Sometimes what doesn’t occur tells us much more than what did – as in Sherlock Holmes’ case of the dog that did not bark in the night. Yes, two things did not occur at the G20, at the end of last week: Why? And what do they signify?
What these two lacunae tell us is something important: that Mr Trump’s presidency has reached a key point of inflection – the end of the beginning, or perhaps even the beginning of the end?
First, there was ‘no deal’ with China. As Christopher Balding, former associate professor of business and economics at the HSBC Business School in China, frankly put it: “It cannot be emphasized enough: This is not a deal, and it is not a resolution. This is an agreement to delay further escalation. Neither side really gave anything, except some cotton candy sweeteners. Nothing fundamental”.
Most of the subsequent media commentary has focussed on the prospects of a return to the Cold War trenches at the end of ninety days (a deadline which incidentally China has yet to confirm) or, even sooner, as Trump returns to Twitter belligerency. But the real question is not what happens towards the end of the first quarter 2019, but why was there ‘no deal’ on Saturday?
Trump has been promising ‘big’: “I am a tariff man”, he proclaims in a tweet, adding: “Make America Rich Again”. And, the Administration keeps repeating that the US economy is strong, whilst the Chinese one is weak: ‘We have all the leverage’, the Administration outs at regular intervals. We can ‘tariff’ double the goods, and double the tariffs too, Trump warns, whilst the US exercises its military muscle, regularly, right into Xi’s face.
And then? Come G20, ‘nothing’. Trump stalks the edges of G20 looking tense and defensive. He was no alpha-male, dominating these events. He looked crocked. It was all a bit of a dud, really.
Recall however, that the G20 followed immediately in the wake of the ‘guilty plea’ to Robert Mueller, for lying to Congress, by Trump’s former lawyer and fixer, Michael Cohen. This, as Harvard Law Professor Dershowitz notes, is evidence of Mueller again creating new crimes (through entrapment), in place of investigating the possibility of past crimes – yet Mueller, clearly is still ‘after’ Trump: And maybe, he will not prove any crime (collusion, were it to have occurred, is no crime anyway) – but that is not the point. Mueller is cornering Trump politically, as opposed to legally, through painting him as sleazy, and surrounded by liars and scoundrels. Mueller is targeting Trump’s vanity: shredding Trump’s self-image as somehow a heroic figure set on restoring the greatness of America: Making America Rich Again. Mueller is slowly paralysing the President’s potency, whilst making him appear a mere empty vessel.
Former US diplomat, James Jatras thus hints at the answer to ‘why no deal’:
“With the Democrats set to take over in the House of Representatives in just over a month, we'll soon see intensified investigations coordinated with Mueller to find any possible pretext for impeachment in Trump’s business or private life. It’s conventional wisdom that even if the Democrat-controlled House can find something to support articles of impeachment, the GOP-held Senate will be Trump’s firewall. Bunk. Democrats rallied around their president Bill Clinton but it was Republicans who threw Richard Nixon to the wolves. Are there a dozen or so Republican Senators who would be ready to dump Trump and install Mike Pence in the Oval Office? You betcha. Start with Mitt Romney.”
And what might, in Trump’s view, stand between him and the unbearable indignity – and blow to his ego – of being ‘dumped’ by his party, and being further humiliated by being hounded from office? Well, what wouldn’t is a collapsing market, and an US economy stalling into approaching recession. That, in itself, could possibly deliver the President precisely into the hands of those Republican Senators who despise him, and who would side with the Democrats in a heartbeat, if they thought they could get away with dumping the President – just as Jatras suggests.
The US market was already sinking into the doldrums in the week before the G20. The trade-war fear, initially discounted, has begun gripping market sentiment. And tell-tale harbingers (though not definitive) of a recessional economy are being espied (such as the inversion of part of the Treasury yield curve, and the oil futures curve having been in contango. Both are considered as signals of a global economy that may be slowing).
The point here is simply that Trump has, very explicitly, hitched his presidential fortunes to a rising stock market and a roaring economy. So, if it might stop the market from puncturing his business-savvy image, why not a offer a trade-war respite with China? Why not give the markets a pre-Christmas goosing?
Then there was the other notable G20 omission: another dog that significantly failed to bark. The Presidents of two pre-eminent military and nuclear powers, who sit astride major geo-political faultlines, and who need to talk, circled each other, closed-faced, and without stretching out hands – they could not find even, the subterfuge for sitting together.
Why? Ostensibly, because a tug-boat and a couple of Ukrainian armed coastal vessels were told to enter the Azoz ‘Sea’, whilst ignoring the required norms of obtaining prior permission. Really? For that? How bizarre. Trump no longer can pull Mr Putin aside, send away his aides, to sit and talk? Even more interesting, was that the Kremlin spokesman subsequently said that there ‘had been exchanges’ with Washington, and that John Bolton would be coming to Moscow, to discuss a possible future meeting between Trump and Putin. And that couldn’t have been done face-to-face in Buenos Aires because of an arrested tugboat? And that such meeting now requires Bolton’s prior imprimatur and involvement?
All in all, President Trump emerges from this summit, a pussy-cat. Big on talk, short on action: Short on action domestically; short on action in cleaning the swamp; and short on action generally. Jatras concludes, more in sorrow than in anger, “it would be only a small exaggeration to say that with respect to foreign and security policy, Trump is now a mere figurehead of the permanent state. Even if Trump and Putin do happen to meet again, what can the latter expect the former to say that would make any difference?”.
Why? We can only speculate: Simply, it may be that he fears that the markets and economy are turning against him. Perhaps Trump fears a Republican ‘Brutus’ will smell his weakness (stripped of his market-raising ‘magic’), and plunge the dagger in his back?
In his book, Principles for Navigating Big Debt Crises, Ray Dalio of Bridgewater Associates distinguishes between different debt cycles: the short-term cycles, and debt ‘super-cycles’. Short-term debt cycles move more or less in parallel with the underlying economic cycles, and last on average 7-8 years – in line with the average length of economic cycles. Debt ‘super-cycles’ typically last 50-75 years, and have a long history. Dalio notes their mention in the Old Testament, which described the need to wipe out debt every 50 years or so, whence it was known as the ‘Year of Jubilee’.
“Debt super-cycles always end with a big bang”, Nils Jensen writes: “The previous debt super-cycle ended with the breakout of World War II, and a new debt super-cycle commenced its life when the canons fell silent in 1945. We are now almost 75 years into the current super-cycle; i.e. it will go down in history as one of the longer ones”.
It is Trump’s misfortune that his Presidency seems to be coinciding with the end to not just ‘any’ super-cycle, but to a turbo-charged, global debt super-cycle, fuelled by radical interest rate suppression, and massive credit creation (which may explain its ‘longevity’). ‘Doubly unfortunate’, perhaps, because at the same time – for related reasons – the US simply is running out of fiscal ‘space’. The Treasury has a big (a repeating, dollar, Trillion-plus) borrowing requirement, in this and coming years, and foreigners are no longer buying US debt. In short, for the first time in seventy years, the Reserve Currency holder is finding it hard to finance itself – and in the current atmosphere of Washington polarisation – the US cannot reform itself, either. It is stuck.
This represents the primordial paradox that is binding the US President: Politically he needs a rising market and a roaring economy, but the ‘Oracles’ are mouthing that the Goldilocks market already may be behind him. He wants the Fed to lift the market aloft, but the Fed is more concerned to prepare for the next phase to the economic cycle. For that, it needs the elbow-room to be able to drop interest rates by 4%, which of course is impossible now. And the Fed needs a leaner balance sheet – in case of needing to charge to the rescue of the economy.
So here is the tension that ‘binds’ Trump: He can act politically, and risk a deeper end-of-cycle ‘big bang’; or act sagely, to limit the potential consequences of a possible debt crisis. But, acting ‘sagely’ also implies understanding that America’s fiscal situation of having to sell a mountain of US debt paper, on a market bereft of foreign buyers is likely to lead interest rates up – and stock prices down (as institutions sell shares to buy the higher yielding USTs). In short,politically he wants shares up and interest rates down, but America’s present fiscal situation is likely to impose the inverse – and therefore expose him to the potential ‘Brutus’ lurking in the Senate corridors.
Which will he choose? Well, we can see it already: Trump is desperate to keep the equity market up. His own security is tied to it: He is bullying Jerome Powell to halt the projected Fed interest rate interest rate hikes; and he wants the price of oil down – so that Powell has no excuse (of rising inflation), to hike rates further. So anxious was Trump, it seems, that he was ready to issue several oil waivers in respect to purchasers of Iranian oil. His 25 November tweet makes the link between low oil prices and his expectation that the Fed should forego hikes, quite explicit:
So great that oil prices are falling (thank you President T). Add that, which is like a big Tax Cut, to our other good Economic news. Inflation down (are you listening Fed)!
What does all this mean? It means that Trump, whose entire business acculturation favours debt – more debt and low or zero-based interest rates – will hope to get his way – and he may partially. The signs are that the Fed will raise rates this month, but may slow the pace of rises next year. (At least, this is what the shape of the futures curves would imply).
But the auguries are adverse: World trade is slowing; China is slowing; Japan is slowing; Germany and Europe are slowing – and the first shoots, hinting that the US has peaked in 2Q18, are poking through the soil. Trump may end with neither a roaring stock market – nor, more ominously, a bond market, painlessly digesting the Trillions of US debt.
In terms of foreign policy, the Hawks run it: Pence, Navarro and Lighthizer will pursue their ‘all-government’ cold war with China, but who knows what will be the state of the US market in 90 days. I would not bet on those additional tariffs and 25% rates emerging in April. Xi has played it perfectly: Sun Tzu would be proud.
And Mr Bolton will continue to press Russia at all points of its border; to disrupt it economically, through a regular diet of sanctions; trouble-raising in Ukraine, and trying to diss Russia’s political process in Syria (the Astana Process).