Daily Comment (April 18, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equity markets are quietly ticking higher.  Earnings remain strong.  Although there wasn’t much market news, there was a great deal of other news.  Here is what we are watching:

Pompeo to Pyongyang: Over Easter, CIA Director and SOS nominee Mike Pompeo was dispatched to North Korea and met directly with Kim Jong-un.  The meeting was confirmed by the president in an early morning tweet.  With the breakdown at the State Department under Tillerson, the White House has been using the intelligence channel to communicate with Pyongyang.  Reports indicate the CIA has been the conduit of backchannel talks with officials at the Reconnaissance General Bureau, the North Korean version of the CIA.  The president has also given his “blessing” to North and South Korea to begin peace talks.

There has been some discussion about the idea of denuclearization.  This has the potential to be an area of “strategic ambiguity,” where two parties say the same thing but mean something entirely different.  For the U.S., it is generally assumed that denuclearization means North Korea gives up its nuclear program.  For North Korea, the term means the U.S. and North Korea no longer threaten each other directly and U.S. troops leave South Korea.  Most analysts have considered the North Korean position a non-starter for the U.S.  Those American troops on the Korean Peninsula are part of U.S. power projection in the region.  However, that analysis may be misreading the president’s core position on foreign policy.  In terms of foreign policy, Trump is Jacksonian.[1]  That means he rejects the burdens of hegemony; foreign policy is mostly based on honor.  In this light, the Syrian policy is perfectly clear—the use of chemical weapons is a direct affront to the president and American honor but there is no need for the U.S. to shape policy in the region because it’s none of our business.  Thus, the White House might be perfectly fine with the withdrawal of U.S. troops from South Korea in exchange for an end to North Korea’s ICBM program.  In other words, the Far East would still be threatened by North Korea’s nuclear program but the U.S. would not.[2]

There are two other items that are part of these meetings.  First, it is notable that Pompeo met with Kim over Easter, which was just after Kim met with Xi in Beijing.  The timing would suggest Washington and Beijing are vying for the attention of the “young general.”  Second, Pompeo is struggling with Senate confirmation.  The announcement that he is in the midst of sensitive talks with North Korea will probably be enough to encourage the senators to approve him so as not to disrupt negotiations.

China and telecom: The U.S. is limiting the ability of ZTE (ZTE: CNY 31.31) to use American technology for seven years.  The White House has been complaining about China’s confiscation of U.S. intellectual property and thus has decided to punish one of the few truly international Chinese telecom companies.[3]  ZTE also engaged in business with nations under U.S. trade restrictions.  Huawei Technologies (SHE: CNY, 7.20) announced it will refocus on existing markets due to difficulty in doing business in the U.S.[4]  Although there has been much focus on tariffs and commodities, the real battle is in technology, where the U.S. is opposing China’s attempts to establish high-tech dominance.

Is Clarida more dovish than we thought?  Barron’s[5] offers analysis suggesting the president’s nominee for vice chair may be more dovish and less conventional than at first glance.  We will have more on this idea in the coming days but we have been concerned the president would lean dovish in picking Fed officials and may berate the central bank for rate hikes at some point.  In other words, relations between the Fed and the White House could eventually become Nixonian, which would mean higher inflation, lower nominal yields and a weaker dollar.

IMF and growth: The IMF is forecasting 3.9% GDP growth for this year, the strongest year since 2011.  The group noted that the global economy is in a widespread expansion, but did warn that a trade war could undermine the current good times.

Nickel prices jump: Nickel prices are higher this morning on fears that new sanctions on Russian nickel producers could restrict supplies.

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[1] For background, see WGRs, American Foreign Policy: A Review, Part I (10/3/16) and Part II (10/10/16)

[2] The meetings with PM Abe must have been awkward in light of the Pompeo news.

[3] https://www.nytimes.com/2018/04/16/technology/chinese-tech-company-blocked-from-buying-american-components.html

[4] https://www.wsj.com/articles/huawei-looks-to-existing-markets-as-tech-becomes-target-in-u-s-china-trade-spat-1523966693

[5] https://www.barrons.com/articles/reading-richard-clarida-hawk-or-dove-1523929538