Gilded Copper and Secret Peace Deals: Aug 2020

Because of the flu some important dimensions of our relationship with China have been overlooked.

Two months before the 2016 election I wrote a blog about the potential market reactions to Trump versus Hillary.  Below is an excerpt from that piece:

“For over two years I’ve voiced that one of the United States greatest economic and political vulnerabilities is if China decided to not show up one month to purchase our debt.  You see, every month we hold a treasury auction, where nations, banks, corporations and financial entities purchase government bonds from us.  We need them to do this because we don’t raise enough in taxes and tariffs to cover our budget.  Just about every month there are some bonds left over and the Federal Reserve steps in and purchases the scraps.  That’s like paying your utility bill with a credit card.  But that’s another story, for another blog.

Other countries are very willing to purchase our bonds because the U.S. Dollar is the world reserve currency and any commerce conducted, regardless of your homeland, will need to be exercised in the greenback.  So, it only makes sense for reserving purposes to have plenty of U.S. dollars, notes and bonds.  This reserving requirement is critical for China, since they’re the 2nd largest economy on the planet (behind us…for now), and they’re reliance on commerce being executed smoothly has been the argument against the fear that China would skip a month from buying at our auction.

I understand that premise, but I also believe that China is not our friend.  Not economically, not politically, not militarily, not even in checkers.  So, then I read an article that the World Bank announced that the People’s Bank of China approved the World Bank’s inaugural issue of Chinese bonds denominated in Special Drawing Rights (SDR’s), and I thought “Hmmm, that’s a very interesting combination of financial dynamics.”

 

Now, 4 years later, people can understand more soberly why I said, “China is not our friend.”  Still not convinced?  Let’s look at something that flew below the media radar just 6 weeks ago.  I’ll bet you don’t remember seeing this headline: China’s biggest gold fraud, 4% of its reserves may be fake.  The article (economictimes.China gold fraud) can be summed up in this quote:

“it now appears that a major part of China’s subsequent economic boom has been predicated on tens of billions in hard assets — such as gold — which simply do not exist”.

If you didn’t see the above article, you also probably missed this one too: GOP senator calls on China to repay $1.6T of century-old debt.  Here’s a quote that captures it well:

“China has repeatedly failed to honor its obligations to America, taking American families’ money and jobs,” McSally said. “Well, the abuse ends here. We are holding China accountable for their debt and for unleashing the coronavirus on the world. We demand China pay back the $1.6 trillion it owes to American families.”

I’m not sure the Senate would have had the leverage to introduce such a pursuit if we hadn’t discovered the chicanery going on with the gilded copper bars.  So, what’s my point?  Glad you asked.

Washington DC has ridden to the rescue to both individuals and businesses with trillions of relief funds.  Our heads have been spinning on a swivel; one hand holding a mask, the other clicking a computer mouse hunting for any optimistic signs that some level of normalcy is around the corner.  We will have clarity after November, regardless of who wins, and then the conversation about how the trillions will be repaid has to begin.  I have some opinions about how this will be managed if Trump wins and the above weakness in China’s camp points to it.  If I tell you outright, you’ll think I’m bonkers, so let’s allow the scroll to unroll a bit and I promise to bring it up again.

Shifting gears…

Of all the exciting potential the Israel/United Arab Emirates peace agreement holds, the most revealing facet of the announcement is that it caught EVERYONE by surprise.  Think about that.  No leaks.  No leaks in an administration that has been more porous than swiss cheese.  How can one interpret that?  One way – if you knew you were being spied on since 2016, maybe you allow the spies to continue, so you can gather evidence of who they’re reporting to.  You know, ‘keep your friends close, but your enemies closer’.  If the Trump Administration can keep such a major announcement like the peace agreement completely locked down until revealed at a 5:30 pm press conference, imagine what else they’ve been able to keep from leaking…

So I don’t drift too far into the political fray, let’s get back to economics.

One of the most critical components of the UAE deal, which will lead to peace agreements among other countries, is that the United States became oil independent over the past 3 years.  Since, for decades, we were the largest purchaser of the Arab countries oil and now that cash flow has basically been eliminated, the Middle East economies need to pivot to other revenue sources.  What’s available?  They aren’t big manufactures of anything.  Farming is out.  The language barrier prevents them from adopting a customer service economy similar to what India initiated 20 years ago by opening Call-Centers.  That leaves two main categories: Technology and Tourism.

Technology

It should be no surprise that the UAE, who along with Israel, is considered the most advanced technologically, not just in the Middle East, but per-capita, after the United States, anywhere in the world.  Cloud base services, Cyber security and AI expansion will find some home bases in progressive Middle East countries.

In March 2019 I introduced you to some new developments along these lines when I wrote about Saudi Arabia and their building of a 5G City-State, NEOM.  You can read the entire piece here:  Blog

Here’s an interesting video about solar powered desalination technology that NEOM is using to address the water challenge that every dessert region faces:  Life in NEOM:  Water.  They also have a fancy new website: NEOM.  My point in showing you this is that despite the flu pandemic, some things keep marching on.

Tourism

It’s pretty tough to convince a family to explore historical sites if they fear the tour bus might have a bomb strapped to the axle.  Enough said.

 

What about the stock market over the next 3-months?  I knew you would ask that – thanks a lot.

In my February 2020 Blog, regarding the stock market sell-off, I predicted:

I believe we’ll see a “V” there without a lot of effort.  Meaning, stock prices will rebound from the sell-off and continue higher (at least modestly higher).

The letter shape we need to focus on is in the Corporate Earnings of 2Q, 3Q and 4Q.  If they are stable, meaning shaped like a “U” over this time frame, then that means CEO’s aren’t snapping to adjust their forward guidance Down.  If we experience a “U”, that will be a tremendous indicator that our economy truly is as strong as the Trump administration touts that it is.  If we can shrug off the Coronavirus without setting up a Recession, the Roger Banister Effect will truly move us to historic, record-breaking levels.

I was right about the “V” in the stock market, as we can see in this graph:

The two red stars I put in the upper righthand corner frame the top legs of the “V”’.  They also could represent a classic “double-shoulder top”, which historically leads to another, deeper sell-off.  If we learned anything over the course of this year, its traditional logic has taken a back seat.

The “U” shape of our economy is, dare I say, completely dependent on who wins in November.  The stock market “V” is fostered by the opinion that the strongest economy in the history of our country has been temporarily sidetracked.   If the architect of that economy wins, 2021 could be a massive growth period.  Why?  Here’s some things to consider:

Prior to the flu shutdown, our economy was roaring based on an economy driven by:

    • Technology
    • Service
    • Independent Oil
    • Farming

You add a layer of Manufacturing to the above and a huge swath of middle-income people are lifted even higher than they were before.  And we’re not talking about just auto-assembly line jobs, but rather high technology, easy skill transfer manufacturing jobs.

If Trump wins, he will go after the Fed and put us back on the Gold Standard.

SpaceX is more than military protection from the heavens.  It will be a platform to:

    • Travel to the Moon (and Mars) will be a realistic concept. The job growth to support such a sector would be stunning.
    • We will begin mining minerals from other planets. No more “harming the environment”.

 

What about the stock market between now and November?  Well, “the market”, which is always forward-looking, views status quo in November.  Could that change – sure.  But, not because of polling data.  I don’t trust polls.  I’m 56 years old and I’ve never been polled.  Have you?

Could “the market” be manipulated into a sell-off to hurt Trump – sure.  I wouldn’t put anything beyond the grasp of people clutching onto their power.  So much for “servants of the people”…

 

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