Daily Comment (October 24, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Here is a recap of what we are watching this morning:

Xi elevated: Although the news is rather obscure to Western eyes, “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” was added to the Chinese constitution today.  Such thoughts, such as Jiang Zemin’s “Three Represents” or Deng’s “Theory on Socialism with Chinese Characteristics,” are also part of the constitution.  For the first time since Mao, such theories have been added to the constitution for a sitting general secretary.  Essentially, this elevates Xi to the same level as Mao in terms of leadership status.  Deng Xiaoping wanted to ensure that China would never have to deal with a cult of personality like Mao had created and thus built a consensus leadership structure that elevated the Standing Committee of the Politburo to the leadership of the Communist Party of China (CPC) and the general secretary was primus inter pares (first among equals).  This pronouncement about Xi suggests that the Deng era is now over.  As we noted yesterday, Xi’s speech jettisoned Deng’s concept of a quiet rise of China; instead, Xi is now signaling that China intends to act as a major power on the world stage.  How this actually plays out will be something to watch.  History isn’t encouraging.[1]  We will get the Standing Committee announcement around 11:45 EDT.  However, with this announcement, it doesn’t really matter who is on the committee.  We don’t expect a successor to be established and our operating assumption is that Xi will remain general secretary until late next decade, although he will legally be required to give up the president title.

EU labor rule change: Currently, within the EU, a worker from a poorer part of the union can take a job in a richer part but accept less pay than the prevailing wage in the richer nation.  These are known as “posted jobs.”  Posted jobs give “imported” labor an advantage in the richer parts of Europe.  The issue has divided the EU.  Not surprisingly, the richer nations, led by France, want to cap the time a posted worker can accept lower pay to 18 months.  Transportation would not be part of the agreement.  Needless to say, the EU’s periphery nations aren’t happy about the proposed changes, while the core of the EU (Germany, Netherlands, France) support them.  Meanwhile, Hungary’s PM Viktor Orban praised Central Europe as a “migrant-free zone.”

Merkel and the U.K.: We noted last week that Chancellor Merkel seemed to turn dovish on Brexit.  Germany apparently has discovered that it runs a large trade surplus with the U.K.; some €50.4 bn last year, or about 1.6% of Germany’s GDP.  This is the largest bilateral surplus with any other nation, even exceeding the U.S.  Merkel seemingly wants to avoid a sudden shock of disrupting trade flows.  In addition, because of the CDU/CSU’s lackluster showing in the last elections, Merkel will be forced to engage in fiscal spending or tax cuts to gain coalition partners.  Thus, Germany will be less able to spend on EU goals and thus can’t easily fill a gap if the U.K. decides to stop paying its EU contributions.  Consequently, Merkel has decided that if the U.K. will pay a fair share of its EU obligations then she will give May some slack in trade negotiations.  As a side note, coalition-building fiscal spending will tend to turn the ECB hawkish sooner than it otherwise would have and thus is EUR bullish.

Differences in vision: Over the past week, we have seen two ex-presidents offer thinly veiled criticisms of the current president.  The criticism was fairly wide-ranging but included the foreign policy of this president, which can be both interventionist and isolationist at the same time.  As we have discussed before, the Trump policy model is Jacksonian.[2]  Jacksonians shun the global policing role of a superpower.  They only go to war when honor is besmirched or when an existential threat to the homeland develops.  Yesterday, at the Hudson Institute, Gen. David Petraeus and Steve Bannon offered dueling visions of American foreign policy.  At heart, however, is a key difference of opinion on policy—Petraeus is defending the traditional superpower role while Bannon is wanting to jettison those burdens.  We suspect Bannon’s position is becoming increasingly dominant.[3]

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[1] https://www.amazon.com/Destined-War-America-Escape-Thucydidess-ebook/dp/B01IAS9FZY

[2] https://www.confluenceinvestment.com/weekly-geopolitical-report-april-4-2016/ and https://www.confluenceinvestment.com/weekly-geopolitical-report-president-trump-preliminary-analysis-november-14-2016/

[3] https://s2.washingtonpost.com/camp-rw/?e=Ym9ncmFkeUBjb25mbHVlbmNlaW0uY29t&s=59ef2311fe1ff6159ed3f073