Shall We Thank “Uncle Xi” for the Resurgent U.S. Economy?

rcwhalen's picture

Latest macromarket note from KBRA.  Happy holiday -- Chris

“It was the best of times, it was the worst of times,
it was the age of wisdom, it was the age of foolishness,
it was the epoch of belief, it was the epoch of incredulity”

A Tale of Two Cities
Charles Dickens (1859)

As 2016 comes to an end, one of the last details of the year involves awaiting the decision by the Federal Open Market Committee (FOMC) whether or not to raise short-term interest rates by a whole quarter of a point. But in many respects, the November election that has brought President-elect Donald Trump to the verge of the American Presidency also rendered the deliberations of the FOMC irrelevant. Since the last week of October, the U.S. central bank has gone from leading the markets to following a remarkable change in economic narrative that has seen benchmark interest rates rise more than a point and equity market valuations soar. Indeed, a mere quarter point move at this late date by the FOMC will hardly generate notice, much less a market reaction.

And yet, it is worth asking whether the renewed exuberance coursing through the veins of Wall Street is really due to the prospect of tax cuts and public spending promised by Trump, or rather the cumulative effect of eight years of extraordinary monetary policy actions. While Kroll Bond Rating Agency (KBRA) has long believed that the positive effects of zero interest rates and trillions of dollars in open market purchases of debt were ebbing, in many respects the benefits were cumulative and seem to have become fully manifest just as the U.S. central bank is trying to normalize policy. The economic malaise that carried Trump to the White House has seemed to subside as Inauguration Day approaches.

With valuations for asset classes such as residential homes and commercial real estate at record levels, and credit expansion in the U.S. banking system showing signs of marked deceleration, it seems appropriate to ask whether the best of times, to paraphrase Dickens, are behind us. After spending eight long years on the economic equivalent of a ventilator, the U.S. economy has gotten up and run at an annualized GDP growth rate of about 3%, a figure that only a decade ago would have generated contempt from most economists. Indeed, the comments by St. Louis Fed President James Bullard that 50 basis points may be the limit of FOMC rate hikes to allow continued growth may be correct.

So while some members of the Trump team may believe that even higher growth is possible given tax cuts, deregulation of the financial sector, and an increase in government spending – a strange mixture of supply side and demand side policies – KBRA wonders whether such initiatives may be needed to merely maintain current levels of growth and job creation into 2017 and beyond. Looking at the swoon in auto sales for example, after years of torrid growth, as well as weakness in other industrial sectors, makes us wonder if our friend Gary Shilling isn’t right when he predicts continued deflation and lower interest rates in 2017, this combined with a soaring dollar.

Donald Trump is scheduled to take the oath of office for the Presidency of the United States on January 20th and some fear will almost immediately begin a trade war with China, which he has branded a “currency manipulator.” But we think it is interesting to note the sage wisdom of Randall Forsyth of Barron’s, who writes that China has been spending its foreign currency reserves to “brake the depreciation of the yuan – contrary to assertions that it’s trying to drive its currency lower.” Many of Trump’s supporters view China’s sales of U.S. Treasury bonds – some $1 trillion since 2014 – as part of a nefarious plot to drive up interest rates and thereby weaken the United States. But in fact China remains the largest holder of U.S. Treasury debt and Chinese citizens have been spending the dollars provided by the Bank of China to purchase real estate and other assets in the U.S.
Hopefully at some point the impressive collection of business moguls and financial titans surrounding President-elect Trump will refocus U.S. policy pronouncements on the basic tenants of global economics, especially the concept of “recycling” dollar trade surpluses. Just as capital inflows from China helped to stoke the housing boom of the 2000s, ending with financial disaster in 2008, inflows from China more recently have helped to reflate sagging asset prices and then some, and arguably complemented the Fed’s actions in this regard.

Instead of attacking China as a currency manipulator, perhaps Trump ought to extend holiday greetings to Chinese Communist Party General Secretary Xi Jin Ping and maybe even thank him for adding another trillion in stimulus to the extraordinary monetary actions of the FOMC since 2008. In many respects, the decision by Xi to allow Chinese nationals to have access to dollars and to spend these funds freely offshore may be at least partly responsible for the strong economic situation that now greets the new U.S. leader. Indeed, what Trump ought to worry about is the day when “Uncle Xi,” as he is known in China, shuts the currency door and ends the flow of Chinese direct investment coming into the U.S.

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Dr. Bonzo's picture

what Trump ought to worry about is the day when “Uncle Xi,” as he is known in China, shuts the currency door and ends the flow of Chinese direct investment coming into the U.S.

 

SMFH... now ZH allows contributors to post articles endorsing money laundering. I thought we were a small tribe of hard core real money types with a penchant toward PMs and fiscal discpline... but here it is... a ZH post extolling the "virtues" of money laundering. Driving up asset prices so that the charts all look nice and shiny and go up and the largest band of murderous scumbags in human history can start burrowing into our society and upend everything we hold dear. WTF.

Is ZH ready to jump the shark?

oddjob's picture

Thanks should also be given to the plebes emptying their wallets at WalFart for toxic Chinese garbage. Good work!

Kayman's picture

What utter Globalist claptrap.  Thank the Chinese for spending American dollars back in the U.S.- directly or indirectly?  Fuck that.  All those dollars should have never left the American economy in the first place. Family killing outsourcing made the filthy rich even filthier. That's it. 

And as a side "benefit" we now have a belligerent China with an industrialized economy, a growing military and corrupt leaders with a bad attitude.

Oh and by the way Whalen, re-read your textbooks on trade. Currencies are supposed rise and fall to correct surpluses and deficits- something that no longer happens in our centrally controlled, fake world.

 

Consuelo's picture

 

 

"It was the best of oatmeals, it was the worst of oatmeals..."

monad's picture

The US should withdraw from the UN and stop financing it. This'll kill Uncle David and Xi in one stroke. In addition corrupt politicians all over the world will be fleeing hitmen sent by their owners. Win-Win-Win, winning so much until you're tired from winning. Equal trade terms, and penalties...

roddcarlson's picture

Yeah thanks China for buying up our housing and making it unaffordable but helping out our bankers and Wall St. Moguls once again drive up our cost of living to make huge profits. I believe our founders predicted that central banks would leave us homeless and in the streets and it appears that the above author thinks we should thank both manipulators the US banking monetary manipulators and the Chinese equivalent.

Or I suppose we could say no thanks for exporting our jobs and then importing more Chinese anchor babies along with allowing home ownership which is another fast track to overcrowding the joint. Between that and all the desperate white guys importing foreign sluts because they can't get a Friday night date with beautiful white girls instead having to dangling a greencard in front of Asian sluts, I'm pretty sure we'll be Asia and Mexico II very soon. Merry x-mas Xi!

roddcarlson's picture

WE are full thank you very much. Do us a favor and buy worthless bonds like you always have, because as you know we need bigger government along with more expensive housing. How come the government doesn't block all these capital purchases here and instead ask they spend their money on worthless plastic toys manufactured here?

roddcarlson's picture

They sell us plastic trinkets and buy our houses, mines, farmland and manufacturing plants, while giving Uncle Sam and Wall St. more money to spend on their adulterous ways. Sounds like a really good deal for the average American on main street.

roddcarlson's picture

All these white guys that don't have a personal fortune but use the US citizenship to get a whore abroad we need to export to their destination of mixing. Tired of this dumb crap. Personally have one of these in my family. The guy never once took responsibility for anything he did in life, spent every dime he ever earned on pointless activities and had 3 kids with an American woman and then has a mid life and goes and picks up an Phillipines woman to knock up. Brings the whole family over here like a reject that he always is and was. Meanwhile whines that he was never given anything (BS) and gets his mommies entire house gifted in inheritance to him (despite other sibling who wanted her share passed directly to her kids) by applying the deep guilt trip because of his entire life profligacy and having nothing to show for it and a bun in the oven while being 50's. If Trump is serious about stopping illegal immigration, it might be a good idea to approach the type of guys I'm talking about that would sell their entire nation out by overcrowding it so they can get some. Why is it stupid and irresponsible people breed so darn well? And ever notice that they always find the free shit that I didn't even know existed or for the life of me would want? Again I'd rather have no kids than kids that look nothing like my heredity. I just don't get it. The shit that smart and responsible people have to put up with their entire life in this country it's nearly unbearable to watch much worse have to pay for the multiplicity of stupid. Capital and reproduction here always drains to the least capable and lowest common denominator. It's why we keep hearing the great sucking vortex of emptying real economic activity, we're going for broke and stupid dear girls and boys and once done it's something that will be paid down by future generations for eternity. Clientelle of a party of rejects that would sell their entire inheritance of a farm for a party to become a serf tommorow.

geno-econ's picture

Unfortunatly, you are not the only one.  America is decapitalizing it's existing wealth by fools.  Just look at the children of successful parents.  Most are not focused on succeding in business or embarking on a proffessional career, but rather enjoying sports, skiing, traveling, drinking fine wine and partying on credit cards while waiting for Daddy's inheritance. Latest Lexus TV ad has a 5 year old saying " daddy I want a Lexus for Xmas"  Globalization and consumerism has serious downsides which are becoming very apparent if you look at what is happening in most famalies. Much has to do with vanashing jobs, but a lot is due to a permissive society in decline.

roddcarlson's picture

Believe it or not I do care about the guy I mentioned above and even his wife. I guess I'm just tired of people showing themselves indifferent for others and just thinking about themselves all the time. I suppose it makes me sound bitter and hateful talking like this, but I'm really just trying to stop bad behavior instead of trying to punish past deeds. All and all I've tried to show people you have to make wise choices as well as be gentle as a dove. I'm a Christian but I'm not lawless, I believe that there is still a logical order to how things work. This idea that people can just keep taking without any concern of intellectual order of capital is going to send people into starvation. I care too much about people to see them starve, but I'm just a single person and it seems the more I try to address bad decision making the more I'm treated as being cruel and mean myself. The biggest cruelty is to let men think that there are no consequences for their actions, worst that they shove their own consequences for another to pick up the slack. Partying is fine as long as people know when to call it off and not have a hangover and trash everywhere the next day. Anyway I agree what you said and I am glad another can see how we got here and where it's all going. As far as other races, I also don't hate them. I just am more concerned about my own right now, as it seems the world pretends we have no rights to have children of our own or to care for our own. There is a certain kind of giving that becomes irresponsible. When you steal the jacket off your own kid to give to another homeless person then something is wrong as I believe God calls us out to care about our own kids welfare first. Abundance and giving is just natural however and I don't mind doing that when not under the obligation of some government scheme that is also obnoxious to one's own family welfare.

In the larger scheme of things I think men choose Phillipine women because the want a young thang. They think they are studs to use the countries welfare to get some young pussy, and to an standup white guy that is just plain despicable. I shouldn't called her a whore, these people are desperate really and I believe she like any other woman probably wanted to find a man to take care of her. So really it comes down to in this case a white guys ego getting in the way of the rest of his family getting a fair share of inheritance. Selfishness is basically another sign of nonthinkers.

Mufasa Dali's picture

Henceforth, you must employ the pronoun Ze. 'Uncle Ze' is appropriate for any gender with which that Chinaman might self-identify.

The Saint's picture
The Saint (not verified) Mufasa Dali Dec 14, 2016 12:47 PM

Fuck Uncle Xi.

Stuck on Zero's picture

It's a good thing that China is buying up our lands, farms, buildings, houses, and factories?