Albert Edwards: Maybe Trump Does Have The Upper-Hand On Xi In The Trade War

In what surely counts as a Herculean feat of self-restraint, SocGen’s Albert Edwards did not take the opportunity on Thursday to gloat about the extent to which global bond yields have now all but confirmed his long-standing “Ice Age” thesis.

On Wednesday, 10-year yields in Germany pushed to -0.60%, while 30-year yields stateside closed in on record lows before Treasurys ultimately pared gains in the afternoon session.

The global stock of negative-yielding debt now sits above $14 trillion, and the likes of Pimco are openly discussing the prospect of US Treasury yields going negative.

Read more: Pimco: ‘It’s No Longer Absurd To Think US Treasury Yields Could Go Negative’

But instead of calmly noting that traded inflation is tumbling, negative sovereigns are now more “rule” than “exception” and the “Japanification” currently sweeping Europe is probably going to make landfall in the US sometime in the not-so-distant future, SocGen’s Edwards uses his weekly missive to talk about China.

Specifically, Albert asks if Beijing is actually in a far more vulnerable situation that many market participants are willing to admit.

Although China doomsaying is a hobby (indeed, a veritable obsession) for some, Donald Trump makes for an easy target when it comes to lampooning strategic incompetence. On its face, there is nothing more absurd than the prospect of a man who, prior to becoming president, was most famous for bankrupting casinos and starring as a D-lister in a cheesy reality TV show, taking on China.

But, Trump does wield the US economy and in addition to wrenching the power of the purse string from Congress on at least two occasions (to cram through his debt-funded tax cuts and then to pay for parts of his border wall) he’s managed to slowly but surely commandeer the Fed. Meanwhile, his “greatest” (as he puts it) tariffs have turned the screws on Beijing at a time when China was already walking a precarious tightrope between deleveraging and opening up the economy on the one hand, and supporting growth and “productive” credit creation on the other.

“I have read a lot in the last few days about China’s decision to allow the Rmb7.00/$ level to be breached [and] one clear conclusion stands out from most people’s analysis, namely China has the upper hand in this trade war because President (for-life) Xi can afford to play the long game, unlike President (with-an-election-next-year) Trump, who needs the US economy to stay strong in the near term”, Albert writes, before asking “what happens if this consensus is wrong”?

He notes that the US economy has had its share of stumbles recently, but, obviously, the Chinese data hasn’t been gangbusters either (although July’s trade data beat expectations).

(SocGen)

“What – if take a deep breath – the Chinese authorities are not as in control of events as investors assume?”, Edwards goes on to ask, before recapping the events of summer 2015, when China’s equity “miracle” imploded in dramatic fashion, leading to a truly absurd scenario that found Beijing detaining journalists and short sellers and halting three-quarters (give or take) of the domestic equity market.

“The Chinese authorities absolutely lost control of the situation back in 2015 [and] indeed, I would contend that they contributed to inflating the bubble in an irresponsible, almost Western, way”, Edwards chides on Thursday, adding that as a result of that burst bubble and the bungled (almost laughable) response from Beijing, his confidence in Chinese authorities’ economic management abilities was severely shaken. “At the time that really shook my confidence that the Chinese authorities were better economic managers than their western counterparts, the latter having demonstrated their gross incompetence in the run-up to the 2008 Global Financial crisis”, he says.

So, what’s next? Well, that’s the multi-trillion question, isn’t it?

For his part, Albert is skeptical of the narrative that Xi actually has an upper hand. To wit, from Edwards:

Ongoing weak Chinese economic data and ructions in the financial sector beg two questions: How robust are China’s economy and financial system really? And to what extent is Trump’s tariff war putting the Chinese economy in a far more difficult situation than most commentators assume? Is this one reason why, in the face of rapidly contracting employment as evidenced by PMI employment series that the renminbi was allowed to slide below the critical Rmb7.00 level?

On the latter question, the answer is obviously “yes”. It’s impossible to separate the trade war and China’s economic circumstances at this point and clearly, the last thing the Party wants is rising unemployment and social unrest.

Edwards also talks a bit about the won’s addition to the CFETS basket back in December 2016. “The reason for the addition of the won with such a large weight was clear; China did not want to lag other competitive Asian devaluations as it did in the run-up to its August 2015 devaluation”, Albert writes, adding that “China is likely to continue to respond to further won weakness by further weakening the renminbi pari passu”.

(Side note: South Korean assets are in a tailspin amid a “perfect storm” scenario.)

After quoting from a recent Bloomberg Opinion article by a Bloomberg opinion article by George Magnus, Edwards closes his latest by noting that although “the mainstream dismisses Trump as shooting himself in the foot by trying to face down a far more resilient opponent, [it could be] the situation in China is far graver than anyone seems to consider possible”.