Submitted by Michael Every of Rabobank
Markets are starting to focus on the 2020 US elections. There are lots of headlines in the traditional mould of ‘This candidate is doing better than that candidate, and hence might win’: Biden is indeed polling far stronger than Trump across the board, in key states, and in key demographics.
However, it’s not hard to find articles suggesting that: Trump might step down if it looks like he is going to lose (in which case who would run?); Trump will find a constitutional trick to stay in office if he loses (which seems to counter the other story); Biden will step down for health reasons even if he wins; that a Dark Horse Duo plan might re-write the election; and that Fox News anchor Tucker Carlson might be the Republican candidate in 2024 if Trump loses (i.e., no return to pre-populism is on the cards in the long run).
Now we have a new wild card: Kanye West has announced he is running for president and has already been supported be Elon Musk, raising the possibility the US might swap The Apprentice for Keeping Up With The Kardashians. There are serious legal hurdles to getting on the ballot in all 50 states at this stage: either West must secure the backing of a small political party or run as an independent, where registration deadlines have already passed in New Mexico and North Carolina. However, he certainly has the money to run if he wishes to, further muddying the electoral waters. Might it draw votes from Biden and hence help Trump? Nothing is certain but uncertainty. Even within the traditional Republican-Democrat dyad there is little clarity on what each candidate is offering. Trump’s 4 July speech attacked “far-left fascism” and the economic messaging remains vaguely #MAGA; Biden’s policy platform (and even who his advisors are) is still far more of a mystery
Certain interested parties are trying to do scenario planning, however. One of them is Europe, where it is unclear if remaining bridges across the Atlantic will be rebuilt or burned a few months from now. Another is China. Note this South China Morning Post article titled “Time for China to decouple the yuan from US Dollar, former diplomat urges”. Zhou Li, a former deputy director of the CCP’s International Liaison Department is “the latest in a series of voices in China” to warn the USD Weapon is real and “has us by the throat”, will pose an “increasingly severe threat” to Chinese development --USD oil sanctions seen as a key area of vulnerability-- and so preparations for gradual decoupling and CNY internationalisation should begin “now”. Li adds China should “give up the illusion” of friendship and instead prepare for full-fledged conflict with the US.
His specific proposal is to increase cross-border payments and clearing, local FX settlement, and maximize CNY usage in industrial supply chains. The problems in internationalizing CNY are manifold, however, which is why the USD weapon exists. The capital account would need to be opened, precipitating a collapse in CNY as money floods out. To try to counter that, it’s China bubble time again – not just in property, but in stocks: the Shanghai exchange was up 4% at time of writing today, and 7% last week, as Chinese press openly talk up a new bull market --despite a flat economy-- going so far as to imply this is part of the struggle between the “world’s powers”, according to Bloomberg: with different percentages, the same dynamic is of course true in the US. Yet for both this is lethal can-kicking at best that only creates far larger problems.
Moreover, we are literally talking about Australia, for example, being persuaded to accept CNY and not USD from China for its iron ore shipments in the near future. To say the timing of such a shift is not politically auspicious is an understatement.
Indeed, the global backdrop is of Cold War and, indeed, of ‘Gods of War’. Last week’s announcement of a 40% increase in the Aussie defence budget came alongside PM Morrison saying: “…we have not seen the conflation of global economic and strategic uncertainty now being experienced here in Australia, in our region, since the existential threat we faced when the global and regional order collapsed in the 1930s and 1940s.” Aussie public broadcaster ABC comments: “If Morrison’s defence strategy sounds like war talk, that’s because it is”. The same is true in India, where military forces continue to build up along the border opposite those of China. Yes, talks are ongoing: and so is mobilisation. The US also has two aircraft carrier strike groups near Taiwan at the moment: that’s not mobilisation, but it is a clear message. (While the EU is setting up a committee that might greenlight a working paper on a potential future petition.)
In short, this is not a backdrop in which Australia will be accepting CNY for its iron ore. No more than the UK will be accepting Huawei in its 5G, according to the British press. Indeed, irrevocable splits appear closer and closer. One could look at the dichotomy in the United Nations Human Rights Council over the new Hong Kong national security law. Or one could read the Wall Street Journal saying “For the US to stay in the WTO, China may have to leave”, underlining that technically tricky and unthinkable as that outcome is, it may be where we are heading anyway.
US election result depending, of course. What is Kanye’s policy on the WTO and China? What is Biden’s?!
Meanwhile, the West continues to try to jumpstart its flailing economy. The latest example being floated is from the forward-looking UK Chancellor Sunak. UK furlough schemes may be rolled back going forwards now pubs are open again but Sunak is perhaps set to introduce GBP500 time-delimited consumption vouchers for all adults targeted towards struggling bricks-and-mortar and services firms to try to jump-start that part of the economy.
When we see that this is all back-stopped by the BoE, and that the UK goods sold must be made in the UK, then I, like Kanye West, will be dropping the mic and walking away. One wonders which politicians looking to be elected in 2020 will pick it up.