This is a personal note and therefore not for wider circulation nor press release.
The way to analyze markets has changed dramatically in my thirty years of doing this job. In the old days, it was about analyzing flows, fundamentals and franchise information.
Now it's all down to either "technological prowess" for the short term price movements or anticipating the next policy change to anticipate bigger swings. The history thus far of 2019 have made it clearer than ever that getting the latter is crucial – as judged by the Fed's Policy Panic this year and now, the direction by what direction the US-China trade talks will take and whether China's policy stance on the CNY is an unmovable object. Like many other observers, I have been somewhat confused on why and how the trade talks between China and the US broke down exactly at a time where the deal was ready on paper ready but not agreed by President Xi & President Trump.
This morning is finally dawned on me what is happening and it is to a large extent a dramatic change of paradigm.
My interpretation: China thinks Trump has a strong chance of regaining The White House – this changes the long-game policy stance from one of wait-and-see to actively pursuing and even rushing a policy shift of technological autarky – ensuring that China has all of the building blocks to avoid the leverage of US sanctions or disruptions.
China plays a long game and as such they did expect Trump to be gone by 2020, so a wait-and-see plan and playing to his vanity and ego had been the game plan. But now the recent change in rhetoric towards a more nationalistic and "blame game" agenda is an important shift. It may be signaling the recognition that Trump risk hanging around longer than the 20 remaining months of his term in office. As such – the end game changes for China. From the US side, we will see more anti-China rhetoric and actions and the pressure will remain on international organizations which will become clear at the G-20 June meeting in Japan, where WTO issues at the top of the agenda. The very existence of the WTO is anathema to Trump and thus terminally impaired as long as Trump is in office, most pressingly in current US refusals to appoint new arbitration judges – which will make any ruling entirely impossible when three judges are set to retire this December.
China is extremely well informed and analytical and the fact that they believe Trump could be around until 2025 has to do with the rise of Joe Biden as his most likely opponent. I will make the same comment I made ahead of the US election in 2016 – Joe Biden is unelectable as was Hilary Clinton. He is an old-guard career politician in his late seventies whowill not fly with the wider audience, much less the increasingly young and progressive Democratic base. I hear you saying – he is very qualified – but Hilary was declared the most qualified person to ever run!
Elections are not a vote on merits and or ideology but a vote on the day on how the population thinks/feels. Joe Biden simply does not match align with any of the rising support for the progressive AOC, anti-crony-capitalist and the Green environmental agenda that drives the millennial generation in the US – the largest generation there by the way, unlike here in rapidly aging Europe.
Every single election since Brexit has been won by what I would call unconventionals, i.e., parties and grass roots candidates who don't accept the status quo or the multilateralism inside the convention of globalization and its "subsidiaries" IMF, World Bank, WTO, NATO, EU and ASEAN. The more "fringe" you are, the more you are outside the tents looking in, the more likely you are gaining that vote of confidence from voters to break from "the system". Feeding the electoral success of these grass-roots, fringe movements is the new social media landscape, which drives traffic not on rational technocratic policy discussions, but on raw emotion and negativity.
The point here is that the US vs. China trade talks may be less and less likely to end in even a "paper deal" as the agenda is changing, from buying time to reactivating the agendas of Make America Great Again and China 2025 – two strategies which were always mutually incompatible relative to the status quo of a globally integrated economy. Yet somehow the market continues to operate with blinders firmly in place and acknowledge the risks that this is the new lay of the land.
Here are a few links to articles which I deem important for the overall take above:
People's Daily: http://www.chinadaily.com.cn/a/201905/16/WS5cdc9c54a3104842260bbdb1.html
Unfortunately, the US side has repeatedly upped its terms, repeatedly contradicted its words, and is obsessed with putting extreme pressure, thinking it can maximize its own interests through such dishonest and insolent bullying tactics. This is a wrong move aimed at a wrong object!
….The United States should never take China's sincerity as softness
…safeguard their national interests and dignity. Our determination is as firm as a rock.
China will never do anything that will leave it humiliated again
The Chinese people know from historical experience they should not fight without adequate preparation. They must adhere to a bottom-line thinking method, prepare for the worst, and work toward the best.
However, negotiations must be based on sincerity and follow the principle of mutual respect and equality. The agreement between the two sides must be equal and mutually beneficial. Only when the two sides are moving in the same direction, seeking common ground while reserving and resolving differences and solving problems with a rational and pragmatic attitude can China-US economic and trade exchanges better serve the people of the two countries and the world.
South China Morning Post: https://www.scmp.com/news/china/diplomacy/article/3010456/what-killed-us-china-trade-talks-tale-two-texts
"I heard there was a text the US side had given to the Chinese and it spelt out what the obligations would have been in certain areas … in the text they got back from China, all of these details were taken out," she told the South China Morning
"A lot of the time it has to do with sensitivity of having the document in the public domain. They do not want it to look like someone is dictating terms [to China]," she said.
The Hill: New polls finds Biden leading DEM pack: https://thehill.com/hilltv/what-americas-thinking/437871-new-poll-biden-still-leads-democratic-presidential-pack-despite
The Hill: https://thehill.com/homenews/campaign/443856-poll-biden-leads-trump-by-double-digits-in-pennsylvania
Trade War is again used in Chinese Media: https://twitter.com/Steen_Jakobsen/status/1128565538555400197
Talks between leaders not always ending well: https://twitter.com/Steen_Jakobsen/status/1127970919178227712
USDCNH as indicator for trade talks success: https://twitter.com/Steen_Jakobsen/status/1127904471290454019
Macro chat w. Steen Jakobsen: https://www.home.saxo/insights/content-hub/articles/2019/05/10/macro-chat-with-steen-jacobsen
Safe travels,
Steen
PS: Since we edited the article – a part confirmation has been given by China on this new path..: https://www.bloomberg.com/news/articles/2019-05-17/china-not-interested-in-talking-with-u-s-for-now-state-media
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
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