RaboBank: “Some In The Market Are Starting To Get The Real Reason Behind The Trade War”

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By Michael Every of Rabobank

London, 1940. Churchill’s War Room, deep beneath Whitehall. A group of officers and a hunched old man with a cigar are huddled around a map on table.

MONTGOMERY: “The outlook is grim, Prime Minister. We are short of ammunition.”

DOWDING: “And planes, Prime Minister.”

MOUNTBATTEN: “And ships, Prime Minister. And ships.”

CHURCHILL: “So, gentlemen, what is to be done?”

Grim silence falls on the darkened smoke-filled room. A bespectacled Treasury clerk enters.

CLERK: “We have an ideal solution, Prime Minister.”

CHURCHILL: “Speak, man, speak!”

CLERK: “We have a very attractive offer to supply us with cheap ammunition, planes, and ships.”

MONTGOMERY: “Who from exactly? Not the Yanks?”

CLERK (checking clipboard): “No, Sir. From Die-keine-Deutsche-munitionsfirma-ehrlich GmbH

CHURCHILL: “That sounds suspiciously German.”

CLERK: “They do list one Badolf Hissler as the main shareholder, but it says here he’s Australian.”

DOWDING: “Austr-al-ian?”

CLERK: “Yes, Sir. And their prices are very good. 75% cheaper than we can do it ourselves.”

MOUNTBATTEN: “I say! That does sound good! A real bargain, what!”

CLERK: “Indeed. Treasury says we must outsource procurement: it’s simple economic logic.”

CHURCHILL: “Field Marshall, please take this man out and have him shot, there’s a good chap.”


The ‘play of the day’ above comes against a backdrop of markets trying to accentuate the positive in the latest US-China trade war deterioration. Indeed, Moody’s has declared a trade deal will still be done and a Bloomberg survey of US economists shows around two thirds think a deal will be signed by year-end, a fifth by 2020, and only 13% don’t see a deal for at least five years. Field Marshall, please take these men and women out and have them shot, there’s a good chap.

The rhetoric from China has turned starkly, aggressively nationalist. The Global Times is calling for a “People’s War”, a 1930’s Mao reference to repelling Japanese imperialism; “trade war” now fills Chinese media, having been largely absent for months; and Tuesday’s People’s Daily mouthpiece posted an image of the Chinese flag with “Talk – fine! Fight – we’ll be there! Bully us – delusion!” superimposed on it. US President Trump is also not backing down in a further set of trade-related tweets, again stating tariff revenues will support ‘patriot’ farmers and adding: “China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win! In any event, China wants a deal!”

A huge fiscal deficit; trade tariffs; a rapid increase in military expenditure; ‘Patriot’ farmers; and a political call for lower interest rates for a national struggle. It all sounds very Chinese, doesn’t it? But that shouldn’t be a surprise. Last year’s ‘The Rise and Fall and Rise of the Great Powers (and Great Currencies)’ argued the historical lessons of the economics of past power struggles are that one must have low borrowing costs, spend a lot on a large military, and be mercantilist if your enemy is. True, one also needs to be economically vibrant, and that isn’t assured with mercantilism, militarism and large fiscal deficits. Yet real free trade, pacifism, and austerity is *ruinous* for Great Power. Which is why the EU is not a Great Power but a Great Whinger.

Some in the markets are starting to get this.

Regular Bloomberg commentator Noah Smith yesterday published an article –‘The Grim Logic Behind Trump’s Trade War With China’– that admits he was wrong to expect a trade deal, that Trump is doubling down, and concludes “There may be a grim sort of logic to this approach…If Trump wants to slow China’s ascent as a superpower, a trade war might be an effective way to do it. If the harm to the US is modest and the costs for China are severe and lasting, Trump might conclude that the former are acceptable losses. Geopolitical primacy, not maximum prosperity for Americans, might be the president’s true objective…. if weakening China really is the goal, then this could be just the opening rounds of a long and grinding trade war.” That’s’ what I argued back in November 2017’s ‘On Your Marx’ special reports, which stressed a New Cold War was likely ahead.

However, many in markets are still acting like a Treasury clerk telling Churchill that Badolf Hissler can offer him a great deal on cut-price bullets, ships, and planes.

On a related front, we see reports of an alleged Iranian drone attack on Saudi oil pipelines(!); also hear Iran’s leader say there will be no war with the US; and Trump has stated reports of 120,000 US troops moving to the region are fake news – because if he were to send troops it would “a hell of a lot more.” Mixed messages to put it mildly.

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