The Maine Surprise Was Time

By John Mauldin

I’m back from Camp Kotok. As always, it was both rejuvenating and enlightening. The Maine woods, lakes, and general environment encourage more candor than I see most places. This, combined with David Kotok’s talent for assembling a diverse group and the always-marvelous Maine hospitality, made it another great success. It helps that David aggressively enforces Chatham House Rules and the Jackson Hole Rule. So you really don’t have to worry what you say.

Basically, Chatham House Rules say that you cannot quote anyone without their permission, but you can share your general impressions of the gathering. The Jackson Hole Rule says that if you overhear another conversation, don’t talk about it without permission. What happens at Camp Kotok stays at Camp Kotok.

However, this time did bring something new. Having gone 13 consecutive years now, I know many attendees and we speak throughout the year. And many of them write just as I do, so I get to get monthly or weekly updates on their thinking. I usually have some general sense of the group’s outlook even before I arrive, which lets me spend the time filling in details.

This year, I quickly sensed a more upbeat mood. Not that many that were wildly bullish, but most were positive or at least neutral. There weren’t nearly as many bears as I expected. “Cautious optimism” seemed to be the theme. That led me to refine my own views with a wide variety of participants. Today, I’ll do the same for you.

First question: Is John Mauldin bullish or bearish? The answer is “Yes.”

I’ve received several reader e-mails accusing me of straddling the fence. I can see why some might think this. I wrote a rather depressing “Debt Train Wreck” series (recap here) then capped it by describing the good things waiting on the other side. That’s perfectly consistent in my mind, but not everyone read it that way. So let me clarify again.

The key is to keep our time frames straight. Here’s what I think.

Long Term (2030 and beyond): I’m amazingly bullish and optimistic. The Great Reset will be behind us (although we will be living with the outcomes) and an honest-to-God recovery will be gathering speed, technology will have created many new jobs, and we’ll be healthier and longer-lived thanks to biotech breakthroughs. I can’t wait to get there. But then again, part of the adventure is in the journey.

Medium Term (2020–2030): We will experience a rough decade as crushing debt forces the global economy into a series of recessions and credit events, culminating in some kind of debt liquidation, i.e. the Great Reset. It will stretch out for several years. We will see social and political turmoil and possibly wars as well. People are going to get hurt, badly. I am not looking forward to this period at all.

As I’ve said recently, I think we can not merely survive, but actually thrive. It won’t be by continuing to do business as usual, however. As the header for this letter says, the Maine surprise was time. I now believe we have more time to prepare than I thought a year or two ago.

Short Term (2018–2020): This is where I am genuinely uncertain. I’ll admit to having wavered, mostly because the data has wavered, too. I thought the second quarter’s 4.1% US GDP growth estimate pretty impressive, but not necessarily enough to prevent a latter-half 2019 recession. But now some data suggests the third quarter will be north of 3%, too. That is much better than we have seen in a long time.

So for the next couple of years, call me “neutral to concerned” that we can totally avoid a recession into the early 2020s. I think there are good reasons to expect recession sooner rather than later. But if (and it's a big if) this whole tariffs/protectionism thing can be brought to a reasonable resolution, then perhaps the recovery can last a little bit longer. Headwinds? Sure. But there are some nice tailwinds as well.

I hope that clears up any confusion. Like the Fed, I remain “data dependent” and may revise my outlook as new information appears… and some did at Camp Kotok. As Keynes said, “When the facts change, I change my mind. What do you do sir?”

Camp Kotok begins with a Thursday night reception and dinner. My associate (and Over My Shoulder co-editor) Patrick Watson was also there, and we split up so we could cover more of the room. (This was his third time so he has learned the drill.) After a few hours, we met outside to compare notes. Both of us had quickly and independently reached the same impression: this crowd was significantly more optimistic than we expected, and more so than last year or the year before.

Of course, we wondered why. Here was a group of highly intelligent, well-connected economic experts. That doesn’t make them infallible, but it means we should (and do) take their opinions seriously. So Patrick and I spent the rest of the weekend trying to understand this difference in outlooks. It boiled down to two things.

  • They aren’t nearly as worried about tariffs and a trade war for an odd mix of reasons.

  • They think tax cuts and deregulation will postpone recession.

I was already starting to agree with the second point. My personal belief is we are seeing more benefits from the deregulation side than the tax cut side, but we can’t ignore the tax cuts.

You wouldn’t know it by reading mainstream media, but most taxpayers saw a real percentage decrease in their tax rates and an actual increase in money in take-home income. Maybe an extra hundred dollars a month isn’t a lot of money to you, but to someone making $40,000 a year, it’s real money. Yes, corporations did get the biggest part. I wish it was spurring more investment, but we are at least seeing some businesses hire and expand.

As noted, the latest GDP data was encouraging. In discussions with other business owners over the past year, I have sensed a growing optimism. The employment data is much improved this year. The tax cuts, deregulation, and other legislation seem to have stoked “animal spirits” in ways we haven’t seen for quite some time. My worry has been that this sentiment is unsustainable, that the bump will last only a quarter or two. The Camp Kotok consensus was it could extend through 2019 and some saw it going into 2020.

That is hard for me to believe, in part because of the first point. I see significant risk that US trade policy will spark a larger trade war and recession. Camp Kotok was more optimistic there, too, and that launched some lengthy debates.

I should note that over the years the consensus has been for more formal debates and larger group discussions. David is actually very good at matching debate partners. Sometimes they get a tad heated, but then everyone sits down with an adult beverage and the camaraderie returns.

Trade negotiations are insanely complex even in the best of circumstances. Conducting them Trump-style is a radical change that has obviously upset many participants, both within and outside the US. People have such strong pro-Trump or anti-Trump feelings that objective, fact-based analysis is hard to find. I did find some at Camp Kotok, though, from people with strong Washington connections.

Here’s the insider’s expectation, as articulated by a China trade expert (who is not at all a Trump fan, by the way). While I would not necessarily call this the consensus view, it’s not far off.

  • The US and Mexico are very close to a bilateral agreement on NAFTA issues. Incoming Mexico president Lopez Obrador is on board, but it will likely be signed before he takes office in November.

  • The Trump administration will use the Mexico accord to extract concessions from Canada. Faced with the prospect of NAFTA falling apart otherwise, Canada will agree.

  • With NAFTA revisions done, Trump will pivot to China. The current slate of tariffs is starting to bite Beijing, and it looks willing to substantially increase purchases of US goods. A Chinese agreement could come later this year or in early 2019. My personal bet is that Trump tries to get something done prior to the midterm elections. It will probably be China’s best option and will help calm tensions in the business community.

  • By 2019–2020, the US-China trade deficit will be much lower, giving Trump an accomplishment on which to run for re-election in 2020.

  • Europe will be harder to actually get accomplished than seems to be the mainstream belief, but there seems to be a willingness to negotiate tariffs down to zero. Over what timeframe? I guess that is for the negotiators to figure out.

That all sounds swell but leaves out a few things.

First, it doesn’t address the broader issues of China’s intellectual property abuses and state support for its “private” businesses. Those are harder than tariffs and, in the long run, far more important. However, China does seem to be working harder at protecting intellectual property, and something like $15 billion a year (if I remember reading correctly) is now coming our way as part of royalties and other patent rights. That’s a start.

Second, reducing the trade deficit will generate a separate set of thorny problems. It would mean the US sends fewer dollars overseas, which will likely strengthen the greenback and make US exports more expensive to foreigners. It will also throw a wrench in the dollar-based global trading system, encouraging other countries to settle trade in different currencies. Not good if you want the dollar to stay the world’s reserve currency. With that capital now going elsewhere, and federal spending still way out of control, our debt servicing costs will rise and so will interest rates.

(Sidebar lesson: in a fiat currency world, it is the somewhat odd “obligation” of the world’s reserve currency issuer to ensure that global trade can be done in that currency. And let’s be clear, China would like to become a world reserve currency on the way to becoming the world reserve currency. It’s not anywhere close yet but will keep trying. And it will be willing to supply all the yuan other countries need. This will happen faster if the US gives nations reasons to find another currency. Focusing on the trade deficit is shortsighted and may ultimately be foolish if the world begins to look for other ways to fund global trade. Right now, the US has an exorbitant privilege of running large deficits financed by foreigners. I would be far more focused on keeping that privilege than on keeping the trade deficit down.)

Third, what about Europe? We have serious trade issues there, too. Camp Kotok sources say they fully expect that Trump will impose his threatened automotive tariffs, likely worldwide and soon, but then generously grant exemptions to everyone except the EU. Markets will not like this at all, but it will play well politically for Trump. They think he will relent after the midterm elections.

The 25% tariff that the US imposes on imported “trucks” means that trucks made in the US offer considerably more profit potential than small cars. Ford is cutting back car production, which will save it about $5 billion, more or less. Small cars are simply not large sources of profits for US automakers in general.

Nevertheless, the Camp Kotok bottom line on trade is that (a) any serious problems are deep in the future and (b) markets and business owners are too worried. This will be apparent to all by early 2019 and possibly sooner. With that concern off the table, the economic recovery (or “boom,” if you prefer) will intensify and endure into 2020. So we should all enjoy the good times while we can.

Aside from the economy, we had considerable discussion about changes in the financial industry—the so-called “fintech” revolution. Many warned of a massive move to online account management (especially mobile), which would shift assets away from legacy banks and brokers to lower-cost managers. Fidelity recently launched some index funds with 0% management fee. They will make money in other ways, but I heard a great deal of concern nonetheless.

Those expressing the most concern were from the big banks and institutions whose dominion is threatened. They are competing on price, and prices are going down. Yes, younger investors are shifting away from traditional management. But for now, at least, those are also smaller accounts that cost more to maintain and service.

However, a very well-known asset manager argued that the simple fact is that people are not going to manage a $500,000 or $1 million account or more from their phone. Most are still going to use a financial advisor/broker (or two or three), even if they do take a sharper pencil to the fees (which they should).

Fees are going to fall across the board in the industry. Those who have been selling high-fee services and products are going to see less demand. And clients are going to become more sophisticated. This will be especially true after the next bear market, when for the third time in 20 years, traditional portfolio managers will have once again charged high fees for very low returns.

And as Lacy Hunt has shown, massive and growing global debt will make the next recovery even slower until that debt gets “rationalized” in some way. If you are an advisor or broker you must find ways to keep your clients out of that very unhappy group or you will become unhappy, too. And if you are an investor, you need to really look at how your investment managers have positioned you, what their philosophy is and whether it matches yours.

Again, the above forecasts are the consensus I heard. I’m not fully on board with it, nor was every single Camp Kotok participant. I talked to others who share my concerns and a few who were even more negative. I am quite concerned about tariffs affecting the recovery sooner rather than later. I have maintained in this letter for almost two decades now that my biggest concern is protectionism and trade barriers. They will be difficult for businesses to overcome.

Furthermore, one former Federal Reserve official told me the Fed is locked-in on the tightening path and will keep hiking even if the economy weakens. That’s a scary thought. That matches my reading, which is that the Fed is pretty much locked into three more rate increases and four if they feel they can get away with it. I think they will keep tightening so long as the economy grows 3% and inflation is a tad over 2%. This week’s inflation data makes me think Jerome Powell will lean against it more aggressively. But he knows they have to be careful. Or at least I think he does. We will find out.

It’s also not the case that people at the gathering were raving bulls. In the formal survey we take at every camp, the average S&P 500 forecast for a year from now was 2901, close to the current level. The 12-month real GDP growth outlook was 2.7%, which is actually lower than we’re seeing right now.

How to reconcile this? Most Camp Kotok attendees have lived through several cycles. They know that big change happens slowly. The global macro forces that could derail this decade-old recovery and bull market are real and will eventually assert themselves… but not this year or next, at least in the consensus opinion.

This is good news because it gives us time. If the Camp Kotok consensus is right, we have another year or two to accumulate capital, prepare our portfolios and businesses for the downturn, and help others do the same.

Two weeks ago in Endgame Strategizing, I said this:

Imagine I had come to you in early 1929 and told you about the Great Depression. If you believed me, you would have changed your life and your investments, preparing to protect your assets and take advantage of opportunities.

So I’m whispering now. Get prepared. We have time. Shane and I are making rather large changes ourselves, actually eating my own cooking, so to speak. This isn’t just theoretical to me.

After Camp Kotok, I’ll revise that slightly. Instead of early 1929, maybe we’re in 1927 or 1928. The events we anticipate are still coming, but we have more time to get ready for them. That’s good. Now we have to use the additional time effectively and most importantly, wisely.

Shane and I leave for Beaver Creek, Colorado on Monday for a combination of work and vacation. I will attend a board meeting for Ashford, Inc. and a few dinners, but the rest of the time will be relaxation… and of course, I will be writing next week’s letter. My intent right now is to talk about all the good things going on in the world. Good News Johnny. There are a lot of things to make you optimistic, both on the economic and technological fronts.

I don’t have much travel planned for the next two months, but a number of things are “up in the air” that could again take me to the airport—when and where still to be determined. We are putting the final touches on some business changes and sometimes that means face-to-face meetings. Not everyone comes to me. Sometimes Mohammed must go to the mountain.

It is time to hit the send button. Last weekend’s intellectual festival was a tad exhausting. You have a great week, and I hope you are staying out of the heat!

Your ready to be positive for a while analyst,

John Mauldin
Chairman, Mauldin Economics

A Presidential Intervention In The Dollar?

by: The Heisenberg

- Over the past two weeks, speculation has grown that the Trump administration could attempt to actually intervene in the currency market to drive the dollar lower.

- As it stands, the U.S. is running a series of policies that are all dollar positive and are self-reinforcing.

- Unless the Fed takes a pause, the only other option appears to be an intervention by the Treasury.

- Here's why that (probably) won't work.

Just after midnight on Friday, the Financial Times reported that the ECB is concerned about some European banks' exposure to Turkey amid the ongoing collapse in the lira.
That article catalyzed a sharp drop in the euro (FXE) and a concurrent rally in the dollar (UUP).
The greenback would go on to build on those gains throughout the session and is now sitting at a 13-week high.
If you're bullish on the dollar right now, you're not alone. I've spent quite a bit of time both here and elsewhere documenting the extent to which the Trump administration has found itself caught in a self-feeding loop that's pushing the greenback higher. Late-cycle fiscal stimulus is helping to prolong what is already the second longest expansion in U.S. history, and although the Citi Economic Surprise index is trending lower, the data is still solid and continues to support a U.S.-centric growth narrative, in stark contrast to the "synchronous global growth" story that defined 2017. That's dollar positive.

At the same time, piling fiscal stimulus atop an economy operating at or near full employment risks overheating the economy and history shows that late-stage expansions are vulnerable to sudden steepening episodes in the Phillips curve (yellow highlights in the chart below).
(Deutsche Bank)
The Fed is cognizant of the above, and with the data coming in strong and fiscal stimulus raising the specter of an inflation overshoot, the FOMC has every reason to stick to its guns on gradual rate hikes. That relative hawkishness pushes up the dollar, and as the policy divergence with America's trade partners widens, the Trump administration's tariffs become commensurately less effective.
The President is acutely aware of this, which is why he expressed his disdain for current Fed policy on CNBC last month, and why he took to Twitter the very next day to suggest that Fed hikes are serving to offset both his domestic economy policies and his tariffs.
So far, the administration's "solution" when it comes to the strong dollar helping China and America's other trade partners weather the tariff storm has been to simply ratchet up the protectionist measures.
But there's a problem with that; namely that protectionism is inflationary in the short-term (i.e., until it leads to demand destruction, at which point it becomes disinflationary, which is when the real trouble starts).
The first round of 301 investigation-related tariffs on $50 billion in Chinese goods was broken up into two tranches, with duties on $34 billion in items taking effect on July 6 and levies on the remaining $16 billion in goods due to begin on August 23. Generally speaking, those tariffs will not have a demonstrable effect on the price of consumer goods in America. But the administration is now threatening to up the ante with tariffs on an additional $200 billion in Chinese imports. That will have an impact on inflation because past a certain point, you can't avoid a rise in consumer prices if you intend to slap tariffs on everything you import from a large trade partner. Here's SocGen's Omair Sharif from a note dated last month:
Unlike a similar $50 billion list unveiled in April, which was composed largely of industrial supplies and components, the proposed $200 billion tally includes a slew of finished consumer items. According to the Peterson Institute, consumer goods account for about $44 billion, or nearly 23%, of the proposed list.
However, China has already offset the effects of both the initial round of 301-related tariffs (on $50 billion in goods) and the effect of the proposed 10% duties on an additional $200 billion in imports. Multiple banks have done the math on this and their conclusion is the same pretty much across the board: the yuan's depreciation over the last three months has completely negated the effect of those 301-related tariffs. As Deutsche Bank wrote a month ago, "perhaps this is why the US President's Twitter feed has turned back to talking down the dollar."
If the President intended to talk down the dollar with his CNBC interview and subsequent tweets, he was not successful. So, in an effort to turn the screws on China now that the PBoC has seemingly reached the limit on how much currency devaluation it's prepared to stomach (the reinstatement of a forwards rule two Fridays ago tipped that 6.90 was where Beijing wanted to cut it off), the Trump administration began pondering the possibility of more than doubling the rate in the next round of tariffs (i.e., the next step would be to slap duties on an additional $200 billion in Chinese goods and the rate would be 25% as opposed to the previously suggested 10%).
Do you see the problem with that? If a 10% tariff on $200 billion in additional Chinese goods was already set to push up consumer prices, well then a 25% tariff on those same goods will only supercharge that effect. The above-mentioned Omair Sharif projects that a 25% tariff on the whole list would lead to a 1.1% jump in core inflation in the U.S. to 3.4%.
Needless to say, that would prompt the Fed to hike rates aggressively and what do aggressive rate hikes entail? That's right, more dollar strength and therefore more of an offset for America's trade partners when it comes to the tariffs.
On Friday, the latest read on inflation in the U.S. showed the core index rising at the fastest YoY pace since 2008. If that continues, it means that Sharif's estimate of where inflation will be in the event the 25% tariff is applied to the entire $200 billion worth of goods will turn out to be conservative.
This is, in short, a self-defeating dynamic and there's no way out of it. Consider these excerpts from a great BofAML note out on Friday:
[It's] an oversimplification to ignore how exchange rates respond to policy changes.  
The US is running a trifecta of dollar-positive macro policies.
  1. Easy fiscal policy pushes up the dollar by boosting interest rates and stimulating imports. The new tax laws also create incentives to repatriate cash to the US and if these monies are not already in dollar assets, this could strength the dollar as well.
  2. Fed tightening also pushes up interest rates, boosting the dollar.
  3. And actual and threatened US tariffs strengthen the dollar as well. Tariffs tend to weaken imports, reducing US demand for foreign currency, and threatened tariffs add to global uncertainty, pushing up safe-haven currencies like the dollar.
In the week through Tuesday, speculative length in the dollar rose for a seventh week in eight, with the net overall long position now sitting at nearly $23 billion, the highest since January 20, 2017:
I said above that there's "no way out" of this loop for the Trump administration if what it's aiming at is a weaker dollar. That's not entirely true. There was one way out: a Fed pause. Note that I used the past tense there. The problem with the President's public comments on the dollar is that they expose the Powell Fed to criticism from lawmakers in the event the FOMC did take a pause on hiking rates. There is no domestic economic rationale for not continuing apace with gradual rate hikes, and until there's an emerging market unwind large enough to give Powell some plausible deniability, any deviation from the current path of monetary policy would be criticized (rightly or wrongly) by some as a political move. That's especially true given how adamant Powell has been about painting an upbeat picture of the U.S. economy.
Given that, the only other option for the White House when it comes to pushing the dollar lower and thereby avoiding a scenario wherein America's trade partners are continually benefiting from the stronger greenback is outright intervention.
Recently, a reader on this platform asked why the U.S. couldn't intervene in the currency market to try and offset yuan weakness and I said that wasn't feasible, at least not in the way the commenter was suggesting. I tried to find that comment before I wrote this article, but I gave up after about 30 minutes. Trust me, it exists and hopefully that person will chime in in the comments here and point me back to it.
Ok, so first of all, outright FX interventions by the U.S. are rare, but this week, JPMorgan's Michael Feroli released a note that got quite a bit of attention, primarily for this line:
We cannot rule out a turn toward a more interventionist currency policy.
Feroli went on to detail how an intervention would work, and suffice to say it wouldn't - work that is.
The Treasury only has about $95 billion in firepower in the Exchange Stabilization Fund. That would effectively double with Fed matching (that's assuming the Fed agreed to participate and it likely would because if Powell resisted, the White House would be livid). But here's Bloomberg's Ye Xie explaining the futility of this exercise (this is from a short blog post out several days ago):
It would require a mind boggling amount of dollar sales to have a material influence. The daily turnover in dollar transactions amounted to $4.4 trillion in 2016, more than 20% of the U.S. annual GDP.
Besides that, this usually doesn't work anyway. As JPMorgan's Feroli writes, "in a country with an open capital account and independent monetary policy, like the US, currency interventions are well-known to be ineffective in generating lasting changes in the currency's value."
Getting back to the reader question mentioned above about how the U.S. might go about intervening to weaken the bilateral rate with China, my reply (and I'm paraphrasing here) was that the mechanics simply wouldn't allow it. Here's how Feroli explains this:
Another potential problem is that China maintains capital controls such that any potential intervention by the US would need to be undertaken in the offshore CNH market. While pressures in the CNH market have often been transmitted into the onshore CNY market (via institutions, including corporates, who have access to both markets and can arbitrage any difference in prices), the PBOC, through regulatory and other means, can sustain a wedge between the two markets if it so desires. Of course, such actions come at a cost, including raising questions about China's declared aim to internationalize the use of its currency and continued inclusion in the IMF's SDR basket, but there is nothing intrinsic in the structures of the offshore and onshore yuan markets that guarantee price equalization. Consequently, interventions in the CNH market can have little or no impact on CNY depending on the countermeasures the Chinese monetary authorities undertake.
In other words (and a lot of readers won't like this, but it's just the reality), China can simply decide to not let that kind of intervention work no matter how hard the U.S. tries. The optics would obviously be terrible when it comes to Beijing's ongoing effort to internationalize the RMB and promote it as a global funding currency. Then again, in that scenario, China could simply point to an actual, overt effort on the part of the U.S. to manipulate exchange rates (that's what "intervention" means), and given how contentious U.S. trade policy has become, it's not at all clear that anyone would blame them.
Coming full circle, if you're bullish on the dollar here, you're not alone and if you read everything above correctly, betting on more greenback strength in the near-term seems like a no-brainer.
But as my buddy Kevin Muir from East West Investment Management is fond of saying, it's always the trades that everyone thinks are foolproof that end up making fools of people.

China’s Two-Front War

Censorship, social controls and a cult of personality can only go so far when the economy is bad.

By Phillip Orchard

Public political drama in China, usually remarkable only in its banality, was downright Shakespearean this past week. It began with unsubstantiated reports of gunfire in the streets of the capital, followed by rumors that Chinese elites had tired of President Xi Jinping’s efforts to develop his Mao-like personality cult. The ceaseless lionization of the president in state-owned media ground suddenly to a halt, restarting only when he appeared in Africa for a series of state visits. News agency Xinhua released an eyebrow-raising article about the downfall of former Communist Party chairman Hua Guofeng in 1980, implying that no Chinese leader is bulletproof. Abruptly, Beijing announced the appointment of a new security chief as party boss of Guangdong province – the southeastern coastal manufacturing powerhouse where much of the pain from the trade war is likely to be felt. A tussle between the central bank and the Finance Ministry over fiscal stimulus spilled into the media. U.S. National Economic Adviser Larry Kudlow said Xi had killed attempts by his advisers to negotiate a truce on trade – suggesting the White House sees divisions in Beijing to exploit. A new scandal erupted over the weekend regarding the distribution of millions of faulty vaccines – just the latest in a string of corruption scandals in the pharmaceutical industry – once again calling into question the government’s ability to manage a crisis.

In short, a trade war is not the only war Xi is fighting.
Deleveraging vs. Stimulus
China expected 2018 to be a rough year even before U.S. President Donald Trump started with the tit-for-tat tariffs. Beijing is in the middle of a sweeping reform campaign meant to address systemic risks such as industrial bloat, unchecked pollution and soaring debt, the overriding goal of which is to make the country better able to withstand a prolonged period of slowed growth.

The reforms were always going to be painful. Indeed, even in the absence of a trade war, measures to cut back on industrial overcapacity, shut down highly pollutive factories, and wean the economy off its addiction to cheap credit would drag down the economy. In the first half of this year, for example, fixed-asset investment grew at its slowest pace since 1999. For the year, Beijing has set a GDP growth target of just 6.5 percent, after hitting 6.9 percent (officially, at least) in 2017.

Xi hopes that short-term pain will result in long-term gain. But in China, the risk is that short-term pain leads to long-term social unrest that destabilizes the whole system. This is why Xi has been able to amass so much power at the expense of party elites. By the time Xi began to purge his opponents and tame the bureaucracy, something of a consensus emerged among party royalty that China needed an authoritarian to see it through the coming crisis. And so, through his first term, Xi has had a mandate to reform, no matter how painful it may be, propelled by a sense of urgency while the Chinese economy still has the wind at its back.

The trade war with the U.S. has complicated Xi’s best-laid plans. Perhaps the most heated debate within Beijing right now appears to be focused on whether the government should be attempting to fight a two-front war – against the U.S. on trade, and against China’s internal dysfunction. In particular, there’s pressure on Beijing to ease off its deleveraging campaign and focus instead on stimulating growth as the trade war intensifies.
Staying the Course
All the while, Xi has refused to decelerate the drive toward reform. Beijing has hinted that some low-level fiscal monetary stimulus measures are in the works, including new local government bonds for infrastructure projects. But these plans, along with modest capital injections into state-run banks and new efforts to encourage purchases of low-rated corporate bonds, are meant merely to calm markets, channel liquidity to the corners of the economy that need it most, and decrease the likelihood of an overcorrection. They aren’t intended to signal an abandonment of the deleveraging campaign or to return to the high levels of stimulus exemplified by 2008, when China unleashed some 4 trillion yuan ($590 billion) in new spending to shield the country from the global financial crisis.

Beijing has, moreover, continued to roll out major new reforms, including in the past week alone, targeting wealth management products, new limits on SOE dabbling in the financial sector, and new property tax legislation. The government has notably declined to intervene amid a rising wave of private corporate defaults, and it has refused to bail out the nearly 60 online peer-to-peer lenders who’ve gone belly up since the beginning of the month. All this suggests that Beijing believes the reforms are doing what they were intended to do: weed out inefficiencies, give Beijing better control over where and how much liquidity is flowing, and put the economy in better position to handle shocks such as trade wars.

Beijing seems to think it’s well-positioned to ride out the trade storm – or at least to outlast the U.S. And there’s reason to be optimistic. Its trade vulnerabilities notwithstanding, China has some advantages in this regard. For example, the weakening yuan, combined with the strengthening dollar, will help keep Chinese exports competitive, even if it causes problems elsewhere in the economy (i.e. increased capital outflows). The sheer size of its labor pool, its superb manufacturing and export infrastructure, and its allure for foreign firms will limit the exodus of companies leaving the country in search of lower labor costs and greater access to the U.S. market. 


And while China depends more on its exports to the U.S than the other way around, it’s worth noting that China relies less on exports now than it once did. Net exports (exports minus imports) now account for just around 2 percent of China’s GDP. A decade ago, they accounted for around 9 percent. (Exports to the U.S. make up just 19 percent of total exports.) Meanwhile, domestic consumption, including government expenditures, accounted for more than 78 percent of GDP growth in the first half of this year, compared to just more than 45 percent five years ago. Moreover, since most of the value of many goods exported from China comes from components manufactured elsewhere, only a fraction of the tariff hit will come out of China’s pocket.



Beijing believes time may be on its side. With U.S. midterms just around the corner, the mere possibility of losing control of Congress will dampen Trump’s biggest threats, or so the thinking goes. For Trump to make good on his promise to slap tariffs on another $200 billion-$500 billion of Chinese exports, he’d have no choice but to target finished consumer goods. It will be much more difficult to hide the sticker shock from voters than it has been with the intermediate Chinese goods targeted so far.

In other words, Xi’s trade war strategy is to try to make it politically problematic for Washington to continue the fight, manage the fallout at home and keep everyone from freaking out — and otherwise to stay focused on big-picture challenges facing the Chinese economy. The core message from state media in recent weeks has been: stay the course.
Nowhere to Hide
The trade war may actually help Xi. After all, if China is heading for an economic reckoning anyway – or, in the best case, painful reform in the face of slowed growth – then the trade war will make it easier for Beijing to pin the blame on the U.S. and to rally around the flag. Chinese state media has already framed the trade dispute as an inevitable byproduct of the country’s success. According to the CPC-crafted media narrative, the U.S. is a declining superpower, headed by an impulsive and vengeful president, eager to deny China its hard-earned place in the world. Its trade war is a tool of the insecure and embattled.

Still, the trade war will almost certainly put Xi’s model to the test. If the U.S. follows through with its 10 percent tariffs targeting $200 billion in Chinese exports, it would shave between 0.2 and 0.3 percentage points from China’s annual GDP growth, according to a study by Deutsche Bank. A smaller pie means less to go around, a status quo some factions will be less inclined to support. In choosing which sectors to shield from U.S. tariffs – and which to expose with countermeasures – Beijing will effectively be picking winners and alienating losers. China’s growing inequality is likely to be further exposed. Censorship, social controls and a cult of personality can help the government withstand the fallout of lost jobs, but they can only go so far.

Interestingly, Xi has been quiet about trade in recent weeks, letting Premier Li Keqiang stand in the spotlight instead. It might be wise to do so. No individual can bridge the structural disparities between China’s coasts and its interior, any more than he can reconcile the differences that are bound to be exposed over the coming months. If Xi’s two-front war becomes unmanageable, there won’t be anywhere for him to hide.

How to Stop Your Smart TV From Tracking What You Watch

Millions of smart TVs in American homes are tracking everything you watch for the sake of advertisers. If that doesn’t sit right with you, here’s how to turn it off.

By Whitson Gordon

CreditCharlie Riedel/Associated Press

Your smart TV is probably tracking everything that appears on the screen. While ad tracking is par for the course on the internet in 2018, smart TVs are particularly interesting. They don’t just track the shows you stream on their built-in apps: they can recognize any show you’re watching, any game you’re playing, or any ad that appears on the screen — from any device connected to the TV.

This technology — called Automatic Content Recognition and usually provided by a company called Samba TV — is simultaneously fascinating and creepy. It aims to provide more relevant ads and recommendations based on what you watch, which some may find useful — but if you’d prefer not to share everything you watch with TV manufacturers, you can turn this feature off.

First, if you don’t use the smart features on your TV, you can block this tracking by simply disconnecting your TV from the internet. Either unplug the Ethernet cable or disconnect it from your Wi-Fi network in the TV’s settings. Without internet access, the TV can’t send information to anyone, meaning your data stays at home. However, it also means your TV’s built-in apps won’t be able to stream any movies or shows, so this solution works only if you get your streaming from a set-top box like the Apple TV (or don’t stream at all).

If that isn’t an option, you can keep streaming from your TV and turn automatic content recognition off. The instructions are a little different depending on what model TV you have, but here’s where to look on the most popular brands.

Samsung TVs: Opt Out of Viewing Information Services

If you have a Samsung smart TV, open the home menu and head to Settings > Support > Terms & Policies. Turn off the “Viewing Information Services” and “Interest-Based Advertising” options. (Some older models may call this feature “SyncPlus and Marketing” instead.)

LG TVs: Turn Off LivePlus

For LG sets, press the Settings button on your remote and head to All Settings > General > LivePlus and turn it off. You may also want to turn off personalized advertising from All Settings > General > About This TV > User Agreements from the General page.

Sony TVs: Re-Run the Initial Setup

Modern Sony smart TVs run Google’s Android TV operating system, which doesn’t have easy access to this setting. Instead, you need to re-run the TV’s setup wizard. To do so, jump to the home screen and head to Settings > Initial Setup. Click through the wizard (taking care to avoid changing things like your network settings) until you reach the Samba “Interactive TV” user agreements. Disable this setting.

Vizio TVs: Disable Viewing Data

Vizio users will find this option by opening the menu and looking under System > Reset & Admin. Highlight the “Viewing Data” option and press the right arrow to turn it off. Some older sets may call this “Smart Interactivity” instead.

TCL and Other Roku TVs: Disable Information From Other Inputs

TVs from TCL, Philips, Sharp and some other brands use Roku as their built-in smart software. On these TVs, you can disable Automatic Content Recognition by opening the home screen heading to Settings > Privacy > Smart TV Experience and disabling “Use Information for TV Inputs”. You may also want to head to Settings > Privacy > Advertising and turn on “Limit Ad Tracking”.

Disable Ad Tracking on Your Other Set-Top Boxes

Your TV isn’t the only thing tracking your usage. Independent set-top boxes like the Roku and Apple TV don’t use Automatic Content Recognition — the feature that scans everything from your screen — but they do still have certain tracking features built-in, usually logging which apps you use and when. If you’re interested in increasing your privacy, you may want to disable these features as well. Here’s where you’ll find them:

Roku: Go to Settings > Privacy > Advertising and enable “Limit Ad Tracking.”

Amazon Fire TV: Head to Settings > Preferences > Advertising ID and turn “Interest-Based Ads” off. Older Fire TVs may have this option under Settings > System instead.

Google Chromecast: From the Home app on your phone or tablet, tap the three dots in the corner to open the menu and go to Devices. Choose your Chromecast, select the three dots menu, and tap Settings. Uncheck the “Send Chromecast device usage data and crash reports to Google” box.  
Apple TV: Jump to Settings > Privacy > Limit Ad Tracking and turn it on. If you have an older device, head to Settings > General and set “Send Data to Apple” to No.

There’s no way to escape all tracking, of course, especially if you’re streaming. These settings may limit some data collection, but even they won’t stop the streaming services themselves: apps like Netflix will always track what you watch to provide recommendations, and there’s no getting around that. So if you want true privacy, you’ll need to divorce yourself from streaming services entirely. You’ll just need to decide how much you really care.