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Out of the Box: It Ain’t the Place Settings, it’s the China

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When you look at the markets, for the moment, the overwhelming concern is China. No one cares about the platters or the food or the silverware, just the China. Apparently, it is what you eat on, that is much more important than the food. This is often called “saving face” but in our current situation there is no saving anything, it is just a “face off.”

Now the two nations wouldn’t be speaking, at all, unless each wanted to make some kind of deal. That much is a positive. The problem is that they can’t agree on just what kind of deal to make, and how it will get enforced, and hence the struggle continues. For years the Chinese government has played the game badly. They have stolen trade secrets, hacked into computer systems, forced American companies, doing business in China, to turn over their computer code, and then they have tried to use their money to buy what technology they could, and many governments were dumb enough to allow them to do just that.

When I spoke at the Pentagon, some time ago, the boys with the stars on their shoulders asked me what I thought about a Chinese company buying Westinghouse Nuclear. I told them flat out, “the United States would have to be out of their mind.” Maybe they listened to me, or maybe not, but the country ultimately reached the same conclusion.

I have no argument with a nation’s aspirations. It is just normal, in the course of things, to want to become more powerful. However, I do criticize China for the way they went about things. They used every trick in the book, to get what they wanted, and the government hid behind many Chinese corporations and claimed that they knew nothing about anything. I believe that like I do that the Easter Bunny and Santa Claus are off in Barbados together.

One of the problems with China is that there is no “Rule of Law” or “Due Process” or an independent judicial system. Everything, and I mean everything, in that country is controlled by the government and all decisions, economic, political, legal, are decided by the people in the one-party government who control everything that happens. To pretend something else is a farce, without question, and I am not into make believe fairy tales, no matter what the Chinese government tells us.

“Part of the Maoist project was the deliberate construction of a new moral identity. To do this it was necessary to destroy people’s previous sense of who they were and to make sure there was no room for it grow back.”
-Jonathan Glover, Humanity

You may not know this but I have it on good authority that if you go to China, and take your cell phone or you iPad or your laptop that you have to throw them away when you get back to the United States. They have all been infected by the Chinese internet and telephone system. God forbid that you don’t because if you connect up with your business internet, or your home internet, then everything attached to it could get infected too. I just wanted to make sure that you all were aware of this.

Bloomberg said yesterday, “China’s move to hike tariffs came in response to the U.S.’s decision last week to increase levies on $200 billion in Chinese imports to 25% from 10%. Trump on Monday accused China of backing out of a tentative deal, saying Beijing reneged on an agreement to enshrine a wide range of reforms in Chinese law.” I don’t believe that the thinking here went far enough. China can have whatever laws it likes, and parades around, but I think that the government will do exactly as it wants, regardless of the laws that they have on their books.

The tariffs can be enforced, one way or another, but it is stealing of foreign trade secrets, the hacking into computers, the stealing of technology that cannot be enforced. In the end, in my opinion, the Chinese will either make some reasonable deal with the United States or they will be forced out of here and possibly Europe as their actions speak louder than their words. The Chinese have pushed the boundaries and now the boundaries are beginning to push back as President Trump announces, “Enough is enough.”

I think he is right. I think he is dead right. The scenario that has been underway for the last decade had to be stopped. It was just a question of when and by whom. Therefore, I applaud the President’s efforts here, as in the best interest of the United States.
The equity markets, of course, get frightened by these types of stand-offs and I am not surprised by the downdraft we have been seeing. I also point out the strength in the Treasury and Fixed Income markets as money heads quickly into safer havens. The decline in stock prices has been a benefit to the bond markets as money ebbs and flows, driven by both Greed and Fear. Bond prices have been going up significantly, as yields have declined.

“The fateful moment for the Chinese economy, crippled by central planning and collectivized production, was when Deng Xiaoping, China’s long-term leader after Mao’s death, announced that the country would pursue “Socialism with Chinese characteristics,” which is to say a market economy under an authoritarian technocracy.
-Clay Shirky, Little Rice: Smartphones, Xiaomi, and The Chinese Dream

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
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