James Howard Kunstler?!

Ahead now, I think you'll see the big nations shrink back into their own corners of the world. I'm not saying we'll see no international trade, but it will be nothing like the conveyer-belt from China to Wal-Mart that we've known the last few decades. And the prospects for conflict are very, very high.

. . . James Howard Kunstler, American author, social critic, public speaker, and blogger

It was back in November 2010 when James Howard Kunstler first wrote the aforementioned quote. We recalled that quote while spending last week in Nashville seeing institutional accounts and speaking at events for our financial advisors and their clients where the question du jour was, “What’s going on with the potential trade war?” In fact, one particularly clever client said, “Who cares about the price of tea in China!” Well, with what’s going on, everyone should care about what’s going on with China and the escalating rhetoric between the U.S. and China.

Speaking to the current spat, our friends at the brainy GaveKal organization penned a terrific white paper last week explaining things, which was titled “The Trouble With Trade Retaliation,” and written by Tom Holland:

So if China can’t impose countervailing tariffs, won’t devalue, and can’t dump its holdings of US debt, Beijing will have to look for another means of retaliation. The most obvious would be to target the businesses of large US companies operating in China.

So why can’t China impose “countervailing tariffs?” Well, it’s actually quite simple. If President Trump slaps another $200 billion in tariffs on China, with the threat of another $200 billion, that would bring the total to some $250 billion, consequently the math just doesn’t compute. Consider this, last year the U.S. imported roughly $500 billion of goods from China, yet China only bought $130 billion worth of U.S. goods. Given this mismatch, China can’t really retaliate in kind because it just doesn’t buy enough goods from the U.S.

As we surmised last week in one of our missives, “We doubt that China will devalue its currency.” Indeed, if China did so, it would cause massive outflows of capital from China’s financial system and likely impinge the renminbi’s credibility of one day becoming the world’s reserve currency, something Beijing has aspired to for a very long time.