The Great Canadian Shoe Heist - Vivek Kaul's Diary
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The Great Canadian Shoe Heist

Jun 21, 2018


POITOU, FRANCE - Yesterday, when the Chinese woke up and heard The Donald threatening to impose an import tax on Chinese-made goods, they practically fell out of bed.

There's a 10% daily circuit-breaker limit in the Chinese stock market. As the name suggests, when stocks fall too far, too fast, they flip a "circuit breaker." Trading stops to stem the losses.

By the end of the day, more than 1,000 Chinese stocks had hit it.

U.S. investors were worried, too. Our message for today: They should be.

After falling for five days in a row, the Dow slid almost 200 points yesterday. By our reckoning, the primary trend for stocks is down.

If we're right, stocks will probably not hit January's high - above 26,600 - again in our lifetimes. At least, not in real terms. When hyperinflation gets underway - as we expect it will in a few years - who knows what will happen.

Empire of Debt

Meanwhile, the Russians, Japanese, and Chinese are all dumping U.S. bonds. As we pointed out 10 years ago in our book, Empire of Debt (written with Addison Wiggin), the U.S. empire is funded neither by tribute, like Rome, nor by trade, like Britain. It runs on debt.

Properly adjusted for inflation, their trade surpluses (where they give us more than we take from them) have totaled nearly $20 trillion.

Much of this money has been channeled into U.S. Treasury bonds; foreigners have financed some $8 trillion worth of U.S. deficit spending over the last 20 years.

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Next year, the U.S. government will have to sell some $1.2 trillion in new bonds just to cover the deficit. In years past, it could count on two sources with deep pockets and an almost insatiable appetite.

Foreigners, described above, recycled trade surpluses into U.S. debt (thereby financing the whole shebang of financialization at home and militarization abroad). And what the foreigners didn't buy, the Fed did; currently, it holds $4.4 worth of assets, mostly U.S. Treasuries.

But now, both sources of demand are drying up. Much discussed in these pages is the turnaround in Fed policy... in which America's central bank goes from being the biggest buyer of U.S. Treasuries in the world to, effectively, the biggest seller.

Readers will recognize this, too, as a souped-up version of the Fed's Mistake #2, in which it tightens up after being much too loose for much too long.

Smuggling Shoes

Now, we turn our attention to the other source - world trade. There, The Donald takes center stage.

The Russians' selling of U.S. bonds comes in response to new U.S. sanctions imposed by Mr. Trump on their aluminum exports. In recent months, they've sold $49 billion worth of the American paper, nearly half their holdings.

India says it won't be pushed around, either. Per Indian newspaper, Mint:

  • India has notified the WTO of a revised list of 30 U.S. imports, including apples, almonds, phosphoric acid, and [Harley-Davidson] motorcycles, on which it intends to impose retaliatory tariffs.

    India is likely to introduce retaliatory tariffs worth $240 million next week on a revised list of 30 items imported from the U.S. to counter the American move to unilaterally hike duties on Indian steel and aluminium. The move comes at a time when India has decided to negotiate a "trade package" with the U.S. to ease tensions between the two sides.

And next door, Canadian smugglers are trying to dodge U.S. tariffs. That's what the president told the National Federation of Independent Business yesterday. The Wall Street Journal reports:

  • "There was a story two days ago in a major newspaper talking about people living in Canada coming into the United States and smuggling things back into Canada because the tariffs are so massive," Trump said. "The tariffs to get common items back into Canada are so high that they have to smuggle them in."

And what does the president claim that Canadians are smuggling across the border? Shoes, of course.

"They buy shoes, then they wear them," he explained. "They scuff them up. They make them sound old or look old."

Oh, those devious Canadians. Now, they're coming down here and buying our shoes! Unless something is done, Americans will soon be barefoot.

Fortunately, America is protected by our first line of defense: sharp-eared Department of Homeland Security agents stationed at the 49th parallel.

They are alert to the threat. No grandmother gets through an airport without a full-body scan... and no Canadian gets across the border with a new pair of shoes.

"Sir... you'll have to come with me. Those shoes don't sound old enough."

Consummate Negotiator

Some will worry that the pressure of trying to punch it up with the entire world is getting to the American chief executive. Some will say that he is "losing it." But we've come to see that POTUS works in mysterious ways... ways we mere mortals cannot grasp.

Tariffs imposed on Chinese goods will be paid by U.S. households; how raising prices on consumer goods will MAGA, we don't know. But that is just one of the tricks of a consummate negotiator: doing things that don't make sense so as to put your opponent off balance.

Or maybe, the president is just sending a signal to his main trade adversaries - the Chinese. From the Middle Kingdom, the U.S. imports more than half a trillion dollars' worth of merchandise per year.

That's the big wonton in America's trade soup. Because the U.S. only exports about $130 billion to China. The difference is the single largest piece of America's annual trade deficit.

This should be an easy win for the Great Dealmaker. With such a big imbalance in their favor, the Chinese have a lot more to lose than the U.S. The U.S. president just has to put the pressure on.

So not only did America's head honcho threaten China with import taxes on $200 billion worth of goods, he also said that if the Chinese tried to retaliate, he'd wallop them with taxes on another $200 billion.

At the proposed rate - 10% - that is equivalent to a $40 billion tax hike on American families.

Trade is usually left to the private sector. It is no place for left jabs or widow-makers. And we doubt that Mr. Trump will have much more success with it than Misters Smoot or Hawley did before him.

But POTUS thinks he is in his element. He was cut out for the public sector all along, where every deal is backed by threats.

And now, he's just following the script from his own ghostwritten book, The Art of the Deal. Hit. Hit back harder. Keep hitting until you win. Or until you go broke.

A word of caution: Don't try this at home. The approach won't work in the private sector. At home... in shops... at work - being a tough guy is a time-wasting distraction. Deals have to be win-win... or people won't want to do them.

Try to bully people in the private sector and they'll just take you for a jackass.


BILL BONNER Founder, Agora Inc
Bill Bonner, Bonner & Partners
Vivek Kaul's Diary

PS: What are India's best investors doing with their portfolios in such a volatile market? Kunal Thanvi is on a mission to reveal their top picks to you. You can follow India's top 40 super investors here.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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