Anyone wondering what just spooked stocks, sent the dollar surging to YTD highs, and yields tumbling, look no further than Peter Navarro's speech this morning, delivered at the Center for Strategic and International Studies, where president Trump's main China advisor not only lashed out at Goldman and "globalist billionaires", but also accused Wall Street of "shuttle diplomacy" with Beijing, while predictably blasting his archnemesis, China, and repeating the point that "economic security is national security" is the guiding principle of Trump administration, and saying that "if China stopped stealing IP it would lose its economic edge" adding that "if China undertook structural changes US asking for it would be existential change for China."
Finally, and most important for risk assets, he has dismissed prospects of a deal, accusing Beijing of wanting to “tap dance” and engage in economic dialogue so that it can keep doing what it is doing.
This, in a nutshell is what spooked risk assets and sent safe havens like TSYs and the dollar spiking, because as Navarro's speech confirms, there will be no breakthrough in the Trump-Xi meeting either in November, or any time in the forseeable future.
Here is a quick breakdown, courtesy of tweets from Bloomberg's Shawn Donnan's who is at CSIS, summarizing what just happened:
- Overflow crowd at @CSIS for Peter Navarro this morning...
- Navarro begins by making point that “economic security is national security” is the guiding principle of Trump administration.
- He also invokes McKinley’s “Patriotism. Protection. And Prosperity” and the tariffs that followed from that as a great example.
- Navarro declares that steel and aluminum tariffs have been huge success and have been repudiation of classical economists’ gloom and doom view that tariffs are bad.
- The Section 301 tariffs have been “brilliant” and move has been “tremendously successful” at responding to Chinese “predation”.
- Declares that Trump’s “tough talk” has resulted in “landmark restructuring” of bad trade deals (Korus and NAFTA) “in Trump time”.
- Navarro says US economy proving Trump is right on “all metrics”...
- “What’s going on with this grand strategy ... is a fundamental restructuring back to a strong manufacturing.”
- “The only thing that grew in the Obama administration was our national debt.”
- “The other thing that President Obama didn’t understand is this concept that economic security is national security.”
- Navarro is arguing now that Trump’s reversal of Obama policies re arm sales has brought defense jobs home.
- The big jobs are in the supply chain for those arm sales, Navarro says. “That’s what USMCA was about was getting control back of that supply chain.”
We are now on to Navarro presenting this Sepetember report on the fragility of supply chains for the US defense industrial base. Report is here: https://t.co/AMlA9UpDWS— Shawn Donnan (@sdonnan) November 9, 2018
- Argues labor gaps in US are also troubling. US now has frightening shortage of nuclear engineers. “This is frightening.”
- Also gap in welders and pipe fitters for shipbuilding: “This is part and parcel of globalization and the globalization of our supply chains.”
- Points to dependence on foreign sources for everything from nylon for tents to lithium for batteries. “The question is how did we get to this place?”
- First answer is “budget sequestration” which he blames on “previous administration and Congress”.
- Third answer is decline of defense industrial base due to forces of globalization and “unfair trade practices” of both allies and rivals like China.
- He is now lashing out at “globalist billionaires” and “unregistered foreign agents” for conducting “shuttle diplomacy” with China to pressure Trump into some kind of deal with Xi at G20.
- He argues that shuttle diplomacy is dangerous and would leave “stench of Goldman Sachs” on any deal Trump strikes eventually.
He has now put up this chart detailing China’s “economic aggression”... pic.twitter.com/3eltwbZzfQ— Shawn Donnan (@sdonnan) November 9, 2018
- “This is not about buying more soya beans or more coal. This is structural. If you took 25 things off that list there would still be enough things to hurt us.”
- Now mocking Chinese for denying any wrongdoing. “It’s Alice in Wonderland.”
- Now argues that if China stopped stealing IP it would lose its economic edge. If China undertook structural changes US asking for it would be existential change for China, he says.
- He is now dismissing prospects of a deal. Accuses Beijing of wanting to “tap dance” and engage in economic dialogue so that it can keep doing what it is doing.
- Now mocking Promises Obama secures from Chinese for them to stop hacking US companies.
- Deals were possible with Korea, Canada and Mexico. “We can trust them... But when it comes to China it’s Sui generis.”
- He has another go at Wall Street and shuttle diplomacy. Urges Goldman Sachs to take its money to Dayton, Ohio.
- "We will strengthen America’s manufacturing and defense industrial base.”
Next up: Q&A
- Before we move on worth pointing out that what we have seen today is an insight into internal Trump administration debate re China. With his criticisms of “Wall Street shuttle diplomacy” Navarro has been aiming at Mnuchin and Kudlow as much as Hank Paulson et al.
- Navarro now taking on Ricardo. Argues Ricardian economics all predicated on floating exchange rates. “That’s not the world we live in... Clear eyes!”
- Andrew Philip Hunter of CSIS is asking re exit strategy from tariffs? Navarro argues that post WW2 US got into habit of trading off economic security for national security interests as helped rebuild Europe...
- Argues geopolitical case for TPP ignores that it would have devastated auto parts industry and others.
- Tariffs approach will “end episodically” when better deals come.
- Navarro dodges direct question re G20 deal with China. “You’re in good hands with Donald J Trump and Robert E Lighthizer.” Dismisses prospect of deal negotiated by “anyone else”. (IE Mnuchin)
- The Trump culture, Navarro says, is to do things from a business perspective and to seed industries rather than subsidize. “For any of you who think tariffs don’t work .. spend like an hour on the internet” and look at anti-dumping tariffs.
- His job at White House, Navarro says, is to help create a manufacturing sector and jobs for “Americans who work with their hands”.
- Last question: “How do you fit these pieces together?”
- Are there other initiatives coming? Navarro says ongoing concern will be maintaining healthy defense budget. “We are at the cusp of the next industrial revolution... points to AI, space... So a deep concern is that we spend that money wisely.”
- If don’t create growth (and econ security), Navarro ends with, US won’t have tax base needed to fund national security...
His full speech is below:
In response to the belligerent, combative speech of the "Death by China" author, safe havens have spiked, with the dollar surging to 2018 highs, 10Y yields tumbling to session lows...
... and the Dow Jones in freefall, last down -270 points as any prospects of an imminent deal with China have just imploded.