Trade War Enters “Phase 1”?

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Trade War Enters "Phase 1"?

Last week the market (and the world) was on the edge of their seats awaiting any news on the US-China trade talks. 

It first was reported that the talks led nowhere, and the Chinese were going to leave a day early.

And then on Friday, President Trump announced that the two countries have entered “phase 1” of a trade deal. He also said that Chinese tariffs, which were going to be implemented on October 14th, have been cancelled, and there is a chance, if talks are constructive, that the tariffs in December would also be cancelled.

The markets liked this initially, but then people began to read between the lines. 

In reality, it came out that the two nations agreed to discuss a process on how to consult during which we will discuss what to agree on. Basically nothing.

On Monday it came out from the Chinese that there was no deal and there will be more talks before they sign or agree on anything. 

The President and the US are getting humiliated right now. It is getting embarrassing. The Chinese have been leading the President on for 2 years now.

Kyle Bass, who is advising the trade team for free, has stated that the Chinese do not want a mutually beneficial deal. There will be one winner and one loser. This is a Thucydides trap.

In fact, it is rumoured that Kyle Bass and US trade adviser Rob Lighthizer were very upset with the President announcing a “phase 1” deal. 

As I have stated in my work, China will come to the table if they have a food issue (pork with the government heavily subsidizing food right now), and/or a credit issue (Bass believes they need US Dollars). The trade advisers believed that the Chinese were on the ropes. However, with the President announcing this deal or truce, it comes out as a Chinese victory.

I have said in the past, and have received a lot of criticism for it, but the Chinese hold the cards. They know that President Trump is fixated with a higher stock market. He needs markets to be higher so he can use “keeping America great” as his re-election slogan. The Chinese can be patient and await for a weaker President from the Democratic side. China has no elections, they can remain patient. If the markets begin to fall, it will be President Trump who will be forced to the trade table to accept a Chinese dictated deal just to save his re-election.

Now some say that what the Chinese did right now is a gamble. That China’s food and credit issues are too real and they should have accepted some sort of deal for relief. Perhaps some sort of private swap line was established but we would not know. However I would doubt this because I am sure the Democrats would leak this out…anything to damage the President and plus, this would mean the US weakening their Dollar which would be bad for US citizens.

I have written about this as well. About one of the main reasons the US is cutting rates is to attempt to drive the Dollar down. The worlds problems exacerbate with a stronger Dollar. I also have spoken about how Russia and China are attacking Dollar demand, and are likely propping the Dollar up and making up for the devaluation of their currency by holding Gold reserves (which appreciate against their currency).

So expect this to linger. As mentioned, we are in a turning point in the world. This is a Thucydides trap.

The President needs to accept that if he wants to win this trade war, the stock market will have to take a hit. Perhaps he knows this and is why he is pushing for QE(stimulus) and 0% interest rates, because there will be nowhere to go for yield except the stock market. Money will flow into the stock market regardless of geopolitical tensions. This would keep stocks propped while President Trump steps up his trade war rhetoric and actions.

I would not be surprised to hear the President reinstate the tariffs he was going to implement on October 14th, and even add new tariffs or increase future tariffs (December). 

China has three stipulations they want met before even considering talking about a deal:

  1. All tariffs dropped.
  2. Huawei CFO released.
  3. Huawei to be removed from the US entity list.

America has tried playing the good will/good gesture card when they allowed some imports to help China deal with their food problem, but the Chinese will not budge. 

The US really has two options left:

  1. Use the military, of which they have perhaps a 1-2 year or even less advantage until China catches up. (Really about China developing missiles which can take out US space satellites which allow the US to strike anywhere in the world- hence President Trump’s space force to protect these vital satellites). This could also include blocking Chinese shipping lanes, as China needs imports and exports continuously to survive. Of course this would be an act of war. This is what Steve Bannon proposed to the President (how the US should give China 72 hours to leave the South China Sea otherwise the US military would remove their presence). Also it is important to note that Peter Navarro, one of the President’s trade advisers, wrote a book on the US countering China with her military.
  2. Essentially remove China from the SWIFT payment system and more capital controls on them. This is what it seemed like the US was threatening when they said they would consider imposing capital controls and not allow Chinese companies access to US capital markets, even saying they would de-list Chinese companies from the stock market, although this is highly unlikely.

The Obama administration allowed China, and to some extent Russia, to get into these checkmate positions on the geopolitical chessboard, where now the only options left are what I have mentioned. 

The Chinese for 8 years kept coming to Washington to speak with President Obama and reassured him that everything going on in the South China Sea was for science. Every year they came back they kept saying this but military assets were moved in, missiles moved in etc. The Chinese and Russians crossed all of President Obama’s red lines and he did nothing.

To end this, I want to share this Youtube Video that you should definitely check out. It was recorded on October 11th/2019. It is by Real Vision, and is an interview between Kyle Bass and US General Robert Spalding on China. It tells you what China’s real goal is here. If you have not, you should also check out the interviews with Steve Bannon and exiled Chinese Billionaire Miles Kwok which also talk about China’s (really the Communist Party) goals and ambitions.

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Vishal Toora

Vishal Toora

Vishal is an avid market analyst, geopolitical junky and wealth management strategist. As the founder of UnchartedFX, Vishal has over 7 years of live market experience with real money accounts. Originally an archaeologist by career, Vishal decided to pursue trading full-time in 2014 because of the freedom and financial stability awarded from the worlds financial markets successfully.

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