China's Other Nuclear Option...

Via Global Macro Monitor...

Sorry to be such a downer, folks.

We have to stress test the macro scenarios versus current market conditions by looking at worst case events, then calculating expected values based on the most likely probabilities. Especially after such a huge run in stocks and with the “buy the dippers” still pounding the table.

Still Expensive

If stocks were in the tank and you could not give them away, we would be looking for green shoots to justify upping investment positions.   That is a long way off, in our opinion. Trading decisions are a different story, however.

Just take a look at the monthly S&P chart.  It looks like we are in a speed wobble in a topping and overbought market which could easily flip us over the handlebars.

China Will Target The Stock Market

In addition to the nuclear option of using its portfolio of U.S. Treasury securities to retaliate against trade tariffs, we believe the Chinese government could target the U.S. stock market.

We wrote last week how the U.S. is in a weaker negotiating position as the result of increased market volatility.

Here is the Washington Post quoting the China Daily, the government newspaper.

“China’s response should follow the principle of a precision strike,” Mei Xinyu, a researcher at a Commerce Ministry think tank wrote in an opinion piece for China Daily. “China should first take measures to deal a blow to the industries in U.S. states that helped Trump win the 2016 presidential election and those states whose political leaders are still backing him in this year’s midterm election.”

But, Mei also recommended selling U.S. Treasury bonds and undermining the U.S. stock market to make Trump “feel the pain.”  – Washington Post

Feel the pain, indeed.

Target Apple

What more efficient way to take the U.S stock market down than to hit its largest stock by threatening market access to the Chinese consumer?   Apple’s market cap is over $800 billion, the world’s largest, and such a scenario would certainly take the overall market down.

The following chart illustrates Apple derives around $50 billion of its annual revenues from greater China, which is about 20-25 percent of its total revenues.

Furthermore, Apple assembles most of its iPhones and gadgets in China.  A disruption to Apple’s supply chain would further disrupt the stock.

U.S. iPhone Imports Distort Trade Imbalance With China 

We have not heard much about it during the recent uptick in trade rhetoric, but U.S. consumption of iPhones distorts the China-U.S. Trade imbalance.  China primarily assembles the iPhone, which accounts for only about 3-6 percent of its value added, yet the full value of iPhones are counted in the bilateral trade numbers.

Take a look at the iPhone X. IHS Markit estimates its components cost a total of $370.25. Of that, $110 goes to Samsung Electronics in South Korea for supplying displays. Another $44.45 goes to Japan’s Toshiba Corp and South Korea’s SK Hynix for memory chips.

Other suppliers from Taiwan, the US and Europe also take their portion, while assembly, done by contract manufacturers in China like Foxconn, represents only an estimated three to six percent of the manufacturing cost.

Current trade statistics, however, count most of the manufacturing cost in China’s export numbers, which has prompted global bodies like the World Trade Organization to consider alternative calculations that include where value is added.

…Apple shipped 61 million iPhones to the US last year, data from researchers Counterpoint and IHS Markit show, spending $258 on average to make each iPhone 7 and 7 Plus.

Using a rough calculation, that implies the iPhone 7 series added $15.7bn to the US trade deficit with China last year, about 4.4 percent of the total. That’s also about 22 percent of the $70bn in mobile phones and household goods the US imported from China.  –  Al Jazeera

Here is a good illustration and further explanation of calculating trade based on value added rather on a gross basis from the OECD,

It is important to keep the above in perspective.  But, hey, it’s politics.  Throw out all rationality, no?


Stocks are expensive and though cyclical factors remain relatively positive – earnings and growth — we are looking below the surface at potential structural shifts in the macro environment.    Movements of the tectonic plates, such as shifts in long-term capital flows, valuation, and sentiment;  the erosion of the  liberal world economic order; secular political trends, and the long-term trajectory of interest rates, among others.

We give our worst case scenario in the tariff dispute about a 33 percent probability and believe the market has only priced in a 5 percent probability.   There is much more going on than just the trade rift between the U.S and China, including growing tensions over Taiwan,  the East China Seas,  North Korea, and the appointment of John Bolton as the new National Security Adviser.   Any or all of these could move south and feedback into trade negotiations blowing up market volatility.

Bigger picture, and more important, is the Thucydides Trap.

Thucydides’s Trap teaches us that on the historical record, war is more likely than not. From Trump’s campaign claims that China is “ripping us off” to recent announcements about his “great chemistry” with Xi, he has accelerated the harrowing roller coaster of U.S.-China relations. If the president and his national security team hope to avoid catastrophic war with China while protecting and advancing American national interests, they must closely study the lessons of the Cold War.  – Graham Allison

Stay tuned.


mobius8curve Mon, 03/26/2018 - 07:16 Permalink

The next crises will be in the treasuries and bond markets that will create a crises in the currency markets globally. This should begin slowly this week with the emergence of the petroyuan and accelerate through the next six months into the fall. This should bring a covenant that begins the tribulation.

The masses have been slowly conditioned to favor electronic credit over fiat currency and now are being conditioned to share all their private information on the cloud through such mediums as Facebook. Soon all private info will be required to be held in the cloud on the blockchain including all their electronic currency on their balance sheet on their IPhone which will be their complete data center and thus their means of doing commerce. All that's left is their biometrics burned into that phone to give access to the internet and you are now one with the beast as a cell number with which you communicate vocally:

Revelation 13:15-18  And it was given unto him to give breath to it, even to the image of the breast, that the image of the beast should both speak, and cause that as many as should not worship the image of the beast should be killed.  (16)  And he causeth all, the small and the great, and the rich and the poor, and the free and the bond, that there be given them a mark on their right hand, or upon their forehead;  (17)  and that no man should be able to buy or to sell, save he that hath the mark, even the name of the beast or the number of his name.  (18)  Here is wisdom. He that hath understanding, let him count the number of the beast; for it is the number of a man: and his number is Six hundred and sixty and six.

We are very close to the start of many troubles controled by the lawless:…


ldd Stuck on Zero Mon, 03/26/2018 - 10:20 Permalink

the writing was on the wall many decades ago. long timers would give new workers a hard time for doing the work they were paid to do. you were not supposed to work too hard/fast. have you ever worked in the US? when i worked in ny i could not believe my colleagues who would goof off as soon as the boss was out of sight. i billed more than my colleagues combined and i was just working at a normal pace.

i have studied and worked in numerous countries. countries like japan, germany and china are successful because their workers are productive. korea used to be a productive country. the workers work long hours but their productivity is low. they fell into the same trap the US has been suffering for a long time - thinking they deserve the benefits their forefathers worked their asses off and died for. ever hear the three generations thing. quite something to watch live.

In reply to by Stuck on Zero

yogy999 shining one Mon, 03/26/2018 - 20:30 Permalink

IMHO we've been seeing Bible Prophecy being revealed on a continued basis for decades now. Why would you be so adverse to entertaining this one.? Technology had rendered everyone to a state of "no where to run or hide" anymore. A cashless monetary system is only moments away. We have basically arrived at that point. Can't wait to see the next brazen moves these central bank mother fuckers do next.!!


Just my thoughts.

In reply to by shining one

Consuelo 52821740 Mon, 03/26/2018 - 11:24 Permalink

When one's belly is full, when one's house is in tact and not a bombed out shell, when one is not holding a dead child and the world around him seems 'normal', it is quite easy to be high-minded and oh-so 'objective'.   Stick around, you're going to need all the 'thoughts' you can muster, and some belief to go with it.   More likely, you'll be a crumbling emotional wreck, with your 'objectivity' shattered.



In reply to by 52821740

philipat Stu Elsample Mon, 03/26/2018 - 07:33 Permalink

If they export junk it is due to the manufacturing specifications given to it by the US Corporations it manufactures for. It is nearly all just contract manufacturing. This applies to the trade balance also. Very little value added remains in China, mostly just wages and a small contract manufacturing margin. The majority of the profits, via transfer pricing, and IP charges (Royalties, Trademark fees etc) get routed out of China to tax haven countries by these same US Corporations. All at the expense of the US worker of course. So get your facts straight. You're just "shooting the messenger".

In reply to by Stu Elsample

Nunyadambizness Justin Case Mon, 03/26/2018 - 15:00 Permalink

So, I guess Communism is better?  YOU bitch and bitch about the "corporation", and yet have you ever started a business?  Ever managed one?  Do you know what the fuck is needed to run one?  You bitch about the cost of American products, then turn around and bitch about wages being stuck in the 90's. DO YOU HAVE A BETTER ANSWER??

How about being a part of the solution instead of a Marxist hack crying about corporations taking advantage of everyone?  If not, just go fuck yourself and your "happiness" studies.

In reply to by Justin Case

EcuadorExpat Nunyadambizness Mon, 03/26/2018 - 19:12 Permalink

If all you can see is communism or capitalism, you should not be contributing to this board. Capitalism, if not guarded by an aware populace and a truly free and honest press always turns into fascism, which is simply the opposite side of the totalitarian coin with communism. Today, America does not have a free press, free markets, or a free citizenry. Or a functioning federal government for that matter.


And yes, I have started several businesses, and hired and paid employees before I sold the businesses. It simply is not possible to do in America today what I did 30 years ago because of oppressive government policies and regulations. 

In reply to by Nunyadambizness

roddy6667 Kayman Mon, 03/26/2018 - 22:25 Permalink

American companies shipping raw materials to China and having the work done over there is the way things have been done for a long time. It is an American company's product. How do you have trouble understanding this? And why did you veer off into that nonsensical rambling about the Little Red Book? Are you having a stroke? 

In reply to by Kayman

bmw550i Mon, 03/26/2018 - 07:16 Permalink

just bring back the gold standard already and crush everyone whos not holding... that will reset the world ...cant give gold as welfare now can you ?

Government nee… bmw550i Mon, 03/26/2018 - 08:24 Permalink

I'm a little slow, but your proposed scenario would explain why India/China are accumulating gold/industrial metals.  Crashing the market via reversal/repudiation of QE WOULD constitute the greatest economic weapon of mass disruption the world has ever witnessed.  Call it an economic/financial EMP, catalyzing cascading supply chain shortages and accelerating price inflation.  Put that on top of the US populace that has a hand already on the trigger in terms of .gov distrust/hatred and the results would be explosive.  All this takes is a one hard global character (CHINA) to start the process.  I suspect that US politicians would cave rather than fight.  All those guns in US citizen's hands sure does represent a problem for the corrupt DC puppeteers. 

In reply to by bmw550i