Whitney Tilson’s email to investors discussing that U.S. and China may be headed for mini-deal on trade this week; Kim Iskyan’s thoughts on the trade war; Lunch with Mohnish Pabrai.
1) Stocks are getting a boost today on hopes of at least a partial trade deal between the U.S. and China.
Q3 2019 hedge fund letters, conferences and more
Here's a New York Times article about it: U.S. and China May Be Headed for Mini-Deal on Trade This Week. Excerpt:
The United States and China could announce a limited trade agreement this week that would prevent President Trump's planned tariff increase from going into effect this month and set rules around how China manages its currency, according to a U.S. Chamber of Commerce official who has been briefed by both negotiating teams.
Top officials from the two countries are meeting again this week to try to resolve a yearlong trade war that has dragged on amid disagreements over the types of provisions any pact should include. But as the clash begins to inflict economic pain on the global economy, negotiators from both sides seem increasingly focused on reaching a mini-deal that would resolve just a portion of the trade dispute.
Stansberry
2) This reminds me of a comment my friend Kim Iskyan, a Stansberry Research analyst who lives in Singapore and specializes in emerging and frontier markets, sent me recently:
I've probably lived too long in the former Soviet Union, where conspiracy theories are the default assumption, but it strikes me that the odds of a U.S.-China trade war "truce" have gone up a lot due to Donald Trump's impeachment problems.
If nothing else, Trump has proven himself to be good at getting people to look at the shiny object in his hand... and what better way to distract the media cycle (and everyone else), at least for a little while, than to resolve the trade war (which of course is entirely of his own creation... but anyway)? Of course, Chinese President Xi Jinping could also use a win these days, with the 70th anniversary celebrations and the Hong Kong protests. The trade war is wearing on both the U.S. and Chinese economies. And though maybe it's a bit early (the U.S. presidential election isn't for another 13 months), but having a fillip of growth (again, so artificial, but still) can only help the incumbent. Maybe it's an actual deal, or maybe it's a lot of empty gestures (true to form), but markets seem to react to all of it anyway.
3) Kim added:
I don't think of it as a trade war... and it's not something that can be "fixed" anytime soon. I think what's happening now is a skirmish that's part of a much bigger war that will last for decades.
No fix soon to US and China issues soon
Kim wrote a longer piece about this, which he has given me permission to share in its entirety. You can read it at the bottom of today's e-mail. Excerpt:
What does it all add up to? The U.S. and China are going to be competitors – economically, politically, geo-strategically, militarily, technologically, and in a lot of other ways – for decades to come.
And now, every two years, China adds GDP equivalent to the total economic output of Brazil. It's just a question of time before China's economy overtakes that of the U.S.
So any kind of band-aid trade deal that Trump and Xi come up with might boost short-term stock market sentiment. It will give Xi some political breathing room, and it will boost Trump's re-election chances. But a deal won't change the underlying fierce competitive dynamic between the two countries.
Remember... China has been around for a lot longer than the U.S. – and knows how to play the long game (that is, it has patience) in a way that's completely foreign to the American political (and economic) system. Americans think, at most, in terms of decades, and politics happen in chunks of four years (for the U.S. presidential cycle). In China, centuries are the currency of time... and leaders come and go when they please, rather than according to the calendar.
4) My friend Mohnish Pabrai is raising money for his wonderful Dakshana Foundation by auctioning off lunch with him. The bidding ends at 7 p.m. Eastern time today. As of this morning, the high bid was $17,100... To bid, click here.
Best regards,
Whitney
The U.S. and China Trade War Is Just a Warmup
By Kim Iskyan
There's a war going on now... a trade war between the U.S. and China. Markets rise or fall according to whether it looks like it's about to be resolved – or if President Donald Trump tweets that the U.S. is going to impose more tariffs on China.
But it's not a war. This is just a warmup... It's kids in a sandbox compared to the war – a multi-generational, decades-long struggle for economic, geopolitical, and technological supremacy – between the U.S. and China that's going to unfold over the next decade.
Farmers
Don't get me wrong. People are getting hurt in the trade war happening right now. It's hitting global economic growth... accelerating deep structural changes to trade patterns and supply chains... pressuring stock markets... and challenging the livelihoods of hundreds of millions of workers around the world whose jobs are at risk.
But at some point, there's going to be an end to the current trade war, or at least a truce. It cost the average American household $414 last year, according to the New York Federal Reserve. The U.S. government is spending more on trade relief payments to American farmers (on whose behalf the trade war is supposedly being waged) than it's earning in revenues from higher tariffs on imported Chinese goods.
Economic growth in China last quarter, at 6.2%, was the slowest since 1992. The government has launched a range of stimulus efforts in part to reduce the impact of the trade war.
And sometime soon, U.S. President Donald Trump and Chinese President Xi Jinping will come to some kind of deal, and both will declare victory. Trump will tweet out self-congratulatory tweets. Jinping will show that he didn't stand down to the Americans. And stock markets around the world will rally.
U.S. and China war
But we're only in the early stages of what I think will be a multi-generational "war" between China and the U.S. And the trade war is just a small skirmish that's part of a much bigger war.
You see, it's easy to forget that a generation ago, China was such a poor country that "Finish your dinner – children in China are starving" used to be a thing parents said to kids facing a plate of broccoli. But after three decades of growing an average of 10% a year, China's economy is the second-largest in the world. And China – which, many hundreds of years ago, was the pre-eminent power on earth – isn't going to play second fiddle to anyone.
So one of the things that the Chinese government is doing with its rapidly growing wealth is extending its geopolitical influence to the far reaches of the earth. As part of Beijing's Belt and Road Initiative (formerly called the One Belt One Road initiative), China is spending $4 trillion to more closely bind Asia, Africa, and the Middle East to China via an intricate network of land, air, and sea transport infrastructure.
I was in Indonesia recently, which – thanks largely to its massive natural resource wealth – is a big target of Chinese government investment. Indonesia – and dozens of other developing markets hungry for capital – have eagerly taken cheap Chinese money that comes (at first, at least) with few strings attached.
Advantage to China
You see, China is pursuing geopolitical advantage around the earth through building infrastructure. And it's also looking to lock up land, oil, copper, and coal to supply its economy for decades to come.
But Chinese "investment" is often less concerned with profit. Instead, it's focused on establishing long-term strategic advantages. China wants to ensure that it has enough oil, copper, and coal to fuel its economy for years to come. And China isn't obliged to stick to the rules of ethical business that often tie the hands of western investors.
On another front, China's military isn't competitive with that of the U.S... yet. Technological advances (in part thanks to technology transfers – both purchased and stolen – from the U.S. and elsewhere, as well as hefty subsidies from the Chinese government) have made China genuinely competitive in a range of sectors.
What does it all add up to? The U.S. and China are going to be competitors – economically, politically, geo-strategically, militarily, technologically, and in a lot of other ways – for decades to come.
U.S. and China economic growth
And now, every two years, China adds GDP equivalent to the total economic output of Brazil. It's just a question of time before China's economy overtakes that of the U.S.
So any kind of band-aid trade deal that Trump and Xi come up with might boost short-term stock market sentiment. It will give Xi some political breathing room, and it will boost Trump's re-election chances. But a deal won't change the underlying fierce competitive dynamic between the two countries.
Remember... China has been around for a lot longer than the U.S. – and knows how to play the long game (that is, it has patience) in a way that's completely foreign to the American political (and economic) system. Americans think, at most, in terms of decades, and politics happen in chunks of four years (for the U.S. presidential cycle). In China, centuries are the currency of time... and leaders come and go when they please, rather than according to the calendar.
The dynamics will change when China becomes the world's largest economy in the next decade or so. As the balance of economic power shifts, so will the terms of any negotiation in the trade war. What would have worked for the U.S. before (like tariffs or banning Chinese tech companies) will not work when China's global economic footprint eclipses that of the U.S.
