Daily Comment (April 15, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Tax Day!  It’s a quiet start to a short week.  Here is what we are watching:

A Chinese anniversary: This is the 30th anniversary of the death of Hu Yaobang, a reformist leader in the late 1980s.  Deng had supported the rise of Hu, who was implementing market reforms, to the chagrin of the traditional communist party elders.  Deng appointed him general secretary in 1982.  In 1987, student unrest led to him being fired from his post in January 1987 and he died two years later.  His death triggered the Tiananmen Square protests in 1989 that threatened the CPC and eventually led to a harsh repression.  Expect the Xi government to attempt to either quash any remembrances of Hu or only allow carefully stage-managed celebrations of this anniversary.

U.S./China trade: Treasury Secretary Mnuchin indicated that the U.S. and China are nearing the final round of concluding issues.[1]  Although Mnuchin avoided discussing details of the negotiations, a few items did emerge.  First, negotiators are apparently considering the possibility that the U.S. could face “repercussions” from not living up to the U.S. side of the bargain.  In other words, if the U.S. fails to meet the terms of the agreement, it is possible that China could implement retaliatory actions, e.g., quotas, tariffs, etc.[2]  We are somewhat surprised the U.S. would accept such a deal, even though it seems fair on the surface.  We note that both Lighthizer and Navarro have argued that China has no right to retaliate with tariffs because the U.S. is simply reacting to earlier Chinse trade impediments.  Thus, this concession, if true, does suggest the U.S. wants an agreement.  Second, there are reports that the U.S. has also given in to China’s industrial subsidies.[3]  China’s subsidies allow it to produce goods at prices below those of foreign competitors, giving it the ability to gain market share.[4]  Third, one of Mnuchin’s aims, reducing the ability of foreign nations to manipulate their currencies to offset the impact of tariffs, is apparently in the agreement.[5]  In theory, this position makes sense; in practice, it’s hard to execute.  We continue to closely watch Lighthizer; he is a trade hawk with clear ideas on how he wants to change the U.S./China trade relationship.  He will not make a deal with China for political expediency.  If the White House pressures him to make an agreement he dislikes, we would not be at all surprised to see him resign.[6]

Finnish elections:  The Finns went to the polls this weekend[7] and, consistent with what we have seen in the rest of Europe, the outcome showed deep divisions within Finnish society.  The center-left, center-right and populist right ended the vote with a near tie.  The center-left Social Democrats won 17.7% of the vote (+1.2% from 2015) and claimed 40 seats out of 200.  That was a six-seat improvement.  The populist right Finns Party won 17.5% of the vote (-0.2% from 2015) and 39 seats, gaining one seat.  The National Coalition Party, a center-right group, took 17.0% of the vote (-1.2% from 2015) and 38 seats, a one-seat improvement.  The Center party, a centrist farm party, took 13.8% of the vote (-7.3% from 2015) at 31 seats.  That was a loss of 18 seats from 2011.  The Greens won 11.5% of the vote (+3.0% from 2015) and 20 seats, a five-seat improvement.  Finally, the Left alliance won 8.2% (+1.1% from 2015) and 16 seats, a four-seat gain.  Various minor parties captured 16 seats.

There is no obvious path to 101 seats because the mainstream parties are uncomfortable with forming a government with the Finns Party.  Keeping the Finns Party out of government forces a “grand coalition” structure, similar to what we’ve seen in Germany.  Such governments tend to be unwieldy.  We expect the process of forming a government to take weeks.  But, the bigger issue remains the rise of populism and the inability of the establishment parties to successfully co-opt the movements around Europe.

More on Asian Swine Fever (ASF): As ASF continues to adversely affect the Chinese pork market, analysts are beginning to calculate the impact.  China is the third largest consumer, per capita, of pork.  However, due to its large population, the impact of China is massive.  ASF is a deadly disease to pigs; once infected, whole herds are quickly lost.  Simply put, there aren’t enough pigs in the rest of the world to offset the losses in Asia.[8]  And, the effects are ongoing.  The current loss of herds is curtailing future supply as farmers in China are reluctant to restart herd building.  The jump in prices will tend to boost production elsewhere, but there is a natural cycle that must be accommodated.

(Source: Barchart)

The ripple effects are starting to show up in the grain markets.  Until herds expand elsewhere, demand for grain will decline, especially soybeans.  Complicating matters is that planting for corn will likely be delayed due to this weekend’s blizzard; the longer corn planting is delayed, the greater the likelihood that acres will shift to soybeans.[9]

Venezuela: The key to the U.S. policy of ousting Maduro is getting the military to turn on the incumbent.  So far, the military has stayed loyal.  Why?  Most likely, Cuban intelligence operatives.[10]

The Fed:There were a number of comments on the Fed over the weekend.  As we noted last week, Herman Cain’s nomination is under pressure.  There is clear establishment opposition to the politicization of the Fed.[11]  The president hammered on the central bank over the weekend.[12]  Starting later today, we will publish the first edition in a new WGR three-part series on the interaction of the Fed on American hegemony.  Essentially, it’s all about the ability of the U.S. to impose at least part of the costs of domestic economic adjustment the world.  Stay tuned…

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[1] https://www.wsj.com/articles/mnuchin-says-trade-talks-near-final-round-11555188048?mod=hp_lead_pos7

[2] https://www.ft.com/content/9d363b28-5e5c-11e9-b285-3acd5d43599e

[3] https://www.reuters.com/article/us-usa-trade-china-exclusive/exclusive-u-s-waters-down-demand-china-ax-subsidies-in-push-for-trade-deal-sources-idUSKCN1RR02X

[4] https://www.reuters.com/article/us-usa-solar/chinas-solar-subsidy-cuts-erode-the-impact-of-trump-tariffs-idUSKCN1LF18K

[5] https://www.wsj.com/articles/u-s-china-trade-pact-takes-aim-at-currency-manipulation-11555074003

[6] https://www.ft.com/content/532fd236-5cd7-11e9-9dde-7aedca0a081a

[7] https://www.ft.com/content/69b66888-5ef5-11e9-b285-3acd5d43599e?emailId=5cb404a5316b1d0004e6714f&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[8] https://www.bloomberg.com/news/articles/2019-04-11/hog-apocalypse-in-china-leaves-farmers-fortifying-pigsties

[9] https://finance.yahoo.com/news/deadly-pig-disease-reshaping-global-230000341.html

[10] https://www.washingtonpost.com/world/national-security/venezuelas-military-despite-us-expectations-has-not-turned-on-maduro/2019/04/13/bd0928de-5d2b-11e9-9625-01d48d50ef75_story.html?utm_term=.9fd5c8f4cda3&wpisrc=nl_todayworld&wpmm=1

[11] https://www.nytimes.com/2019/04/11/business/mankiw-moore-cain-federal-reserve.html

[12] https://finance.yahoo.com/news/trump-slams-fed-again-says-151047489.html