It’s Going to Get a Lot Messier

Well, this being the first of who knows how many (or how few), I am going to take a minute to posit some guidelines:

  1. every figure that I use is legitimate – absolutely no fake news, not ever…any question as to the source will be immediately answered
  2. I have no political agenda – that said, the reader should understand that economics and politics are inextricably linked and, as such, political references are inescapable insofar as they relate to the topics of discussion
  3. as stated in the original introduction, there is no fixed schedule


Okay, then – it’s been a helluva few weeks. Leading the headlines is the SEC charging Elon w/fraud – I guess that he should have stuck to weed when he started blowing smoke. It’s too bad but maybe the Board will finally grow a pair and start to exercise some of the overall control for which they are so well reimbursed.

For trade, people, we have an ongoing mess that’s going to get a lot messier…’s not just tariffs and counter-tariffs. Yes, I could give you a whole long boring exposé about wave theory and comparative advantages,  but it comes down to scratch two economists and get three diseases, and no one has a clue as to what they are much less a cure for any of them…I wish that I could add, “LOL”, but it’s really not funny because it’s really true. All they have are theories – just look at this guy in the White House, Peter Navarro. Whether you agree with the tariffs or not, or with protectionism or not (and tariffs are an economic response to the latter, which is politically motivated), the record shows that this guy never worked anywhere except in academia.

And the theories that he has expounded (and that the President has embraced and is implementing) have significant weaknesses (I am trying to be polite) that are just now starting to become apparent….you can turn a motorboat port (left) or starboard (right) with a twist of the wheel and get immediate response but a yacht takes longer and a major  cruise ship even longer than that. There is a time lag and this is why applied economics is as much an art as it is a science – changing the tariff structure, or the tax structure, or the interest rate structure today will not have an immediate effect – but there will be effects down the line and the study of economics is (or should be) focused on what the changes of today will produce later on. To use an analogy, every tsunami started out as a relatively small disturbance that got vastly magnified.

As time goes on, I will continue to expand upon the preceding comments – for today, importing to the USA for the next few months is going to be ‘interesting’…..manufacturing availability will be constrained, quality controls will be similar to what is usually experienced around CNY and container space will be short as everyone tries to beat the imposition of the 25% tariff.

As the US interest rate goes up, the pressure is going to be on all currencies and economies, particularly EM’s. For example, the problem with the Turkish lira is not solely confined to Erdogan’s antics – sure, he exacerbated the situation (and is still doing so) but the real deal is that loans were made during QE at terms that seemed good for everybody. The thing is, these loans are expected to be paid back in US dollars – and, when your currency has sunk 40% or more in value, no one is going to have any confidence that you can pay it back, so no one is going to roll it over, which prompts additional declines. This isn’t news – the same thing started with Thailand in 1997 and spread like wildfire and acquired the sobriquet of, “Asian Flu”……a cute name that covered a whole lot of hurt. I remember being on an Asiana jumbo then leaving Seoul bound for Qingdao that had 20 passengers. People were lining up at government offices to give in their jewelry to help the country pay down its debts – Korea learned from that experience but almost no one else has. Do you know that the interest rate in Argentina these days is 60% – yes, sixty percent – and the peso is still falling and money is still fleeing the country? The Indian rupee is at record lows – and the list goes on. So you say that you don’t do business there so why care – but your bank does, or a corespondent bank that your bank deals with does, and if those can’t pay back (economic imbalances, imposition of currency controls etc. & etc.) for whatever reason, your bank and your country, wherever they are, are going to be affected – when the Turkish lira started to collapse less than 2 months ago, 3 French banks were immediately and seriously affected.

Today, everyone talks about the low household saving rate in the USA – but Allianz just reported that the ratio of Chinese household debt to GDP is now 49.1%, and that is up 20% in just 5 years. There is at least one company in China (Lexin) that will make loans to consumers for any purchase, even a chocolate bar or a lipstick! This can only end one way. and it won’t be pretty.

The Chinese yuan is down over 9% since April (against the USD) and trade is down and trending more so. That said, it does not take a genius to figure out what the net result of a 25% tariff will be as costs of everything from underwear to televisions skyrocket (and I am not even mentioning things like appliances or cars)….replacement purchasing will be delayed, inventory will be curtailed, companies will close, banks will be awash in bad debts – sound like 2008? It is worse,  because net indebtedness in the USA is actually several times what it was then, so the results will be magnified.

Safe (economic) haven – global trade is like financial leverage….when you make a good bet, that leverage magnifies your winnings and you look like a genius, but when the bet goes the other way ????




Bennett Little is one of our experts in the Global From Asia VIP network. Get to know more about him here.

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