Posted on 09/10/2020 7:56:07 AM PDT by SeekAndFind
Today is like one of those rare occasions when the Broadway understudy for a leading role finds out that the star has the flu (not Covid-19) and so they get to go in front of the audience for once. Yes, Europe, today is your time to shine: Everythings coming up Milhouse!.
Or not. Because the pressure is certainly on.
First, we have the ECB. The market whisper is that they have decided that a global backdrop where the Fed, BOE, RBA and RBNZ, among others, have all flagged that things remain grave, and that far more easing can still be; where a second wave of the virus is clearly evident; and where we are worryingly close to a Hard Brexit, is the right time to sell sunny economic uplands ahead. Or at least that is what the markets will perceive the outcome to be if we indeed see their economic forecasts revised upwards without the right serious tone. They will take that to mean that while everyone else is close to doing more, the ECB isnt. And the impact, if we havent already seen it in buy-the-rumour, sell-the-fact manner, will be appropriate.
So over to the always-says-exactly-what-the-market-wants-to-hear ECB President Lagarde to try to explain how they are upbeat, but not so upbeat that anything needs to change in any of the wrong ways like EUR hitting the roof, for example.
Second, we have the EU trying to deal with Brexit, where the UK is, on its own admittance, steering towards acting like a rogue state and unilaterally breaking international law. There is an emergency meeting today between the two sides and, frankly, its unclear if the UK is going to talk or declare There is a bomb in this briefcase! One would imagine that part of this might feed into the ECBs thinking if the meetings overlap(?)
At the same time, the EU is dealing with China. EC executive vice-president Vestager is going to be talking to Chinas Liu He, and the South China Morning Post reports the latter will be offering Europe the chance to join it in its proposed new China Network on data security .as opposed to the US Clean Network, being the unspoken part. Once again, we see Europe caught in the middle. Once again, it will probably try to go its own way. In the same way Europe doesnt rely on the US in NATO and on the USD in the Eurodollar markets. The understudy, indeed.
Lets see how Milhouse does when the spotlight shines.
Meanwhile, here is something to study. China has announced it plans to boost its strategic commodities reserves to assuage anxiety over energy and food security. Starting in 2021, it will make what Bloomberg calls mammoth purchases of crude, strategic materials, and farm goods, officials apparently say. This is being done to ensure China can ride out any repeat of this years supply disruptions, or a deterioration in trade relations with the US, for example. This is apparently part of the shift to internal circulation, or greater self-reliance, which is already being flagged, and which will kick in for the five year plan 2021-25.
Actually, those in the know know that this has already been happening across the board for some time: China has been swallowing up raw materials and strategic goods far in advance of what the economy needs right now. That means the drop in other imports --which are still down y/y overall even including this commodity surge-- is even larger. (And why arent FX reserves rising even as the trade surplus soars ? Mmmm.)
Heres the understudy way to study this: go long commodities! - because obviously China buying in vast quantities for years to come, right? Expect lots of stories like that.
Heres the star way to think about it: what does it really say if China is stocking up so much? Has there ever been a point during trade tensions where anyone has ever threatened not to sell to China? The issue is always that trade partners dont ONLY want to sell raw materials and unprocessed commodities to it, but rather to hold more of the technology and value chain themselves. That is as true for Europe as it is for the US.
What possible disruption could be on the horizon that would require China to have a large enough buffer of all conceivable inputs --in remote inland areas to boot-- that it needs to use up its precious USD reserves in a bulk splurge now?
Geopolitics, as we say euphemistically? That hardly suggests the benign, sunny uplands that ECB is going to try to sell today, with its eyes firmly on its own shoes, RBA-style.
It cant be on *imminent* concerns of the US acting on Chinas USD access because all these purchases will presumably still be made in those precious USD, even in vast size, right? Or is the idea with THAT much buying, a shift to CNY can be accelerated? For commodity sellers, thats something to consider. So is that this would be a multi-year bull-run and then a very sharp stop.
Indeed, theoretically China would no longer have to worry about not having enough of X, or Y, or Z; and it could simply stop buying from industry/country X, or Y, or Z for a year or two if prices were too high, .and watch them collapse, until prices were again amenable, or the asset was for sale, or the relevant government came to its senses on foreign policy.
I am not saying this is what China *IS* doing. Yet this is how anyone seeing trade geostrategically, or fearing that others are going to do the same, would think and act. We have more than enough examples from history from all round the word; and our domestic economies are replete with monopoly and monosophy, and at the firm level we see the same game play out.
Is everything really coming up Milhouse, Milhouse?
But lets ignore all that and watch Christine Lagarde try to explain why there may be marginally more of the inflation the ECB never generates ahead than the previous set of forecasts predicted, underlining why such forecasting is not worth doing anyway.
Nice summary. Trump's name did not come up but his fingerprints are all over this. What we're seeing here is the largest manufacturing nation in the world attempting to flex its muscles as a consumer nation. That, given the ongoing (and inevitable) diaspora of manufacturing to everywhere from Malaysia to Lesotho, may well be in its long term interest but we're talking decades there - or are we? Because China has discovered what it means for a manufacturing nation to be so dependent on oil producers, where the role between manufacturing customer and producer is now switched. For now the effect is blunted by the fact that low oil prices are in China's interest but it is clear that they are not under its control, and for an autocratic government that is threatening indeed. And all the while looms Trump, with his hands on the controls of both, albeit to a limited (but very significant) degree. China would love to attain that position if only for its independence. And that may be, at least partially, what this is all about.
Prior to WW2, we embargoed Japan from scrap metal and oil because of their brutality in China. As a result Japan, with no such resources of her own, was facing economic calamity. This, at least in part, precipitated Pearl Harbor.
We are not embargoing the PRC, but we are pressuring it economically and their economy is not nearly as robust as they project.
Will they attack us? Depends. China has a lot more resources to draw upon. But it pays to remember December 07, 1941, whenever you pressure a country that thinks it is your peer.
Many questions w/o answers in this speculative column. If the race to hoard commodities over to the China side is any indication, the above quote from near the end of the article could loom significant.
If the long reign of the USD is now in jeopardy it would be because the $30T national debt is never going to be paid, in which case confidence in the USD as the world's go-to currency could evaporate overnight in a great cascade. The chicoms have long endeavored to undermine it in favor of their own yuan.
Maybe..
But they’ve been stock-piling food and medicine for about a year.
They even own food processing plants in the US and all of it gets shipped to mainland China to be stored in cold storage freezer warehouses.
We should be doing it too. Its monetary policy.
To me, the longer we wait, the stronger China is going to become. Better to force them to be openly aggressive than allow them to slowly gain geostrategic advantage. Right now, a US blockade would mean China gets nothing in or out by sea, bringing its economy to a halt and producing serious food shortages. There simply isn't enough rail capacity to make it up. The CCP would probably respond with missile attacks on US bases in the Asia/Pacific and probably massive cyber attacks on US business and infrastructure. They could also prompt the Norks to try some BS, in which case turning NK into a glass parking lot would be a good idea. Right now they have managed to alienate everyone around them, and neighbors like India might find this a good opportunity to dogpile on the Chinese.
Dollar hegemony won't end because it cannot: no other currency bloc will allow the enormous trade deficits need to become a reserve currency, and the political risk with China vis a vis the yuan is so insanely high that no one would accept it as a long term reserve.
Germany's and China's exports would also tank-- right now the ECB is worried about a collapse in German exports driven by a rise in the Euro vs. the dollar.
Stop funding communists, i.e., Red China!!!!!!!!!
It’s hard to believe DC has allowed China to dominate US government and institutions for decades now.
Bring USA production for USAians back from China and everywhere else.
Huge swathes of US citizens who use to build USA products, live in ghettos, like Detroit. What kind of evil wrought this destruction upon our cities?
Buy USA. Give your neighbor a job.
We affectionately call them Free Traitors.
Who the hell is talking about a blockade?
Blockading the PRC is an act of war. We are not nearly to that state yet.
Japan was not blockaded - it was embargoed. Nobody in the US was allowed to sell them scrap metal or oil. Japan didn’t have metal ore or oil so that threatened to destroy their economy. Their options were to change policy or find other sources.
You ignorantly, from under your isolationist rock, violate the trade mark law repeatedly and call American businessmen Free Traitors.
The business of America is business.
Your comments are well-reasoned. Thanks.
American businessmen are not all Free Traitors. Free Traitors are a small subset and need to be crushed.
> The business of America is business.
Ahh .. a “movement” conservative globalist shill.
Not many of you left!
Have a nice day!
There is no apology to mere wage earning Bourgeoisie for being a successful businessman trading over much of the world
America was founded on world trade.
No one is talking about a blockade at the moment, but that seems to me to be exactly the possibility the CCP has in mind if it is stockpiling. Same as Japan in 1941.
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