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The Trade Cascade…

Summary:
The genius market pundits are/will attribute today’s modest decline to the following trade tape bomb from CNBC, Trump is ‘highly unlikely’ to meet Chinese President Xi before March trade deadline  – CNBC Sorry, the Dow was already down 250 points before the headline on global growth fears. Nevertheless,  another 500 points lower and Kudlow will be out on the North Lawn touting his optimism about a deal, no? Chinese Game Theory Don’t you think the Chinese negotiators know this?  That is part of their game theory in the negotiations? We maintain our position that the Trump team is outgunned;  POTUS doesn’t understand trade; China is not subject to domestic political pressures to support its stock market; China is still a command economy and, in general,  not subject to market

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The genius market pundits are/will attribute today’s modest decline to the following trade tape bomb from CNBC,

Trump is ‘highly unlikely’ to meet Chinese President Xi before March trade deadline  – CNBC

Sorry, the Dow was already down 250 points before the headline on global growth fears.

Nevertheless,  another 500 points lower and Kudlow will be out on the North Lawn touting his optimism about a deal, no?

Chinese Game Theory

Don’t you think the Chinese negotiators know this?  That is part of their game theory in the negotiations?

We maintain our position that the Trump team is outgunned;  POTUS doesn’t understand trade; China is not subject to domestic political pressures to support its stock market; China is still a command economy and, in general,  not subject to market discipline;  Xi owns Kim Young-un and is using the North Korea Potemkin nuke deal as a pawn in a game of 3-D chess with the U.S.,  and, most important, and contrary to what POTUS perceives,  the Chinese have little fear and respect for POTUS threats and policies.

We came across this yesterday in the Digital Journal,

The chaotic nature of the Trump administration, and its isolationist America First rhetoric haven’t impressed the Chinese. They went right ahead with the South China Sea islands project, and the “tariffs war” has achieved no major turnaround in trade policies. To put it bluntly, China obviously isn’t scared of Trump, whether he decides to fight or not. Quite the opposite; his lack of depth and amateurishness in foreign policy may be encouraging them. – Digital Journal

Having said this, we are rooting for the home team but are not that foolish to bet against the China version of Tom Brady (we learned that lesson again on Sunday and are one Benji poorer).

End Game

Cramming all of the above into a “payoff matrix“, we reach the following conclusions.

We won’t cop out to the “uncertainty”  default position of most and have an opinion on the end game:

Trump caves on the big issues, such as structural reform of the Chinese economy and tech transfers and a Potemkin trade deal – a few soybeans here and there – gets done or the “pretend and extend”  negotiations continue with March 1st tariff deadline pushed out. 

Similar to the government shutdown, a lot of pain inflicted on the U.S. economy and individual Americans, farmers, in particular, with little to show for at the end of the day.

Alternative Scenarios

We will give an 8 percent probability Lighthizer gets all his cookies in a final deal and 12 percent Trump blows up and is “surprised” his new BFF President Xi won’t move on the big issues and goes ahead with the March 1 tariff hikes.   Seat belts, please!

Bloomberg gave us a little insight into how the talks are going,

One of Donald Trump’s most persistent economic promises has been to rewrite the U.S. relationship with China. Yet as he approaches a potential deal, some of the very hawks who have cheered on the president’s trade war already fear he may end up falling short.

With less than a month before a March 1 deadline for either a deal or an increase in U.S. tariffs, hardliners inside and outside the administration fret Trump is being outplayed by Chinese President Xi Jinping and seduced by what they see as empty promises.  – Bloomberg, Feb 4th

Fake news?   We report, you decide!

Gregor Samsa
This site is designed as a “go to” source for traders, investors, policymakers and any interested in markets and the global economy. We provide informed opinion, timely market information, sources, and links.

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