Evans-Pritchard develops Trump derangement syndrome

Via an increasingly hysterical Ambrose Evans-Pritchard today:

If Donald Trump and his close advisers think China’s economy is tottering on the brink and acutely vulnerable to pressure, they are sorely misinformed.

…Construction is picking up after a slowdown earlier this year. Industrial profit margins are at a seven-year high of 7 per cent, despite a spate of high-profile defaults – which merely means that China is willing to let them default.

The state-controlled banking system can roll over bad debts for as long as it wants, albeit at a cost of lost dynamism. There is little risk of a financial crash or a “Minsky Moment” within the political time-horizon of Mr Trump.

This is not an economy in imminent crisis. Nor is it a political system that can be brought to its knees.

Is bringing China to its knees Donald Trump’s objective? I don’t think so. He wants to stop it stealing US IP and to force it to act more fairly on trade. If he does so it will also cap its growth and the “catch-up” superpower will be just another secularly stagnant market. That is not the same thing.

One can certainly question the tactics. They have been confused. If the objective was to trigger capital flight and crash domestic demand then a higher US dollar was needed as well as tariffs. Trump took the second not the first.

In short, AEP is using a straw man. His Trump derangement syndrome mounts:

Capital Economics estimates that the latest US tariffs will cut Chinese economic growth by less than 0.5 per cent of GDP, and this can be offset by fiscal stimulus in a heartbeat.

“We believe that the White House has made a grave miscalculation about China’s vulnerability. It’s the fiscally incontinent US we should be worried about,” said Patrick Perret-Green from the hedge fund AdMacro.

…Mounting damage to the US corporate supply-chain will soon cut into Wall Street profit margins and trigger a correction in US equity markets, currently priced for perfection and trading at a higher Shiller P/E ratio than in 1929 or at the pre-Lehman peak in 2007.

UBS sees the blow to China GDP at 0.8% for 2019. There’s no doubt about the stimulus. So the impact is roughly neutral. Long term this will hurt China via more productivity-choking debt.

As for the US, corporate supply chains won’t collapse in a heap like AEP. They’ll adapt. There’ll be trade diversion to cheaper EMs than China, probably within the US alliance network (Vietnam and Mexico will boom). This will trigger investment and growth. Some of the production will come home. There will be a little inflationary flow through to US consumers but its low so that’s hardly catastrophic and will be offset by the increased activity and rising wages anyway.

The only convincing argument I’ve see for slower US growth arising from tariffs is a rising USD but that isn’t happening for now.

The real growth problem for the US is the fiscal cliff but Trump has time to address that too with infrastructure stimulus.

Finally, AEP blows off:

…Clearly Beijing cannot and will not kowtow to intimidation of this kind. William Zarit, the head of the American Chamber of Commerce in China, predicted that the country will meet “fire with fire”, taking the world into a “downward spiral of attack and counter-attack” that engulfs everybody.

Rubbish. It’ll do what it did today. Symbolic all counter-tariffs and allow CNY to fall.

China is not an idiot. It knows who loses trade wars: surplus countries.

David Llewellyn-Smith

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