Marshall Plan you will see.

But all attempts will be vain.

The Federal Reserve will stand discredited, embarrassed, helpless.

In the 2024 presidential election, the American people will invite in a “progressive.”

He/she/hir, we could not identify the winner — the haze was thick, the picture grainy — will sign into law some version of Modern Monetary Theory (MMT).

It will differ vastly from the Federal Reserve’s quantitative easing. Quantitative easing was contained within the banking system. It largely prospered Wall Street… and largely bypassed Main Street.

The American people were left to scratch by on the leavings.

But MMT promises to pour money directly onto Main Street — and Maple Street and Oak Street and Pine Street and Birch Street.

Everything for Everyone

The print press will go into fantastic and ceaseless operation. It will promise to fan a roaring whirlwind of prosperity.

Off the presses will fly the wherewithal for Medicare for All, universal college education, guaranteed employment at $15/hour, a Green New Deal, etc.

It will give a good original impression. The economy will jump, thrill and excite… after dozing lo so many years.

And the authorities will finally have their 2% inflation, sustained.

MMT will receive a highly favorable press. What ogre, what misanthrope, what dastard could be against it?

But a paper prosperity is a false prosperity. It is the eternal quest to lunch for free… and the immemorial dream of cranks.

That world has no existence… at least not upon this Earth.

MMT will give an overall increase of the price level — but without a corresponding increase in goods, products and services.

The Stirrings of Inflation

After decades of muted (official) inflation, inflation’s initial gurglings and bubblings will catch the American people off their guard.

But after some hard experience, they will recalibrate their expectations. They will begin to hunker in against the expectation of rising prices.

A chance spark will light an inflationary brush fire. It will soon jump the perimeter. Before long it will spread like prairie fire… carried along by the gusting winds of sentiment.

And so MMT will ultimately kindle a fine inflationary blaze.

The authorities will be eager to get water on it. But they will discover it rages beyond all control.

Can it happen so fast? Yes, it can happen so fast.

Explains Jim Rickards:

MMT advocates also seem to think inflation can be dialed back or tweaked at will. Maybe they’ll say we’ll only spend $90 million on a Green New Deal instead of $97 trillion. They think they can dial it down. But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a nonlinear system.

It’s like moving the control rod in a nuclear reactor. If you get it wrong by just a little, you can melt the reactor down and kill a million people…

Inflation is not a linear phenomenon but a nonlinear phenomenon that can spiral out of control before you can do anything about it.

The fiscal authorities will truly have a tiger by the tail. But what can they do?

No Good Options

They can kink off the oxygen feeding the fire. That is, they can turn off the print press.

But a paper prosperity requires ever-increasing amounts of paper. Shutting down the press would murder it.

The late-lamented Paul Volcker put down inflation in 1981 by lifting interest rates to 20%. But the debt level then prevailing was a trifle — a pimple against today’s Matterhorn.

Today’s creaking, debt-addled economy may not withstand 5% rates… much less 20%.

But if authorities let the fire run, it may burn until nothing remains to burn.

What will they decide?

It is at this point — 2027 or 2028 — that our vision of the future turned to static.

And perhaps it is just as well, given the hell-mouth scene we report.

‘It Can’t Happen’

You may laugh the preceding out of court. The “experts” certainly will.

But did the experts foresee the 2001–02 dot-com smash-up? Did those same experts holler about a subprime mortgage crisis beforehand?

And how many would have told you this in 2007?

That negative interest rates would soon become reality… or that “quantitative easing” would soon become a household term?

Indeed… how many would have told you Mr. Donald J. Trump would one day be president?

Yet they came to be, all of them.

Do you wish to peer around the next bend? Do you wish to steal an unauthorized glimpse of the future?

Then you must range out ahead of the herd. You must venture out upon the thin, spindly branches, risking a fall. You must shoo away consensus.

And you may need to fall in with disreputable company. As our co-founder Bill Bonner recently reminded us:

To find the new truth, we have to go far out on the knowledge spectrum to the edgy part… the shady and speculative part… where the kooks, geniuses and gurus are.

Come we now to the “trade of the decade”…

The Candidates

Is the trade of the decade some promising, youthful technology company?

Is it a manufacturer of driverless autos, or artificial intelligence?

Is it a wager on China — or a wager against China?

Is bitcoin the trade of the decade — or a rival cryptocurrency?

None of these is the answer. Then what is the answer?

Colleague Byron King recently sat at a business meeting where Mr. Bonner was likewise sitting.

During the proceedings Byron cleared his throat, faced Mr. Bonner… and requested his trade of the decade:

“Well,” he said…

“When I look at what’s going on with the world, with the U.S. dollar, politics, everything…”

The room was silent. You could hear a pin drop. You could detect the vibe of grinding vertebrae as people strained their necks to pick up on Bill Bonner’s latest Trade of the Decade…

Mind you — gold was Mr. Bonner’s trade of the previous decade. It was also his trade of the decade prior.

Did gold satisfy its advertising?

“If you followed Bill Bonner’s Trade of the Decade for 2000–09,” Byron reminds us, “you more than tripled your money, in terms of dollars.”

Plenty handsome. But what about the decade just vacated?

“If you bought into Bill’s Trade of the Decade for 2010–19, you went from $1,100 to just over $1,500, or a 36% gain… admittedly with a ride.”

The Trade of the Decade

So what is Mr. Bonner’s trade of this freshly hatched decade? Has he found an alternative to gold?

In Mr. Bonner’s own words:

I’d have to say stick with gold. I can’t think of anything else that’s as well set up to hold value and deliver gains.

Thus you have your trade of the decade — gold — ancient, fusty, unresponsive, unglamorous gold.

Gold will provide you a potent antidote to the monetary toxins above described. And if the stock market is knocked flat this decade?

Gold should help keep you upright.

Thus we speak our piece for gold.

Might we report a faulty vision of the future?

It is entirely possible. Our eyes have failed us before.

If erring, we find solace in this one supreme fact:

We face no consequences for our botchwork.

On Jan. 3, 2030 — 10 years from today — no living soul will recall a single word we wrote this day.

But if proven correct, we will be certain to remind you…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

Agreement reached by US, Canada and Mexico – again – to replace NAFTA

Canada, Mexico and the United States have agreed to a fresh overhaul of their quarter-century-old regional trade pact after negotiators approved changes to a preliminary deal struck last year, and officials will sign the new agreement on Tuesday. The deal, which still needs the approval of lawmakers in all three countries, adds more stringent oversight of the pact's labor provisions demanded by US Democrats, changes that Speaker of the House Nancy Pelosi said made it an "infinitely better" deal than the one struck between the Trump administration, Canada and Mexico in 2018.

Trade Wars Just Getting Started

This post Trade Wars Just Getting Started appeared first on Daily Reckoning.

Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.

Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.

The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.

A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.

On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.

But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.

Most of the issues will not be resolved quickly, if ever.

Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.

These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.

China has now regained its lost economic and military strength and refuses to make similar concessions today.

In order to break the impasse between protections the U.S. insists on and concessions China refuses to give.

This points to the fact that the “trade war” is not just a trade war but really part of a much broader confrontation between the U.S. and China that more closely resembles a new Cold War.

This big-picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018 and a follow-up speech delivered on Oct. 24, 2019. Both speeches are available on the White House website.

Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the U.S. and that business as usual will no longer protect U.S. national security.

IMG 1

Pictured above are Vice President Mike Pence (l.) and Secretary of State Mike Pompeo (r.). Pence and Pompeo have taken the lead in the public criticism of China by the Trump administration. In a series of speeches and interviews they have pointed out egregious human rights violations, blatant theft of intellectual property and threatening military advances that should cause the U.S. to treat China as more of a geopolitical adversary than a friendly trading partner.

The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of The Coming Collapse of China, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below:

The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public.

“America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed Chinaʼs disturbing behavior during the past year.

Some argue the vice presidentʼs talk didnʼt differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijingʼs refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions.

Moreover, the vice presidentʼs thematic repetition was itself important. It suggested that the administrationʼs approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels.

Instead it called China — and its de facto ally Russia — “revisionist powers” and “rivals.”

At a Hudson Institute dinner last Wednesday, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact… those systems have on American national security.” Chinaʼs ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”

The U.S.-China trade war is not the anomaly globalists portray. It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game.

Free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.

Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually begun by China 24 years earlier when China devalued its currency (1994) and continued when China joined the WTO (2001) and immediately started to break WTO rules.

The trade battle is now joined, but no critical issues have been resolved and none will be in the near future. The U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty.

China cannot agree to U.S. demands without impeding its theft of U.S. intellectual property. This theft is essential to escape the middle income trap that afflicts developing economies.

The EU is caught in the crossfire. The U.S. is threatening to impose tariffs on German autos and French agricultural exports as part of an effort to force an end to German and French subsidies to favored interests.

The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony.

Neither is likely soon.

Regards,

Jim Rickards
for The Daily Reckoning

The post Trade Wars Just Getting Started appeared first on Daily Reckoning.

Miners welcome RCEP agreement

The resources sector has welcomed the conclusion of the Regional Comprehensive Economic Partnership (RCEP) agreement. The RCEP is the world’s largest trade agreement covering 15 countries in our region with a population of more than 2.25-billion, a combined gross domestic product (GDP) of $25.8-trillion and nine of Australia’s top 15 trading partners.

Parliament urged to ratify two FTAs

The resources sector has welcomed recommendations from the Joint Standing Committee on Treaties (JSCOT) to ratify Australia’s free trade agreements with both Indonesia and Hong Kong, saying it would grow trade in minerals and mining services. The JSCOT earlier this week tabled a report on Australia’s proposed free trade agreements with Indonesia and Hong Kong, saying that Australia needed to stand up for the principle of free trade and shore up the foundations of the global trade system.

WTO slashes forecast for trade growth as conflicts mount

The World Trade Organization (WTO) cut its forecast for growth in global trade this year by more than half on Tuesday and said further rounds of tariffs and retaliation, a slowing economy and a disorderly Brexit could squeeze it even more. The WTO said it now expected global merchandise trade to increase by 1.2% this year, compared with its April estimate of 2.6%. That growth was 3% in 2018. For 2020, growth of 2.7% is forecast, down from a previous estimate of 3%.

Surging trade uncertainties about ten times previous peaks – IMF

Concerns about global trade have reached nearly ten times the peaks seen in previous decades and could shave about 0.75 percentage point off world economic growth this year, according to data compiled by the International Monetary Fund. The Americas and Asia-Pacific are most affected by concerns about the US-China trade war, while Africa is least affected, the IMF said Monday in a new index aimed at quantifying trade uncertainty.

China: Paper Tiger

This post China: Paper Tiger appeared first on Daily Reckoning.

China’s shock currency devaluation last week begs the following questions: Is China a rising giant of the twenty-first century poised to overtake the United States in wealth and military prowess? Or is it a house of cards preparing to implode?

Conventional wisdom espouses the former. Yet, hard evidence suggests the latter.

IMG 1

Your correspondent in the world famous Long Bar on the Bund in Shanghai, China. The Long Bar (about 50-yards long) was originally built in 1911 during the heyday of foreign imperialism in China just before the formation of the Republic of China (1912-1949). Bar regulars were divided into “tai-pans” (bosses who sat near the window), “Shanghailanders” (who sat in the middle), and “griffins” (newcomers who sat at the far end).

I made my first visits to Hong Kong and Taiwan in 1981 and my first visit to Communist China in 1991. I have made many visits to the mainland over the past twenty years and have been careful to move beyond Beijing (the political capital) and Shanghai (the financial capital) on these trips. My visits have included Chongqing, Wuhan, Xian, Nanjing, new construction sites to visit “ghost cities,” and trips to the agrarian countryside.

I spent five days cruising on the Yangtze River before the Three Gorges Dam was finished so I could appreciate the majesty and history of the gorges before the water level was lifted by the dam. I have visited numerous museums and tombs both excavated and unexcavated.

My trips included meetings with government and Communist Party officials and numerous conversations with everyday Chinese people, some of who just wanted to practice their English language skills on a foreign visitor.

In short, my experience with China goes well beyond media outlets and talking heads. In my extensive trips around the world, I have consistently found that first-hand visits and conversations provide insights that no amount of expert analysis can supply.

These trips have been supplemented by reading an extensive number of books on the history, culture and politics of China from 3,000 BC to the present. This background gives me a much broader perspective on current developments in China and a more acute analytical frame for interpretation.

An objective analysis of China must begin with its enormous strengths. China has the largest population in the world, about 1.4 billion people (although soon to be overtaken by India). China has the third largest territory in the world, 3.7 million square miles, that’s just slightly larger than the United States (3.6 million square miles), and only slightly behind Canada (3.8 million square miles).

China also has the fifth largest nuclear arsenal in the world with 280 nuclear warheads, about the same as the UK and France, but well behind Russia (6,490) and the U.S. (6,450). China is the largest gold producer in the world at about 500 metric tonnes per year.

China has the second largest economy in the world at $15.5 trillion in GDP, behind the U.S. with $21.4 trillion, and well ahead of number three Japan with $5.4 trillion. China’s foreign exchange reserves (including gold) are the largest in the world at $3.2 trillion (Hong Kong separately has $425 billion in additional reserves).

By way of contrast, the number two reserve holder, Japan, has only $1.3 trillion in reserves. By these diverse measures of population, territory, military strength and economic output, China is clearly a global super-power and the dominant presence in East Asia.

Yet, these blockbuster statistics hide as much as they reveal. China’s per capita income is only $11,000 per person compared to per capita income of $65,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis.

China’s military is growing stronger and more sophisticated, but it still bears no comparison to the U.S. military when it comes to aircraft carriers, nuclear warheads, submarines, fighter aircraft and strategic bombers.

Most importantly, at $11,000 per capita GDP, China is stuck squarely in the “middle income trap” as defined by development economists. The path from low income (about $5,000 per capita) to middle-income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to purse assembly-style jobs.

The path from middle-income to high-income (about $20,000 per capita) is much more difficult and involves creation and deployment of high-technology and manufacture of high-value-added goods.

Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks.

China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.

In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved.

With this background and a flood of daily reporting on new developments, what do we see for China in the months and years ahead?

Right now, China is confronting social, economic and geopolitical pressures that are testing the legitimacy of the Communist Party leadership and may lead to an economic crisis of the first order in the not distant future.

In contrast to the positives on China listed above, consider the following negative factors:

Trade wars with the U.S. are escalating, not diminishing as I warned from the start in early 2018.

Trump’s recent imposition of 10% tariffs on the remaining $300 billion of Chinese imports not currently tariffed (in addition to existing tariffs on $200 billion of Chinese imports) will slow the Chinese economy even further.

China retaliated with a shock devaluation of the yuan below 7.00 to one dollar, a level that had previously been defended by the People’s Bank of China. Resorting to a currency war weapon to fight a trade war shows just how badly China is losing the trade war.

But, this currency war counterattack will not be successful because it will incite more capital outflows from China. The Chinese lost $1 trillion of hard currency reserves during the last round of capital flight (2014-2016) and will lose more now, despite tighter capital controls. The spike of bitcoin to $11,000 following the China devaluation is a symptom of Chinese people using bitcoin to avoid capital controls and get their money out of China.

The unrest in Hong Kong is another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest has spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.

This social unrest will grow until China is forced to invade Hong Kong with 30,000 Peoples’ Liberation Army troops now massed on the border. This will be the last nail in the coffin of the academic view of China as a good global citizen. That view was always false, but now even the academics are starting to understand what’s really going on.

International business is moving quickly to move supply chains from China to Vietnam and elsewhere in South Asia. Once those supply chains move, they will not come back to China for at least ten years if ever. These are permanent losses for the Chinese economy.

Of course, lurking behind all of this is the coming debt crisis in China. About 25% of China’s reported growth the past ten years has come from wasted infrastructure investment (think “ghost cities”) funded with unpayable debt. China’s economy is a Ponzi scheme like the Madoff Plan and that debt pyramid is set to collapse.

This cascade of negative news is taking its toll on Chinese stocks. This weakness began in late June 2019 when the summit meeting between U.S. President Trump and President Xi of China at the G20 Leaders meeting in Osaka, Japan failed to produce substantive progress on trade disputes.

Since then, the trade wars have gone from bad to worse and China’s economy has suffered accordingly. My expectation is that a trade war resolution in nowhere in sight and the trade war issues have been subsumed into a larger list of issues involving military and national security policy.

The new “Cold War” is here. Get used to it.

Regards,

Jim Rickards
for The Daily Reckoning

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