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Out of the Box: It’s Here, It’s There

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It’s here. It’s there. It’s Never-Never Land. It’s Always-Always Land. It’s why the markets are up. It’s why the markets are down. It is the quintessential whipping boy for everything being bad. It is the angel in disguise when the equity markets go up. It is a belt and a road and the answer is always China.

“China is a big country, inhabited by many Chinese. ”
-Charles de Gaulle

The Press has been touting the maybe-maybe deal with China as the reason for everything. Trump pushes Xi pushes back and what else is new in a Game of Thrones. The words bandied about always express it as “China is the World’s Second Biggest Economy.” This is true but China’s economy is 41% smaller than the United States. Further, there is no “Freedom of Trade” in China and there is no “Rule of Law” or “Due Process.”

Every decision is political and there is only one party. The Chinese currency is controlled tightly by the government and the major Chinese corporations are heavily influenced, if not controlled, by the Chinese government. I assert that the political system in China bears almost no resemblance to the political system in the United States.

“Master Li, how are we going to murder a man who laughs at axes?” I asked.

“We are going to experiment, dear boy. Our first order of business will be to find a deranged alchemist, which should not be very difficult. China,” said Master Li, “is overstocked with deranged alchemists.”
-Barry Hughart

Our system, without question, isn’t perfect. I make no such claim. However, having said that, I would also say that ours is a vastly better than theirs. Ours is a Democracy while their system of government is an autocracy. I have no issue with their trying to overtake the United States. It is their country after all and every nation has aspirations. I am just stating that the very government that got Xi and his cohorts in power has no shot, in my opinion, of getting what they want because the structure of their government won’t allow it, in the end. They have stumbled into the Gordian Knot.

This potential trade deal with China would be a positive, in my view, if the two governments can work something out that makes sense for both countries. If they do not it will be a slight vibration for the United States and a real cause of concern in China. To be quite open and forthright, we can afford a “No Deal” and they can as well, just not as well. Their belt would tighten around their road and their necks.

“Toward the end of the meeting, Xi asked about Trump. Again, Obama suggested that the Chinese wait and see what the new administration decided to do in office, but he noted that the president-elect had tapped into real concerns among Americans about the fairness of our economic relationship with China. Xi is a big man who moves slowly and deliberately, as if he wants people to notice his every motion. Sitting across the table from Obama, he pushed aside the binder of talking points that usually shape the words of a Chinese leader. We prefer to have a good relationship with the United States, he said, folding his hands in front of him. That is good for the world. But every action will have a reaction. And if an immature leader throws the world into chaos, then the world will know whom to blame.” -Ben Rhodes

Well, whoever may get blamed is not what is the center point for me. I think that the Press is far more focused on this China deal than investors, especially institutional investors. I also point out that while equities have been having a tough time of it, that bonds are performing exceptionally. Whether it is Treasuries or Investment Grade bonds or High Yield bonds, they have all been on winning streaks.

Far more important than the Chinese trade negotiations, in my estimation, are the forthcoming European elections. They commence on May 23. When all is said and done, I suspect, the European Union will never be the same again and Germany will find that the EU has slipped out of its control.

They said I was wrong about Brexit. I wasn’t. They said I was wrong about Trump. I wasn’t. I am going for three for three here and I’ll make the bet that I am right. You may make your own bet of course.

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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