We were wondering how long before one of our favorite “perma-skeptics”, Socgen’s Albert Edwards, would chime in on the global trade war that broke out in the past few weeks, especially since trade protectionism, tariffs and subsidies are the opposite side of the same “strategic” coin of currency devaluation which we have observed for the past decade, and both of which have one purpose: to make one nation’s goods and service (and stocks) cheaper to the outside world (curiously, in recent years, it has emerged that “soft” protectionism i.e. currency devaluation, is far more acceptable to the establishment than direct or targeted trade intervention via tariffs and trade protectionism).
We got the answer today when in a note, what else, warning what comes next, Edwards writes that whereas “a trade war and competitive currency devaluation was always going to be the end game in our Ice Age thesis as a global deflationary bust destroyed wealth, profits and jobs” and it now looks that this endgame “might be arriving sooner than we had anticipated.”
The reason: central banks. The catalyst: Donald Trump.
As Edwards explains, while the world is all too quick to point the finger at Trump for daring to expose that the trading emperor is naked, the real culprit behind massive trade imbalances is elsewhere, usually inside a central bank building:
“Increasing trade tensions are an inevitable consequence of the side-effects of QE pursued by central banks – especially the ECB. In the near term, there are a couple of trade issues rankling the US Administration far more than steel and aluminium that could easily trigger a full-scale trade war. More immediate is the impending result of a US probe into China’s alleged theft of intellectual property. And boiling away in the background are Germany’s, and now too the eurozone’s, outsized trade surpluses.”
Edwards begins his analysis by pointing out something trivial: politicians lie.
In this context, Edwards claims that President Trump “is a most unusual politician. Like him or loath him, he seems to be doing something politicians seldom ever do: namely, attempting to fulfill his election promises. This is most unusual!”
However, “Internationally, the US is by no means the laggard when it comes to broken political promises.” On the opposite end of the spectrum from Trump is Italy, which “easily wins the award of lying politicians” and which Edwards says is “perhaps the one reason electorate has turned its back on mainstream political parties” As a reminder, in the dramatic election outcome two weeks ago, euroskeptic, anti-establishment parties win a nominal majority, an unprecedented result for modern Europe.
And, as Edwards correctly points out, “economic stagnation has coupled with political disappointment to turn a disillusioned and angry electorate away from the mainstream. To a greater or lesser extent, you can see this sort of electoral revolt in almost every single European country as well as in the US.“
The SocGen strategist notes that Italians have more reasons to be angry:
since the inception of the euro at the start of 1999, Italian GDP has increased a paltry 8%. Contrast that with the UK and US, which have both grown around 45%, France and Germany at around 30%, and even Japan, which has grown around 20%! And Spain, despite seeing a gut-wrenching 10% decline in GDP between 2008 and 2013, has still enjoyed a massive 42% GDP rise since the euros inception. Italy’s economic performance is a disgrace for a G7 country and frankly intolerable. Against this backdrop, I’m amazed the vote for Italian radical parties wasn’t even higher!
Italy’s semi-permanent stagnation is also one of the main reasons why he remains confident that the eurozone will eventually fragment. “Italy will never grow on a sustainable basis within the eurozone straitjacket.”
But before the inevitable collapse, there are a few additional steps.
First, what will emerge is that the next trade war – after US-China – will be Washington-Brussels – and almost exclusively due to Mario Draghi.
The incredible yield suppression in the eurozone has seen capital flows haemorrhage out of the region in search of yield. This is why the ECB is largely responsible for placing the eurozone in the crosshairs of Trump’s newly aggressive protectionist measures. (Actually as Reuters reports, although Trump’s rhetoric may have attracted the headlines, a recent study shows protectionism has been on the rise for some time now. The world has racked up 7,000 protectionist measures since the 2008 crisis, with the US and EU implementing around 1,000 each, followed some way behind by India at 400).
What happens next, according to Edwards, is troubling as it will be a recreation of World War II, initially in the trade arena: a trade war between the US and Germany.
I believe Germany’s gargantuan trade and current account surplus will soon attract Trump’s full attention. The US has not been alone in criticising Germany’s outsized external surplus – so too have the European Commission, the IMF and the OECD. To be sure, other countries have a bigger surplus as a % of GDP, like Switzerland, Holland and Singapore, but these countries are relatively small. Germany’s surplus is now, in dollar terms, the biggest in the world. The eurozone surplus has also been rising in recent years to stand at 4% of GDP.
Making matters worse, everyone knows that it is Germany’s FX subsidy courtesy of the EUR – which replaced the far stronger Deutsche Mark – that makes Berlin one of the biggest currency riggers in the world. In fact, “a Chinese official commented a few years back that Germany, not China, was actually the world’s biggest currency manipulator – in tying its currency to far weaker economies, the real DM is massively undervalued.“
Ironically, Germany is aware of what is coming, and as Edwards writes, he agrees with former German Finance Minister Schäuble, who correctly pointed out that it was the ECB’s QE policies that exacerbated the trade situation, in stimulating capital flight from the eurozone that (by identity) has increased the overall trade surplus by depressing the euro.
As a result, Edwards expects Trump to “soon turn his protectionist fire on both Germany and the EU. That will be messy.”
But first there’s China.
And as we explained yesterday, as a result of the ongoing Section 301 investigation which will culminate soon in dramatic a trade confrontation, “this is likely to be a far more explosive issue for China than recent tariffs on steel and aluminium” according to Edwards.
Watch this space. President Trump looks as if he wants to be a politician who is remembered for fulfilling his promises!
So what happens next? Using Japan as a template for the “economic and financial Ice Age unfolding in the west” Edwards made one major contrarian prediction: “to those in the noughties who said a bust in the US and Europe would be nothing like the 90s bust in Japan, I agreed. I thought it would be much worse because the west did not enjoy Japan’s high levels of equality and social cohesion.”
Looking at recent events, it appears that when confronted with Japanese-style pain, he’s been right: western electorates’ anger is boiling over… the only thing keeping social sanity in check are near record high stock prices. That, too, will go soon one central banks finally end their daily manipulation some time over the next year.
In that context, Edwards concludes, he has “always viewed competitive devaluation and trade war as a likely endgame of the predicament we find ourselves in. It’s just coming sooner than I expected!“
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