Daily Comment (May 22, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Financial markets are quiet this morning.  This is what we are watching this morning:

The problem of priorities: There is a stock scene in most action movies where the hero is surrounded by bad guys but, inexplicably, they attack one at a time.  The hero fends them off, showing he can defeat a group aligned against him…assuming they don’t all attack at once.  When one runs for president, it seems there is an assumption that the world behaves like an action movie.  In real life, the “bad guys” (“issues”) don’t take turns.  They come at the POTUS all at once.  President Trump is dealing with the multiplicity of issues and performing triage.  Here are the evolving issues:

  1. North Korea has become the most important item on the agenda.[1]  President Trump is running the risk his predecessor had with Iran; he may want a deal more than the other party.  If the president can reach a substantive agreement with North Korea, it would be historic, something none of his predecessors have been able to pull off.  The lure of this achievement may be overtaking the real possibilities of an agreement.  It’s critical for both parties to know exactly what they want.  The U.S. should press for an elimination of the nuclear risk to the United States. Anything beyond that is a mere plus.  Note that we didn’t say “denuclearization.”  That may come over time, but if there is anything Kim wants to avoid it’s the fate of Muammar Gaddafi.  He will keep some form of a nuclear threat for that reason alone.  What the U.S. should try to accomplish is an end to the delivery mechanism to the U.S.  North Korea should want sanctions relief and an eventual peace treaty that will foster economic development.  This outcome may be achievable, but if John Bolton[2] has hijacked the president’s policy on North Korea then the summit could end up in a stand-off, with the next logical step being war.
  2. Focusing on North Korea means that trade negotiations with China are less important.  China is willing to give the impression of a trade win to the White House; for example, today China announced a large reduction in car tariffs, to 15% from 25%.[3]  There were non-binding promises for more imports, mostly grain and energy.  The ZTE (ZTCOF, $2.26, 4/26/18) situation is getting resolved with a less rigorous U.S. response.[4]  The president has put Treasury Secretary Mnuchin in charge of the China negotiations, sidelining hardliners such as Peter Navarro.  Steve Bannon criticized Mnuchin’s trade negotiations as a “giveaway.”[5]  In reality, we think the president wants to hew a hard line toward China on trade but he cannot have a trade war with China and a historic agreement with North Korea at the same time because China could scuttle U.S. negotiations with Kim.  China, so far, is the winner on trade; its key goal remains intact, which is to maintain the industrial policy toward becoming a tech powerhouse.
  3. What about Iran? Secretary of State Pompeo outlined U.S. goals with Iran.  Essentially, the U.S. wants Iran to end its nuclear program permanently, stop developing missile technology and withdraw its influence across the Middle East.  As one would expect, the response from Iran has been less than open.[6]  Agreeing to this proposal would be tantamount to unilateral surrender and, in fact, would essentially require regime change.[7]  The Iranian Revolution was not just about Iran but about spreading Shiite theocracy throughout the region.  The U.S. goal may be regime change.  If so, this could be setting the preconditions for war.  However, there is another item to consider.  If the Iranian leadership actually withdraws, a power vacuum would develop in Syria and Iraq.  It is unclear who would fill it.  At first glance, it would seem that any replacement for Iran would be better for the U.S.  However, the last “vacuum filler” was Islamic State.

For now, North Korea is the #1 priority.  That means the U.S. will go easy on China and will probably not move beyond rhetoric on Iran.  But, once the North Korean situation is resolved, attention will need to shift to other priorities.  Our guess is that Iran becomes next “in the barrel.”  If true, that should underpin oil prices.

Zuckerberg in Brussels[8]: The Facebook (FB, 184.49) CEO will go to Brussels to discuss his company as Europe prepares to unleash its new regulations on privacy, known as General Data Protection Regulation (GDPR), which appears to restrict social media’s ability to track user behavior.  We expect Zuckerberg to offer investment and promises to do better[9] but, in reality, GDPR potentially could seriously harm the business model of social media[10] by reducing the amount of data that can be collected and sold to advertisers.

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[1] https://apnews.com/f2e5aa3856b44b4b823064834dfb819d

[2] https://www.washingtonpost.com/world/asia_pacific/whos-to-blame-for-the-hiccup-in-north-korea-talks-south-koreans-say-bolton/2018/05/21/f5099324-5cdf-11e8-8c93-8cf33c21da8d_story.html?utm_term=.895661ce1c71

[3] https://www.ft.com/content/dbda0d5c-5d89-11e8-9334-2218e7146b04

[4] https://www.wsj.com/articles/u-s-china-agree-on-broad-outline-to-settle-zte-controversy-1526959695

[5] https://www.bloomberg.com/news/articles/2018-05-21/steve-bannon-condemns-mnuchin-s-trade-truce-as-china-giveaway (paywall)

[6] https://www.ft.com/content/972765b8-5cfa-11e8-9334-2218e7146b04?emailId=5b039e04f872430004412604&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[7] https://www.ft.com/content/2b97380a-5d63-11e8-9334-2218e7146b04?emailId=5b039e04f872430004412604&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[8] https://www.ft.com/content/cd745340-5d47-11e8-ad91-e01af256df68?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

[9] https://www.politico.eu/pro/mark-zuckerberg-hearing-eu-european-union-brussels-cambridge-analytica-antonio-tajani/?utm_source=POLITICO.EU&utm_campaign=db3d564eca-EMAIL_CAMPAIGN_2018_05_21&utm_medium=email&utm_term=0_10959edeb5-db3d564eca-190334489

[10] https://www.politico.eu/article/gdpr-survival-guide-europe-privacy-data-protection-general-data-protection-regulation-may-25-facebook/?utm_source=POLITICO.EU&utm_campaign=f3892c4dc9-EMAIL_CAMPAIGN_2018_05_22&utm_medium=email&utm_term=0_10959edeb5-f3892c4dc9-190334489