After Pedro and his tortilla munching amigos south of the US border, Trump’s favourite punching bag appears to be China:
I questioned the wisdom of this in last week’s World Out of Whack.
Contrary to Trump’s claims, China is trying to fight a market which is pressuring the yuan down. We know that China isn’t actively pressuring their currency down but rather trying to hold back the outflows.
Do they want a weaker yuan? Sure, but they also want a stable currency which means one that doesn’t move around like an epileptic stealing hubcaps from moving cars.
We can see how they’re managing the decline in their falling FX reserves which have been used in order to support the yuan. China, folks, is experiencing significant capital flight and this is what is pressuring the yuan lower. Trump clearly doesn’t get this.
China have a “helluva” battle on their hands as on the one hand they are trying to curb a credit bubble and on the other hand trying to ensure the economy continues growing.
Today’s thoughts aren’t on China or the renminbi but rather on their
friendly neighbour, Japan.
Japan have made absolutely no bones about devaluing their currency. Trump has been relatively silent on Japan (compared to China, that is).
Japan are really in a pickle. The lid is tightly screwed on the jar and there is no way they get to come out as anything but shrivelled and sour. Sweet cucumber time has long gone.
Abe for his part can easily come out today and tell Trump, “No, really. We aren’t intervening in the currency market.”
“Foreign exchange rates are led by the markets. We are not manipulating them,” Masatsugu Asakawa, vice finance minister for international affairs.”
Strictly speaking this is true.
Ever since the BOJ pegged the the 10-year bond yield at 0% they no longer needed to directly intervene in the currency market, just the bond market. What they did, of course, in this
batshit crazy unprecedented move was to give up control of their balance sheet.
It’s still amazing to me that they’ve managed to do this. On its own it makes no sense. But when viewing the world in its entirety and considering the monster global bond rally of 2016 where we had over $13 trillion trading at negative yields, we can see that that this helped the BoJ get to this position. Below you can see how the JGB 30-year bond yield briefly flirted with the 0% line in that period of insanity.
Now, when the BoJ pegged the 10-year at 0%, for JGB bond traders this must have been like taking away Trump’s Twitter account. They must have been at a complete loss as to what to do. Short or long, doesn’t matter. All of the pressure has to move to the currency markets. After all, what is a sovereign bond if it’s not simply a long dated currency and what are you to do as a trader if you can no longer trade the bonds?
Traders make money on volatility and the BoJ completely eliminated volatility. Whether they actually eliminated it or simply suppressed it like a massively coiled spring I’ll leave for another day’s discussion, but for now traders can’t make money where there is no volatility and there ain’t any in the JGB 10-year.
What this means, of course, is that the yen is now in the hands of the market and no longer in any way controlled by the BoJ. Scary stuff and a topic I’ll have to cover another day.
Trump and Deal Making
What I’ve been trying to get my head around is what Trump is thinking about all of this (if he thinks of it at all).
Of course he has his own problems and his own agenda. Chief of which is to deliver on his promises to the American people. We also know Trump is a businessman. So when talking to China instead of brow beating a nuclear power it would make a lot of sense to go to Xi and say:
“Listen buddy, I know I’ve said some nasty things about you and, to be honest, your eyes still look funny to me but listen, let’s work something out.
How about you agree to invest in US infrastructure, because you know, and I know you know this, we’ve got a wee bit of a problem here ourselves.
It’s not really like we’ve got the money sitting in the bank to invest in this stuff. I mean, we can borrow it and, believe me, I’m all about borrowing. I mean just look at all the debt my businesses have managed to use in the past.
But you know, there will be noise about budget deficits and silly things like that. What about instead of me slapping you peasants with tarrifs you agree to invest in our infrastructure and things can keep going just fine for you lot? Whadya say?”
Xi for his part would likely be quite happy to do this, even if the tone may irk him some.
After all, China has been trying to invest in the land of the round-eyes for a long time and it’d be politically feasible for him to pull this off. Everyone walks away a winner.
This doesn’t really look like it’s going to happen but it got me to thinking, what about Japan?
Japan could do it.
As I was thinking through this process my buddy Brent Johnson from Santiago Capital hit me with the following message which was surreal. Either great minds think alike or fools never differ.
“IMHO…Trump is not going to go after Japan. I think he has already won this meeting/negotiation tomorrow.
I think Currency Manipulation comments by Trump’s surrogates over the last month (w/o specifically naming Japan) has Abe scared to death. Without yen deval Japan economy craters and Abe does not get re-elected. Trump knows this. So Abe is going to walk into the meeting tomorrow singing Trump praises (which with Trump’s ego is maybe all that is needed) and offering all kinds of above the table bribes.
Japan will invest in US jobs, Japan pension will invest in US infrastructure, and Japan will keep buying treasuries. And probably more. All in exchange for Trump not naming them a manipulator. And Trump may like it because he will have Abe under his thumb. And if Abe is gone he would have to negotiate with someone new.”
The only thing I’d add to this is that as China grows and continues to expand its presence in Asia, Japan arguably needs the US military more than it has since the World War II. This would be sufficient incentive for Abe to kowtow to Trump’s wishes.
What do you think? Let me know in the comments box below.
“Negotiating with Japan, negotiating with China — when these people walk into the room, they don’t say, ‘Oh, hello, how’s the weather? So beautiful outside, isn’t it lovely? How are the Yankees doing? Oh, they’re doing wonderful, great. They say, ‘We want deal!'” — Donald Trump