Good morning ๐ง๏ธ๐ช๏ธ. A typhoon passed through ๐ญ๐ฐ& it's gloomy outside, just like the mood of markets after:
a) JPO said hedgy words "act as approprioate"
b) Carney speech on the dollar & digital $
c) China raising tariffs to 30% from 25% on 75bn
d) Trump raised 300bn tariffs to 15%
Facts of tariffs so far:
a) China imports from the US roughly 120bn & tariffed 110bn so got 10bn left & so to ESCALATE it needs to raise the level as volume limited
b) That happened w/ 75bn raising by 5% so items like US crude went from 25% to 30%
c) US imported ~550bn & so far
Events leading to today:
June '18: ๐บ๐ธ25% tariffs on 34b; ๐จ๐ณ retaliates w/ 25% on 34
Aug '18: ๐บ๐ธ25% on 16b; ๐จ๐ณ same
Sept '18: ๐บ๐ธ10% on 200b that'll be raised to 25% (1 Jan)
๐จ๐ณ retaliates w/ 5% on 60b
Truce
May '19: ๐บ๐ธ raises 10% to 25% on 200b
June '19: ๐จ๐ณ raises 5-25% on 60bn
Not yet tariffed by both sides but WILL starting 1 September 2019, yes this Sunday:
a) ๐บ๐ธ tariffs on the remaining (see chart ๐๐ป) 300bn by 10% that later exempt 156bn (mostly consumer goods till 15 December)
b) China retaliates w/ raising 5% on existing tariffs of 75bn so +5% ๐๐ป
๐๐ป:
c) ๐บ๐ธ Raising 5% on existing to 250bn to 30% on 1 October 2019.
By 1 October 2019: China tariffs on the US ranging from 10-30% of 110bn of goods & the US got 30% on 250bn of goods & 15% on 300bn of goods (w/ 156bn delayed til 15 Dec)
Basically all of trade b/n US&China ๐๐ป๐๐ป
d) By 15 December, unless there are efforts to delay tariffs, there will massive front-loading for fear of this happening & guess what?
WE WILL HAVE TARIFFS ON ALMOST ALL OF US CHINA TRADE.
But that never ends there. Watch investment.
70th anniversary of the People's Republic of China led by the CCP is on, wait for it:
1 October 2019, which is the same date that the 25% of 250bn goes to 30% & obvs a month before on 1 September 15% on 144bn (156bn to be applied on 15 December 19.
About that September talk๐ฌ..
As a recap: Notice that the "bark" much stronger than "bites" to manage expectations & actions always surprise u w/ lower magnitude but trend is escalation.
Meaning, worst case scenario now new normal & u rejoice when it escalates but less than "bark"๐๐ป
As in the 10% to 15% of 144bn of goods on 1 September 19 (15% on 156bn of consumer goods 15 December) & 25% to 30% for 250bn of mostly intermediate goods on 1 October may not be realized, which u'll rejoice but only b/c ur expectations are managed. Don't forget that norms change
Trump: Non-committal in China tariff delay. Told you. He just puts it out there so you price the WORST & then takes a bit away & then when it happens you will think it is GOOD NEWS.
True story. This is what happened since late Jan 2018. SPX futures up 1% vs -1% this morning.
Do you know what happens after every escalation so far for trade-war? Deescalation by both China & the USA (yep, true story), albeit short-term reprieve until it escalates again, kind of like a dance to get to know each other's limit...
Same script still plays to buy time๐๐ป
#Breaking Mofcom's Gao (de-escalating): Trade escalation not good for ๐จ๐ณ, ๐บ๐ธ; ๐บ๐ธ & ๐จ๐ณ in effective contact; ๐จ๐ณwon't discriminate against foreign firms; Won't crack down on foreign firms; discussing ๐บ๐ธ visits in Sept; ๐จ๐ณ has ample tools to respond but thinks should discuss removal
โข โข โข
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Two days after the elections & as Trump team prepares their team, let's talk about economic impact. This morning, I will read with you a few papers that have analyzed what he said as literal policy translation.
First, Trump 2.0 will not be as messy as Trump 1.0. Why? Well, dude is gonna prolly get enough people to approve his thousands of people that will be appointed so DC.
This is what you get when you have total power (likely House, Senate).
Second, he has done it already so got a few people in the bags to choose from and the troops in the GOP have rallied behind him.
What does that mean? Trumponomics is going to be pretty forceful, whatever that may be.
There are a few things we know that he is very consistent:
a) On domestic policy - he will like extend his Tax Cuts and Jobs Act (TCJA) or basically corporate tax cuts and also income cuts. That will help boost economic growth but WIDENS THE DEFICIT.
b) On immigration - he will at the minimum TIGHTEN the policies. Whether he will actively deport all these people that entered illegally is a question mark. Irrespective, Biden towards the end of the term got the memo that the open border thing isn't good for politics and since tightened.
That said, he said he would deport so some deportation is likely. Magnitude is question mark.
Prabonomics Wish List: Higher Tax Revenue, More Social Welfare and Rapid GDP Growth.
A thread on Indonesia's 8th President who will lead Southeast Asia's largest economy & fourth most populous in the world in the next five years. Let's go! ๐ฎ๐ฉ
First, what is Prabonomics? Well, we don't know yet but he won on the promise of continuity of Jokonomics that comprised of infra capex, fiscal prudence, and downstreaming of metals (nickel).
Still, let's talk about his objectives. On the economy, he wants:
GDP to rise by 8% in the next 2-3 years (Jokowi only managed 4.1% on average in 10yrs and excluding Covid years then 5.1%) so that is raising GDP growth by 3-4% higher than its current batting average.
How will achieve this 3-4% higher average GDP growth?
Well, more social welfare spending is where we wants to do it. Basically, more free school food, more housing, more self sufficiency of food.
So a mix of social capital & some infra but generally more about social welfare vs the emphasis on highways and new capitals.
How much more? Well, he floated IDR450trn or 30bn for free school lunch for 81m Indonesian or 2% of GDP.
Here is a short thread on why China fiscal policy, specifically central government support, is sorely needed & monetary support so far is not enough.
First, China got triple D problems - deflation, debt, demographic. All going badly.
Regarding deflation, it reflects an imbalanced economy where supply-side support for a long time has led to too much supply relative to demand domestically.
The easiest way to see it? China's producer price index. It's -2.8%YoY for September 2024. Meaning, producers get less money for the same stuff they make vs last year.
Okay, how is this bad? Margin compression. Your revenue is lower if you are a producer. Or DECLINING INDUSTRIAL PROFITS.
The positive side of this equation is that as they produce so much stuff that is not in demand and prices are cheap, then they can sell ABROAD (exports) for much cheaper than the competition.
A cheaper yuan (meaning depreciated) also helped. All those reasons led to China gaining global market share in manufactured goods to the chagrin of big traders like the EU, South Korea, Japan, and even the not big trader like India that has a about USD100bn of deficit w/ China.
Okay, so it's a bright spot as it gets more income than it spends (imports) so it has a trade surplus.
But that is also a source of geopolitical tensions as other countries are not happy w/ their firms going out of business as they can't compete w/ Chinese goods that are literally deflated.
So tariffs are going up, started by Trump in 2018 but frankly increasingly the EU and likely more and more...
Great story about India rice policy. What I find interesting about this is of course the agriculture gets the most subsidy in the budget & one can say that India gives so much more to farmers and the sector than any sector by a wide margin.
That is a distortion that favors them as they are a powerful vote bank. But at the same time, the government also banned the exporting of rice when rice surged and that meant farmers couldn't make more money.
What India does with farming is very interesting. As it is a country with food surplus and the budget gives most weight to farming while most farmers remain very poor and more than 75% work for sub minimum wage.
India's central government expenditure budget. Rural development + agriculture gets so much.
There is a lot of talk about production linked incentives but it really just got 1.5bn in FY25. So that means this budget is just mostly agrarian.
Meanwhile, farmers were blocked from exporting rice, causing rice to rot. This is a policy to prevent rice price from rising, causing CPI to spike.
This is a sector worth paying attention to as most Indians live in rural areas & they matter even if farming is only 16% of GDP.
One of the reasons India deal with w/ the energy and thus the food crisis is that it is a country that has a SURPLUS in food. As in they EXPORT food.
So to make sure domestic prices & supply stay ample during GLOBAL SHORTAGES due to shocks, India curbed food exports from wheat to rice and sugar.
Meaning, India exported less & so the Philippines saw a huge increase in rice price imported (btw, good for Vietnam & Thailand obvs).
Modi reversed his non-basmati white rice introduced in July 2023 but still have export duty on parboiled rice and minimum price imposed on shipments abroad of the white variety of grain.
The best research on India is written by the @RBI and it's called the RBI Bulletin (very similar to BOE bulletin) & it's amazing. Go to the state of the economy for charts/details on what's going on in India & then they always have essays on specific issues.
Central banks are consistently the best place to get information on a particular country. I also like the RBA website as well. Enjoy!
We can read some of these together in case you find it intimidating reading central bank language.
Germany is in structural decline & the path for that was waved by Angela Merkel who:
a) Allowed for mass irregular migration since 2015 that paved ways for Brexit, the far right rise in Germany and Europe
b) Appeasing Russia after its annexation of Crimea and expansion dependency on Russian gas
c) Phasing out nuclear energy.
As a result, Germany today deals with HIGHER input costs (energy is obvs) & also the political fallout of irregular migration.
Sholz of course is a worse politician than Angela Merkel but the path of its demise is paved by her.
The fact that China has pursued:
a) Expansion of coal, solar, wind, and nuclear to REDUCE INPUT COSTS
b) Subsidies in high-tech
c) Allowed for it to be competitive despite higher tariffs in Europe.
Meanwhile, Sholz asleep at the wheels. This is his reaciton: โOur country cannot and must not get used to this,โ he went on. โThe AfD is damaging Germany. It is weakening the economy, dividing society and ruining the countryโs reputation.โ
Germany doesn't understand that it cannot pursue its current path of extreme liberalism that worsens its competitiveness and destabilize its own society & expect to do well to lead Europe out of this mess.
Extreme liberalism can only exist in a vacuum or hypothesized world.
We exist in a world of limited resources. Countries like China are just better organized. Believe it or not. Sholz has no clue & will lose in 2025 but before he is gone he is still around to make a big mess.
Continuing to close the last 3 nuclear plants was a disaster.