Notes From Underground: Making Sense Of the Jabberwocky

Fans of Lewis Carroll should know the whimsical poem from Alice in Wonderland that comes across as complete NONSENSE. The collection of tweets from the White House is the modern day version of the Jabberwocky. On Friday Trump tweeted about how well the talks were going with Chinese and that they were close to completion with a positive outcome. So between that and a strong jobs number, the U.S. equity markets had much to celebrate

Fast forward to the weekend: It turns out the China/U.S. trade talks were not going as well as Mnuchin/Trump thought on Friday, resulting in a major sell-off upon the Globex opening at 5:00 p.m. CST Sunday night.

There was more pressure on Monday as investors became concerned about the economic impact from Trump threatening increasing tariffs on another $200 billion of Chinese exports. U.S. agricultural products were sold in an anticipation of reciprocity by the Chinese authorities. Again, U.S. negotiators mistime these tariff increases because the Southern hemisphere has bursting grain bins as another massive harvest has just be gathered into the elevators for export. On Tuesday there was more recriminatory accusations by both parties in regard to the White House tweets. Robert Lighthizer and Steve Mnuchin now claim the Chinese RENEGED on previous agreements in regards to state-owned enterprises and intellectual property. The Chinese maintain that they are being bullied into accepting conditions that are in continual motion. The key to this recent war of words can be found in a South China Morning Post article from April 29 titled, “Art of Being Vague: How Trade Negotiations Get Lost In Translation.”

Journalist Finbarr Bermingham wrote: “While both sides are negotiating in their native tongues with the help of simultaneous translation, the subsequent text will be translated into both English and Chinese. These translations will then be ‘scrubbed” by lawyers and technical translators in an effort to reach a final text that both sides are happy with.”

The problem is not new to international trade negotiations because of political constraints weighing upon both parties.

Mary Ryckman, a seasoned veteran of the USTR negotiations said, “You have the ‘art of being vague’ and you agree to be vague because you want to come to an agreement. This is one of the issues that’s holding up the current U.S.-China talks, around enforcing the agreement.” Lighthizer has been peeved about the negotiations that allowed the Chinese into the WTO 20 years ago, believing the language of that agreement allowed China to play fast and loose with the rules.

The issue is that Article 15 of the WTO agreement has still not been resolved over China’s rise to be treated as a market economy. In an effort to solidify an enforcement mechanism Lighthizer seems to want concrete language. The problem for the Trump White House is that the president, and especially Mnuchin, is concerned that the failure of negotiations will result in a global economic slowdown. Then there’s risk of a downturn in the equity markets, which President Trump has maintained is the barometer of the success of his economic policies.

The question for markets: Which party has the other captive? Trump is captive to the financial markets. The Chinese are weary of slowing growth as the fallout from trade friction negatively affects several regions. And now the Fed is caught off-guard by believing that a trade deal was a done deal.

The market also has to digest the fact that once President Trump can declare “victory” he will most probably turn his attention on Europe, especially Germany, in an effort to correct the great imbalances that exist there.

In my opinion, the FED is going to find that it is global growth that is transitory. If I am correct then the FED OUGHT to be CUTTING THE INTEREST ON EXCESS RESERVES RATE AGAIN in an effort to pump liquidity into a global economy that is allegedly starved for DOLLARS. The recent contraction in money supply data can impede economic growth. Oh well, what do words really mean anyway? Are FED FUNDS MORE SIGNIFICANT THAN IOER? One pill makes you larger. One pill makes you small. And the ones that POWELL gives you don’t do anything at all.

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10 Responses to “Notes From Underground: Making Sense Of the Jabberwocky”

  1. Trader 1 Says:


    What odds would give Lighthizer putting some deal put together so Trump can declare victory?

  2. Mike Temple Says:

    I said it in response to your last article, and I will repeat it now.

    Powell is at the mercy of the markets and all the dribble about PCE deflators and transitory inflation/deflation is so much hooey for the MSM that parse his every word and intonation.

    After today’s hiccup, German 10 yr has a negative yield. If the unthinkable happens and Trump actually unleashes a trade war, watch for the Chinese to do to American brands what they did to Japanese brands back in 2013ish.

    GM sales of Buick’s will plummet to ZERO. The same may hold true for Apple products. Watch for public burnings of Buick’s and IPhones. Don’t think it can happen? Just ask Toyota.

    Trump may yet get his interest rate cuts far sooner than he could have imagined. And, you bring up an excellent point about the upcoming European trade talks. And, even more intriguing, Congress has yet to ratify Trumps replacement of NAFTA.

    May you live in interesting times, indeed


    • yraharris Says:

      Mike –thanks for the input both times.I agree that Powell is at the mercy of the markets far more then he will ever admit.Your point about domestic consumers in China and comparing to Japan products in 2013 is very sound—and Sun Yat-sen may have driven a Buick but that does not hold for Xi

  3. asherz Says:

    Not exactly Lewis Carroll but Trump Art of the Deal. You jaw bone negotiations as you move the deal along with positive comments. But when the other side reneges on agreed points in the talks, you walk away.
    I tried this many years ago in Middle East Casbahs. At one point in the negotiations I walked away. Nine out of ten times I got called back by the vendor and got my price. With me it was a game practicing my negotiation skills.. For the seller, his business. We always smiled at the conclusion.
    As I wrote recently in this space, this is a much bigger game than NAFTA or USMCA. It is the China challenge to American sole superpower status. And Lighthizer with Pompedeo and Bolton in the background understand all this. My prediction was that if a deal is reached, it will be Swiss Cheese and not Muenster, full of holes. But I’m not sure the Casbah buyer will return if the seller does not cave in.
    President Xi in building up his military, consolidating his authority, investing in Africa, South America and elsewhere, South China Sea moves, etc. has a visible goal. He will not totally capitulate to a real free and fair trade agreement. His Achilles Heal (or the Asian equivalent) is a slowing economy with a huge debt overhang. Most of the latter is domestically held, but any default would bring people out into the streets and threaten Xi’s position.
    At least that is the big picture as I see it.

    • yraharris Says:

      Asherz—-too bad you weren’t able to teach the Secretary Madeline Albright who made a major faux pas whenshe chased after Arafat as he was leaving the US Embassy Compound in Paris when he was walking away from a supposed deal–Albright has been on my list of major incompetents ever since

  4. John Brady Says:

    Think Steve Bannon’s Monday Washington Post Op Ed is a MUST MUST read.

    • yraharris Says:

      John Brady–thanks read the piece and my response is now Bannon needs to read Graham Allison’s The Thucydides Trap

      • Chicken Says:

        Factitious disorder is the premise upon which beltway zombies justify their existence.

  5. Michael Temple Says:

    Despite my gloominess, I think we will see “more negotiations” as the outcome of the Thurs/Friday meetings.

    Stocks will rally, on cue, to challenge the highs.

    We shall see.


    • yraharris Says:

      Mike T—reality is not gloomy.If you trade based on emotional underpinnings you will need another profession.Trading what OUGHT to be is what Keynes lamented when he stressed that markets can remain irrational much longer then you and I can remain solvent

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