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Last week, we described how as a result of the recent violent move away from momentum and growth stocks and into value names, momentum traders got crushed in a sharp drawdown, which Nomura’s Charlie McElligott described as a 4 sigma move.

It has only gotten worse since then.

As a reminder, while on one hand most institutional investors have stayed on the sidelines so far in 2019, those who did take the plunge, ended up buying up the traditional “slowdown” favorites: growth and momentum names, while shunning or outright shorting value. This was a mistake.

As McElligott writes in his daily note, as the Fed pivoted violently away from the 2018 volatility-inducing regime of “QE to QT,” the collective embrace of outright “QE” thinking of lower rates and flatter curves, saw equities investors go back to their “Slow-flation” comfort blankets—as + Sec Growth + Defensives / (-) Cyclicals has been a massive positive performance driver for the majority of the past 5+ year period.

However, do note that the latest move higher in markets was not precipitated by further weakness, or “bad news is good news”, but rather sizable beats in economic indicators, starting with China’s dramatic Manufacturing PMI rebound; as a result, we have now seen global growth getting re-priced higher in the nine days since the peak of the Rates “overshoot” following beats in China Mgf PMI, US ISM, EZ Retail Sales and Service PMIs, US NFP and Claims all last week). This sent the “value” factor exploding higher in conjunction with the latest US yield curve “bear-steepening” (which has seen the front-end EDM9EDM0 cut in half, from -42bps on March 27th to today’s -23.5bps, while the long-end has again steepened with 5s30s back to 60bps from 56bps last week, as per McElligott.

And as global growth re-priced higher, we have seen the “perpetually underweighted/placeholder shorts of predominantly “Cyclical” sectors” ripping higher in April (Materials +4.3% MTD, Financials +3.5%, Energy +2.8%, Industrials +2.2%) while the “Slow-flation Barbell Longs” act as a relative “source of funds”: “Secular Growth” high flyers like “Tech Momentum Longs” are -4.2% MTD extending on the momentum carnage discussed last week; some more details on this violent reversal of the most crowded positions:

• Sofware 8x’s EV / Sales -1.5% (after being +36.4% YTD); and
• “R&D / Sales” factor struggles -0.4% MTD (after being +29.7% over the past year),

… with “Low Vol” Defensives languishing as well (Utilities -0.9% MTD vs +8.9% YTD, Staples -0.6% MTD vs +10.5% YTD, Healthcare +0.2% MTD vs 6.4% YTD, REITS +0.4% MTD vs +17.1% YTD).

Meanwhile, another relevant topic is that while investors have been positioned incorrectly in the context of the recent growth/value reversal, many have stayed out of the market in the first place, with hedge and macro funds barely responding to market moves. Or, as McElligott points out, “you still don’t have many market players “participating” in this equities move to the extent they want, especially in the leveraged-fund space”:

Equities Long-Short HF “Beta to S&P” is down to 12th %ile since 2003

“Cyclical Beta / Value” discussion, Long-Short “Beta to Nomura Beta Factor” is down to just 9th %Ile since 2003

Conversely, the crowding into Long Growth and Quality / Defensives, Short Value is incredibly extended—particularly with Mutual Funds—and thus, susceptible to “tipping-over” even on just a modest “rebalancing”: in fact, Mutual Fund “Beta to Momentum Longs” is up to the 98th %ile since 2003

 

These exposures, and the precarious positioning discussed above is especially dire for hedge funds, which have once again missed much of the recent move in stocks, and as McElligott puts it, the recent moves have been “just another pain trade as bursts in  the “value/momentum” ratio have tended to correspond with hedge fund performance drawdowns over the past five years.”

But wait, there’s more (pain for momentum chasers): as the Nomura strategist furhter adds, as-opposed to what is a very positive seasonal backdrop for Cyclicals and thus Value, “seasonality is a massive NEGATIVE PERFORMANCE DRIVER for “Momentum” factor in April as it is the worst month of the year for the factor since 1984: “1Y Price Momentum” shows April on average -2.2% / median return of -0.5% and “just” with a 43% “hit rate”—as the “Momentum Shorts” (i.e. “Cyclical Beta” / “Value Longs”) tend to EXPLODE higher, +3.3% on average since 1984.”

Finally, there is the possibility that the upcoming Fed announcement of a “Reverse Twist” will only add to the suffering of “growth/momentum” longs. Specifically, the last twist in the knife to momos, and the latest boost to the “macro/technical” tailwind to this “Positive Value, Negative Momentum” dynamic could come in the form of an expected “Reverse Operation Twist” from the Fed, which as the Nomura strategist explains is “by definition, a curve “Steepener” as reinvestments are moved “across the curve” but by-and-large concentrated into the front-end in order to shorten the weighted average maturity of the SOMA portfolio”, which as shown in the charts below will further boost Value factor (especially Banks / Financials)…

… and act as a further headwind to Momentum factor, as said legacy positioning is forcibly rebalancing to a more pro-cyclical/reflationary worldview.

via ZeroHedge News http://bit.ly/2Vvibit Tyler Durden

Authored by Patrick Buchanan via Buchanan.org,

During an Iowa town hall last week, “Beto” O’Rourke, who had pledged to raise the level of national discourse, depicted President Donald Trump’s rhetoric as right out of Nazi Germany.

Trump “describes immigrants as ‘rapists’ and ‘criminals’” and as “‘animals’ and ‘an infestation,’” said Beto.

“Now, I might expect someone to describe another human being as ‘an infestation’ in the Third Reich. I would not expect it in the United States of America.” The crowd lustily cheered the analogy.

By week’s end, Beto’s Third Reich comparison had been matched in nastiness by Bernie Sanders’ description of the president to the cheering activists of Al Sharpton’s National Action Network:

“It gives me no pleasure to say this but today we have a president who is a racist, sexist, a homophobe, a xenophobe and a religious bigot.”

Sanders managed to appeal to almost all elements of the Democrats’ coalition by accusing Trump of hating blacks, women, gays, foreigners and Muslims.

Sanders’ outline of Trump calls to mind Hillary Clinton’s now-famous attack on the white working-class folks who would give Trump his victory:

“(Y)ou could put half of Trump’s supporters into what I call the basket of deplorables … racist, sexist, homophobic, xenophobic, Islamophobic — you name it … he has lifted them up.”

Where Hillary’s slander of the Donald’s MAGA constituents as a thoroughly rotten crowd of Americans came two months before the 2016 election, Bernie’s assault on Trump’s character comes fully 20 months before the 2020 election.

If this is the level of discourse from Beto and Bernie, two of the leading candidates for the nomination, two years from Election Day, 2020 looks to be one of the ugliest campaigns in American history.

And what does it say about democracy if this is the character of politics at the highest level in the world’s leading democracy?

When such language is deployed without admonition from the major media, what does that say about the sincerity of the media’s calls to unite and heal the country?

And if Democratic leaders are openly massaging the hatreds of the party base with such slanders, what does it tell us about those leaders?

If they believe such charges – “It is the truth and we need to confront that,” said Sanders – why do Democrats not impeach and remove such a ogre? Why has Nancy Pelosi ruled that out?

At the end of a week where he withdrew his nominee to head Immigration and Customs Enforcement and saw the departure of his Secretary of Homeland Security, Trump, referring to the 175,000 migrants apprehended crossing the U.S. border in February and March, protested repeatedly, “Our country is full.”

Echoes of Hitler’s Germany, said The Washington Post:

“Adolf Hitler promised ‘living space’ for Germans as the basis of an expansionist project, which historians said distinguishes the Third Reich from today’s xenophobic governments. Still, experts found parallels.

“‘The echoes do indeed remind one of the Nazi period, unfortunately,’ John Connelly, a historian of modern Europe at the University of California at Berkeley, said in an interview with The Washington Post.

“‘The exact phrasing may be different, but the spirit is very similar. The concern about an ethnic, national people not having proper space — this is something you could definitely describe as parallel to the 1930s.’

“The president’s words became even more freighted when he repeated them on Saturday before the Republican Jewish coalition in Las Vegas, saying, ‘Our country is full, can’t come. I’m sorry.’”

Trump’s actions and words last week do seem to portend tougher action on illegal immigration, but one need not look to Nazi Germany for precedents. They may be found in our own history.

The 1924 immigration act restricted legal immigration into the U.S. and imposed ethnic quotas. That was American, not Nazi, law and was enforced by Presidents Coolidge, Hoover, FDR, Truman, Eisenhower and Kennedy.

Eisenhower, who led the Allies to victory over Germany, sent Gen. Joseph Swing to the U.S. border to remove a million people who had entered Texas illegally from Mexico, which the general proceeded to do.

Ike had crushed fascism and understood that securing the homeland against illegal mass migration is fascism only in the minds of those who have forgotten, if ever they knew, what a country is.

From his words and actions, Trump clearly senses that this may be the existential issue of his presidency: Can he secure the border against what seems to be an unstoppable invasion from the global south?

Nor is this only an American issue.

In the capitals of Europe – Budapest, Berlin, Paris, Rome, London, Madrid – the gnawing fear is not of Vladimir Putin leading a mighty Russian army back to the Elbe to recreate Stalin’s empire, but of the African and Muslim hundreds of millions looking hungrily north to the pleasant lands of the former mother countries.

via ZeroHedge News http://bit.ly/2IjLYag Tyler Durden

We noted Monday that just hours after President Trump formally designated Iran’s Islamic Revolutionary Guards Corps as a terrorist organization, Iran’s foreign ministry responded in kind, immediately put forward a bill placing US Central Command on a list of organizations designated as terrorists, akin to Daesh. 

A number of analysts were quick to point out how this sets the stage for further unnecessary tit-for-tat escalation inevitably making things messier for US forces in the Middle East, and significantly increases the changes of direct war. Soon after the White House’s IRGC designation, Israeli Prime Minister Benjamin Netanyahu thanked President Trump in a tweet, the Hebrew version of which bragged it was all the prime minister’s idea. 

Netanyahu said in the Hebrew-only tweet that he was glad Trump “answered another one of my important requests” which will keep the world safe from Iran. It’s unclear what the prime minister mean from “another” of his requests, but less than two weeks ago Trump made a dramatic decisions to overturn decades of official US policy and bestow formal recognition of Israeli sovereignty over the Golan Heights after receiving a “quickie” history lesson.  

It’s well known that Netanyahu had personally lobbied for weeks and months for that decision, and on Monday appeared to be touting both as his initiative on the eve of Israel’s election.

According to The Intercept’s translation the statement said: “Thank you, my dear friend, President Donald Trump,” Netanyahu tweeted in Hebrew, “for answering another one of my important requests.”

Netanyahu is taking credit for Trump’s decision to designate the Revolutionary Guard as terrorists. “Thank you for responding to another important request of mine,” Bibi says.

He got the Golan 2 weeks ago and now this 1 day before Israel’s election. https://t.co/PAvX22o4Y5

— Raf Sanchez (@rafsanchez) April 8, 2019

Likely the statement was not made in English in order to avoid making President Trump look weak in front of US political leaders and the American public, while at the same bolstering (in Hebrew to Israel’s domestic audience) Netanyahu’s ability to immediately make Washington bend to Israel’s interests. 

Though Trump has clearly thrown his full support behind a Netanyahu victory, it doesn’t bode well for “America First” having the Israeli leader essentially bragging that Washington policy can be dictated from Jerusalem. 

Unlike his English tweet simply saying thanks, Netanyahu reveals in Hebrew that Trump agreed to designate Iran’s IRGC as a terrorist organization ”as another important request of mine”.

In other words, Trump gets dangerous policy directives from Netanyahu https://t.co/iLxfwML0f8 pic.twitter.com/lppZ2W2Wo6

— Dan Cohen (@dancohen3000) April 8, 2019

On the further significance of the statement, The Intercept observed:

Joe Dyke, an Agence France-Presse correspondent, pointed out that Netanyahu omitted the claim that Trump’s move was made at his request in a subsequent tweet in English. That left the prime minister open to the charge often leveled at Palestinian leaders by Israelis, that they placate the international community in English and then say something quite different for domestic consumption in their native tongue.

A(nother) misguided election-eve gift to Netanyahu. A(nother) dangerous U.S. misadventure in the region.

— Javad Zarif (@JZarif) April 8, 2019

Israelis head to the polls to elect a prime minister on Tuesday, and one key feature of Netanyahu’s campaign — lately beset by no less than three corruption charges as prime minister — has been his warm relations with the American president and close cooperation. 

via ZeroHedge News http://bit.ly/2D5M2qO Tyler Durden

Authored by Christopher Whalen via The American Conservative,

The Federal Reserve is out of control, acting in ways and with powers that were never explicitly granted by Congress…

Last week, President Donald Trump set the economics community aflame by suggesting that he will appoint businessman and presidential aspirant Herman Cain to the Federal Reserve Board. Even more than political economist Stephen Moore, the critics maintain, Cain represents a threat to the cabal that has controlled the central bank for decades.

Why? Because Cain is a successful executive who founded a real business, took risks, and created jobs, things most academic economists will never ever do.

Media outlets and other allied constituencies have howled with rage at the prospect of President Trump “packing the Fed,” a distant reference to attempts by President Franklin D. Roosevelt to pack the Supreme Court in the 1930s. Those worried about the independence of the Federal Reserve Board should reconsider. Independence from what exactly?

While the Fed is meant to be independent from the executive branch on a day-to-day basis, it is certainly not independent of Congress or the law. Yet the Fed in recent years has shown a troubling tendency to deviate from its legal mandate and make up new authorities to fit the changing economic situation. Case in point: the dubious notion that we should seek a 2 percent rate of inflation.

Anybody who cares to read the 1978 Humphrey Hawkins law will know that the Fed is directed by Congress to seek full employment and then zero inflation. Not 2 percent, but zero. Yet going back a decade and more, the Fed, led by luminaries such as Janet Yellen and Ben Bernanke, has advanced a policy of actively embracing inflation. And neither Bernanke nor Yellen bothered to consult Congress when they decided to discard their legal responsibilities.

Quantitative easing, to take another example, represents a vast inflation of the financial markets and housing, yet Fed officials actually appear in public and talk about the conundrum presented by “low inflation.” The inflation in home prices that occurred during and after the Fed’s purchase of trillions in securities has permanently raised the price of housing in many parts of the country, preventing millions from purchasing homes. Yellen confesses to be “perplexed” by the dearth of home purchases by young families, but she is the cause of the malady.

Not only are these pro-inflation policies in violation of the letter of the Humphrey Hawkins law, but they have contributed to increased volatility in the financial markets. The third and frequently forgotten mandate in the Humphrey Hawkins law commands the Fed to employ policies that will produce “stable interest rates.” But the economists have long since stopped talking about this.

The basic problem with the Fed today is that it has gradually fashioned a new set of rules for itself, particularly since 2008, on which Congress has never been consulted. In the same way that economists use their imaginations to concoct new theories about economic behavior, the Fed board has apparently decided to take up legislative powers as well. Is the Fed meant to be free of any real-world restraint on its actions.

As Alex Pollock of the R Street Institute writes in American Banker:

One may wonder whether Fed independence is a technical or a political question. It is political. The nature and behavior of money is always political, no matter how much technical effort at measuring and modeling economic factors there may be. For example, the Fed over the last decade systematically took money away from savers and gave it to leveraged speculators by enforcing negative real interest rates. Taking money from some people to give it to others is a political act. That is why the Fed, like every other part of the government, should exist in a network of checks and balances and accountability.

The biggest problem facing the financial markets today is that the folks at the Fed have no appreciation for how their policies are affecting the real economy. Ten years of inflation, open market manipulation, and other experiments have left the U.S. burdened with trillions of dollars in new public and private debt. The December market break was a direct result of the fact that Fed officials do not really understand the real-world consequences of their actions.

Take another example: U.S. financial institutions are facing years of lower profits as funding costs for banks normalize thanks to Fed manipulation. Yet asset returns for banks and investors will remain suppressed by “extraordinary” monetary policy. Are these massive distortions in the financial markets authorized by Congress? No they are not. When investors in bank stocks have to watch the net interest income for the industry contract, one wonders what our friends on the Federal Reserve Board will say.

Moreover, the Fed’s decision to use excess reserves and repurchase agreements to manage short-term interest rates amounts to the nationalization of heretofore private markets. Is this authorized by Congress? No it is not. Instead the Fed is extending its government-sponsored monopoly over the short-term money markets with little regard for the rights of private investors and financial institutions.

We should be worried about Fed independence, but not because the central bank is somehow suffering under the tyranny of the executive branch. Rather the Federal Reserve is out of control, acting in ways and with powers that were never granted to it. Quantitative easing, “Operation Twist,” and the explicit 2 percent inflation target are just three example of how the Federal Reserve Board is operating outside of its legal authority.

It’s high time that President Trump put some new faces at the Fed and started asking questions about what policies it follows and why.

via ZeroHedge News http://bit.ly/2VBruh2 Tyler Durden

Back in February, the BLS reported a dismal jobs report, when the unrevised number saw only 20K payrolls added. While the subsequent data saw a marked improvement, and an upward revision to the February number which was a cold-weather related outlier, the JOLTS survey appears to not have caught up, and the result was the ugliest job openings survey in three and a half years. Specifically, in February, the BLS reported that only 7.087 million jobs openings existed, the lowest number since March 2018, and a drop of 538,000 in one month: the biggest plunge since August 2015. Notably, the January print was revised higher to 7.625 million, effectively tied with the all time high in this series.

Ironically, just last month we said that “with the Fed positioned for an economic slowdown, the JOLTS data better turn negative fast or else Powell will soon be facing some very unpleasant questions why the Fed’s rate hikes are on pause when the number of job openings in the economy is soaring to unprecedented levels.” One month later, as if on cue, we got the most negative JOLTS data in almost 4 years.

According to the BLS, the number of job openings fell for total private (-523,000) and was little changed for government. Job openings decreased in a number of industries, with the largest decreases in accommodation and food services (-103,000), real estate and rental and leasing (-72,000), and transportation, warehousing, and utilities (-66,000). The number of job openings fell in the Northeast, South, and Midwest regions.

Despite the plunge in job openings, February was the 12th consecutive month in which there were more job openings then unemployed workers: considering that according to the payrolls report there were 6,21MM unemployed workers, there were 876K more job openings than unemployed workers currently, (how accurate, or politically-biased the BLS data is, is another matter entirely).

In other words, in an economy in which there was a perfect match between worker skills and employer needs, there would be zero unemployed people at this moment (of course, that is not the case.)

Adding to the sharp deterioration in the labor picture to close the year, as job openings tumbled, so did the number of total hires which dropped by 133K, to 5.696 million, the lowest since last September. The hires level hires level was little changed for total private and fell for government (-40,000). The number of hires decreased in construction (-73,000), nondurable goods manufacturing (-33,000), and state and local government education (-22,000). 

According to the historical correlation between the number of hires and the 12 month cumulative job change, the pace of hiring right now is precisely where it should be relative to the cumulative change in hiring.

At the same time, the so-called “take this job and shove it indicator”, the quits level, was surprisingly resilient in a month in which everything else collapsed, and dropped by just 3K to 3.480MM.

Putting all this in in context

• Job openings have increased since a low in July 2009. They returned to the prerecession level in April 2014 and surpassed the prerecession peak in August 2014. There were 7.1 million open jobs on the last business day of February 2019.
• Hires have increased since a low in June 2009 and have surpassed prerecession levels. In February 2019, there were 5.7 million hires.
• Quits have increased since a low in August 2009 and have surpassed prerecession levels. In February 2019, there were 3.5 million quits.
• For most of the JOLTS history, the number of hires (measured throughout the month) has exceeded the number of job openings (measured only on the last business day of the month). Since January 2015, however, this relationship has reversed with job openings outnumbering hires in all months.
• At the end of the most recent recession in June 2009, there were 1.1 million more hires throughout the month than there were job openings on the last business day of the month. In February 2019, there were 1.4 million fewer hires than job openings.

And visually:

via ZeroHedge News http://bit.ly/2WZSkzP Tyler Durden

Renegade General Khalifa Haftar has only intensified his ongoing assault of the Libyan capital of Tripoli after the UN and various countries, including the United States have urged him to halt the advance of his Libyan National Army (LNA). Haftar’s response? His forces unleashed air power over Tripoli’s suburbs on Monday. 

Video emerged online and confirms the LNA’s airstrike on what’s said to be the city’s only currently functioning airport — Mitiga Airport — in the eastern quarter of Tripoli in what constitutes a major escalation. The video shows the moment a MiG-21 jet drops its deadly payload over what appears to be a densely packed civilian region. 

Amid widespread condemnation from supporters of the UN-backed and recognized Government of National Accord (GNA) entrenched in Tripoli, LNA spokesman Ahmed Mismari insisted that the attack wasn’t aimed at civilian planes in a statement. 

In the video footage an LNA warplane launches what appears a pair of unguided air-to-ground missiles towards the target — it’s unknown if there were any casualties from the airstrike, though over a dozen have died since the assault on Tripoli began from Benghazi-based Gen. Haftar’s forces, which includes multiple civilians. 

The UN said 3,400 people have been displaced since the outbreak of major violence near Tripoli last Thursday, with Libya’s Ministry of Health citing 21 deaths and 27 injured, according to CNN. 

One political commentator and historian, Gerald Horne, placed the latest rapidly unfolding events within the context of the prior NATO intervention: “You may well expect a bloodbath to unfold in Tripoli. Which is quite tragic and unfortunate, but I’d say it’s the inevitable outcome of the ill-advised attack by NATO, led by the US, that resulted in the 2011 overthrow of Gaddafi,” he told Russia’s RT. 

Libya’s beleaguered Prime Minister Fayez al-Serraj, leader of the GNA, has been told by his western supporters not to leave Tripoli. Though the UN and France have this week made shows of support the GNA’s Sarraj, whom Haftar is seeking to unseat, France is widely seen as quietly supporting Haftar, who could be the war torn country’s next potential strongman backed by the Gulf states and some European countries (similar to the rapid rise of Egypt’s Sisi).

France has been under pressure since Haftar’s assault on Tripoli to not merely issue statements condemning “all sides”. Meanwhile the GNA and its backers have called Haftar’s use of air power a “war crime”. The United Nations called it “a serious violation of international humanitarian law”. 

French President Emmanuel Macron’s office has lately said it wanted Sarraj to remain a “key player” in continuing efforts to negotiate peace between the GNA and Haftar’s forces, saying “France would like Sarraj’s government to remain a key player and to try and conclude the peace process negotiated in Abu Dhabi,” according to CNN.

Last week’s assault by LNA forces focused on securing Tripoli’s international airport, 15 miles south of the city center, but which has been out of operation for years. It was briefly taken over by Haftar’s forces, but the GNA currently claims to be in control.

“Haftar forces attacked Tripoli four days ago, mainly from the south and got as far as controlling Tripoli international airport,” the GNA told CNN Monday. “As of yesterday and today, Monday, Haftar forces have been pushed back and Tripoli secured.”

On Sunday Secretary of State Michael Pompeo had urged in a statement, “We have made clear that we oppose the military offensive by Khalifa Haftar’s forces and urge the immediate halt to these military operations against the Libyan capital.”

Explosion reported at the Mitiga airport, with initial reports suggesting this was the result of an LNA airstrike #Libya pic.twitter.com/FOcQB1V3EU

— Michael A. Horowitz (@michaelh992) April 8, 2019

Additionally Pompeo stated, “There is no military solution to the Libya conflict” — an absurd and ironic line for a top US official, given it was the US-NATO led 2011 war on Libya’s Gaddafi that plunged the country into years of internecine civil war and violence in the first place. 

via ZeroHedge News http://bit.ly/2U3arD6 Tyler Durden

Authored by Charles Hugh Smith via OfTwoMinds blog,

The world’s worst negotiating strategy is to make a crazy tulip-bubble stock market rally dependent on a trade deal that harms the interests of the U.S.

The world’s worst negotiating tactics, the equivalent of handing the other side a loaded gun while waving a squirt gun around, are:

1. Declare a de facto political deadline for a deal. Constantly tweet that a deal is imminent. This gives the other side unparalleled leverage: having backed yourself into a deadline corner, where any delay will be viewed as a political defeat, the other side knows it doesn’t have to concede anything to get a deal out of you. You’ll cave in to every one of their demands due to the fatal stupidity of creating an arbitrary deadline.

2. Hinge the entire advance in U.S. stock markets on a trade deal being signed.President Trump and the corporate media have goosed U.S. stock markets higher for three long months with rumors of an impending trade deal with China.

This reliance on a trade deal to goose stocks ever higher gives the other side enormous leverage, as they can now say: give us everything we want or we walk, and your stock market crashes.

Making matters even worse, the entire U.S. status quo has made the stock market the one signifier of the economy: if the trade deal evaporates and the market crashes, that calls into question the entire (bogus) narrative of endless growth.

Thus it is easy to predict that 1) there will be no U.S.-China Trade Deal signed in the next few weeks or months (i.e. U.S. negotiators realize no deal is better than a bad deal) or 2) any Trade Deal that’s signed will be either worthless (i.e. a meaningless PR gesture) or worse, actively harmful to U.S. interests because it gave the Chinese everything and got nothing for the U.S. except a bunch of empty unenforceable promises.

No wonder the Chinese leadership is extremely confident they can pressure President Trump and his team into a phony “deal” that leaves all of China’s advantages intact and gives the U.S. nothing.

As noted above, they know President Trump has constantly been touting U.S. stock market gains, and that these gains are largely based on the promise of a “trade deal” being signed soon. Every tweet that President Trump has issued promising a deal in the next few days has strengthened the leverage of China’s negotiators, as it’s obvious to all that it’s impossible for the U.S. to back out of the deal without crushing the U.S. stock rally.

The Chinese leadership is also extremely confident that they can “play” President Trump’s impatience to “close a deal” even if it is disastrous to U.S. interests. Once again, all the psychological leverage is in the Chinese team’s hands while the U.S. has been backed into an absurd corner by the constant touting of a trade deal to boost stocks to insane levels of over-valuation.

The Chinese leadership is also confident that their economy has weathered the worst of the slowdown and is now on the mend, and so they no longer need a trade deal with the U.S. (It’s difficult to imagine the Chinese leadership believing their own bogus public statistics, but perhaps they have confidential data that supports their claim.)

The only way the U.S. can re-establish any measure of leverage is to walk away from the empty-gesture agreement China is pushing. In other words, the only way to get a deal that’s in the interests of the U.S. is to call China’s bluff, break off negotiations, take the hit to the bloated U.S. stock market and then see whose economy is in better shape six months from now.

If the U.S. economy is in better shape than China’s in six months, then China will have incentives to sign an agreement that meets the minimum interests of the U.S.

If China’s economy is in better shape than America’s in six months, then the U.S. can sign the same worthless agreement that it rejected in April: no harm, no foul.

Who is more dependent on the other? Commentators have argued for a decade that China’s purchase of U.S. Treasury bonds gives it immense leverage. Given that the Federal Reserve can create $1 trillion in a few seconds and buy China’s entire Treasury holdings, this is zero leverage.

Export-dependent manufacturing nations need customers for their excess production. No customers, no sales; no sales, no jobs; no jobs, hello Cultural Revolution #2, never mind the millions of security cameras being installed to impose a Chinese Big Brother Police State.

The world’s worst negotiating strategy is to make a crazy tulip-bubble stock market rally dependent on a trade deal that harms the interests of the U.S. Yet that’s just what the U.S. has done, over-promising on a daily basis to goose an overvalued stock market a few points higher.

The only way to protect the interests of the U.S. is to walk away from the negotiations and renounce the deal. Anything less is an empty PR gesture that harms the interests of the American economy and people.

The only way to avoid a bad deal is to walk away and await a better opportunity down the road.

*  *  *

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via ZeroHedge News http://bit.ly/2I8qfmm Tyler Durden