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The Stars May Have Aligned For One Bank’s ‘Uber-Bearish, Extreme’ Oil Scenario
In late June, BofA’s Francisco Blanch showed up on Bloomberg TV and said this:
The trade issue a
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This would be taken by the market as further confirmation that no US-China trade deal is likely near term, and provoke Trump into who- knows-what, resulting in more pressure on both US and Chinese stock markets. Not clear why that’s in China’s interests.
yeah, but whether trump admits it or not, there’s only so much he can do. he can go to 25% tariffs on the entirety of Chinese imports, but after that, it would be mathematically impossible to avoid a pretty steep rise in consumer prices and even if import substitution is possible, he’s taking aim at some of those countries too (e.g., Vietnam). we’ve really yet to see a situation where another country (or another politician for that matter) just tells him to straight up pound sand. It’s entirely possible that he would fold if China just decided to say “well, we’re not trading with you at all anymore and we’ll buy as much Iranian oil as we want”. or “starting Monday, Apple is banned from selling products here”, etc. also important to remember that China is not like any other country on the planet. they could, in theory, devalue dramatically and just implement even stricter (i.e., totally draconian) capital controls. that would be a disaster for most emerging markets, but i’m not sure it would be for China. as far as equities go, they could just ban selling of A-shares and halt anything that’s falling like they did in 2015. sure, that would be a disaster in light of recent index inclusions/bigger weightings in global indices, etc. and it all sounds absurd, but you’ve got to think that after a while, somebody, somewhere is going to completely run out of patience with Trump, especially to the extent it becomes impossible to discern even a hint of a goal/end game/etc. he’s just poking China with a sharp stick every, single day and acting like he can bully them like they’re Mexico or something. it’s actually a miracle he’s gotten away with it this long.
brilliant comment H!
That would be cathartic to see, in many ways.
However, if China overtly takes on the aggressor role or is perceived as such, it risks rallying Americans behind Trump and/or facing the next Administration that is forced by public opinion to be even more hostile to China.
Even if aggressive action did force Trump to “back down” and thus probably lose in 2020, the chaos will preclude reaching a comprehensive agreement with this Administration and Congress. By playing a long game they can get to the next Administration anyway, without the risks described above.
My feeling is also that the Chinese are more prone to patient and calculated maneuvering than to rapidly escalating to an OK Corral style throwdown. That could be a bit of cultural stereotyping on my part.
Finally, I’m not sure Trump is capable of tolerating the loss of face that backing down would entail. He’s emotional, ego-driven, insecure, and playing with other people’s jobs and money. He might be more likely to simply push it all over the cliff. I’m sure the Chinese government have plenty of psychological analyses of Trump.
I doubt that a sizable number of Americans that are not Trump supporters are going to give a rat’s ass that China is buying Iranian crude. Really, they want nothing to do with Middle East wars, and to them dumping the Iran deal is just stupid. If oil prices collapse they won’t be crying either.
But here is the kicker, things have completely reversed in the last 20 years, now higher oil prices benefit the US in many ways, especially manufacturing to support shale extraction. Look what happened in 2015-16. If prices collapse I don’t even think the zombies will be able to keep up the hamster wheel of drilling and the already cloudy PMIs will get quite dark.