To the Brink

The cannons are readied, bayonets are fixed… the bugle is ready to blow.

Diplomacy has failed.

The trade war will resume this Friday — should 11th-hour negotiations fail.

The 10% tariff on $200 billion worth of Chinese wares becomes 25%.

And President Trump threatens to order 25% imposts on an additional $325 billion “soon.”

Existing tariffs are “partially responsible for our great economic results,” he justifies.

Meantime, Chinese negotiators have dallied, dithered and dawdled.

The president, Sunday:

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars… of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

So Mr. Trump drops the carrot… and seizes the stick.

He undoubtedly hopes to pummel China into last-minute concessions.

Then he can thump his chest about a “wonderful” trade deal… wrested only in the nick of time.

Export-driven China needs the United States more than the United States needs China, he believes.

Following Sunday broadside, China threatened to back away from scheduled talks this week.

But it has since come around… and discussions will evidently proceed on the timetable agreed.

Goldman Sachs believes the feuding parties will come to terms before Friday. Sixty percent odds, they give, for a peaceful resolution.

But a dangerous game is underweigh…

China takes its honor very heavily. Will it be publicly shoved around?

Trump’s country hardball, explains Rabobank analyst Michael Every:

Puts [China’s]chief negotiator Liu He in a very awkward position. While it may be Trump’s style to be impulsive in the final stages of a deal, the Chinese government will lose face if they cave in to his demands following a public threat on Twitter. It could be perceived as a breach of trust and the Chinese may conclude that the U.S. has been negotiating in bad faith after all. 

What if China walks away from the negotiating table? Does Trump go chasing after it, sobbing for peace?

Or does he let them slip away — knowing retaliation ensues?

But only when they decide to walk away and announce their retaliation will we truly know Trump’s intentions. Is he really willing to cancel trade talks and to put the recent rally of his beloved stock market at risk? And this with just 18 months left before the U.S. elections? Or will he somehow regain control over his emotional intelligence and still find a way around this strong May 10 deadline?

These are the questions that rise before us. For the moment, no answers are issuing.

But Jasper Lawler — who heads research at London Capital Group — fears the Great Negotiator may be overplaying the cards in his hand:

“We know from experience that this could be one of Trump’s infamous negotiating tactics, but there is a good chance that this time it will backfire.”

We shall see… soon.

But what about the all-important stock market? How did markets take yesterday’s news?

Dow futures plunged 500 points Sunday evening. And the major indexes opened the day deeply in red.

But by mysterious coincidence, eager buyers soon fell upon Wall Street in throngs.

Stocks clawed their way back… and the Dow Jones regained some 300 points by midmorning.

Who came rushing in at the fatal moment?

We have no specific answer at this time.

But the wags at Zero Hedge pointed a jeering finger at the Plunge Protection Team.

By the closing bell the Dow Jones closed to within 66 points of even.

But should diplomacy fail, Friday’s tariffs will represent the largest increase since hostilities commenced last year — some $30 billion.

And the American consumer would bear the blast this time…

Previous tariffs centered largely on capital or intermediate economic goods. But perhaps 25% of Friday’s tariffs target consumer goods.

Can the consumer absorb the blow?

Renegade economist John Williams of ShadowStats believes the economy is already sunk in recession — damn the official statistics.

We have a recession in place. It’s just a matter of playing out in some of these other funny numbers… The economy is tanking, and I’ll contend it already has, although we have not seen it in the GDP reporting. 

And the sting in the tail:

“The underlying weakness is with the consumer.”

That is, the very consumer likely to absorb the worst of the tariffs… should they proceed Friday.

The clock ticks.

Regards,

Brian Maher
Managing editor, The Daily Reckoning