The “Calculus” of U.S.-China Trade Negotiations Heading Into Dec. 15th Tariff Territory + USDA Cattle On Feed Analysis

My Expectations [Calculus] Have Improved Regarding Potential “Phase 1” Trade Agreement Before “Nuclear Option” of Dec. 15 Tariffs Go Into Effect

There’s clearly much to “un-pack” from the above view-point, so let’s take it one piece at a time: (1) In the picture below, we see Pres. Xi (and his aide) helping escort Henry Kissinger–the man who helped Pres. Nixon “open-up” China mind you–from a meeting with some fairly powerful people…including it appears Henry “Hank” Paulson (over the shoulder of Mr. Kissinger), who just happens to be the former US Treasury Secretary as well as former CEO of Goldman Sachs. This picture was courtesy of The Wall Street Journal and was part of an article written regarding how the US-China relationship being at a ‘Critical Juncture’–that’s Xi’s words not the WSJ’s. This, to me, is a “tea leaf” which supports the argument made by very good sinologists (China experts) here in the West that Xi is feeling pressure from his own party within China. For me, it really says something to have the leader of China walk in public with the architect of Pres. Nixon’s opening of China back in the 1970’s. Maybe I’m over-reaching. However, when I put this together with Pres. Trump saying on Friday that he both wants to support Hong Kong democracy but also wants to support “his friend” Pres. Xi, I think I have a pretty strong piece of ground to stand-on when I suggest to you that: both President Trump & President Xi likely want to end their stand-off, because both are pragmatists: both realize that it will help resolve the threat of a 2020 global economic downturn, and both realize that they are helping themselves with their domestic constituency. As I wrote many months ago in my special report on both [request a copy on this website if you’d like a copy], both men work from the mindset of Realpolitik–that political science theory of political realism; I learned this very quickly at college and one of the key books we utilized was Hans Morgenthau’s, Politics Among Nations. Here is a link that helps describe his six major points. There is also a well-written article from Reuters relating a similar mindset that I am laying-out.

My bottom-line point in this blog post is to re-iterate that this next week may be our last best chance to find common-ground & balance between the two sides, and finally–with pen and paper–lock down an actual Phase 1 Agreement before the “nuclear option” of Dec. 15th US tariffs hit on Chinese-made smartphones, toys, computers, and the like. If this were to occur, I am fearful that the chances for a trade-deal before the U.S. 2020 Election would shrink dramatically.

There Is Little Doubt In My Mind That Global Trade Is Slowing The Global Economy–Lagging 3 Or So Months I Suspect

The Charts Below Portray The Same Thing: Additional Trade Frictions Are Likely To Be Felt: It is in these four charts–among others–just released this week by the OECD that we see the potential negative feed-back loop developing if a US-China Trade Agreement can’t become tangible & real; we see in these charts a coordinated, wide-ranging struggle in economic factors…from Manufacturing Orders to Industrial Production Figures to Retail Sales to Services…the “heart” of both the U.S. & Chinese economies. Yes, the U.S. remains the bright-spot in the global economy, but for the commodity markets this is not going to be taken as good news, mainly due to the fact that it will likely keep the US Dollar well-supported and thereby hurt the U.S. export potential–as it has done since the end of 2018. See the currency charts below for a visual example of what I could envision if trade tensions worsen.

OECD notes in their summary that Graph B, Global New Orders, shows a drop that is now the lowest in seven years (blue line); these are the types of indicators which should be garnering both President Trump & President Xi’s attention in my view–and I suspect they are, and that both men are very well aware of what’s at-stake. With many things, like a FED rate policy change, the real economy doesn’t “feel” the full effects for 3 to 6 months; I think a similar situation is building here; namely, that if the trade increases to be hit with increasing tariffs in mid-December, it will be very difficult to not have a recession by Q2 of 2020 in the global economy. All of this works into my calculus and my increasing hope for the long-awaited Phase 1 Agreement and even longer-awaited “thaw” in trade tensions.

The Currency Charts (Below) As Well As Hogs & Soybean Futures Aren’t “Buying-In” To My Mindset From What I Can Tell: After this week’s trade, we see that the Soymeal has closed below $300/ton for the 1st time since the end of September on a weekly basis, and is now trading back to Aug-Sep levels. The same goes for the Lean Hogs: we see that they fell to within about .70/cwt. of their August lows…which were also the lowest level since March. It seems very apparent to me that the hogs especially don’t have any US-China Trade Agreement “Premium” built-in: instead of trading record Brazilian beef prices due to Chinese demand & a coming 2020 protein shortage in the global market, they continue to trade massive domestic kill numbers in my view. This week’s Total Pork Production of 588.3 Mln. Lbs. was 23% above last year’s level for the same week.

USDA CATTLE ON FEED ANALYSIS: “Neutral” Fat Cattle / “Neutral-Friendly” Feeder Cattle In My Estimation

I’ll be watching closely the 100-day Moving Avg. in the January Feeder Chart (Below), As I Think The On-Feed Number Was Low Enough vs. Expectations That This Price Level Should Hold…Especially Given That Nov. Feeders Expired at around $145.50 Area. IF THIS MOVING AVG. HOLDS ON MONDAY’S CLOSE, I’D EXPECT A NEAR-TERM LOW IN FEEDERS TO DEVELOP. I would expect the cattle to have to work a little harder, both technically & fundamentally, to resume their upward trajectory–given both the weakening holiday seasonal tendency in this market, as well as the fact that packers know that Placements aren’t on the decline at this time any longer. Regarding Cold Storage: Not Much Change From The Trade Bias Of Being Long Cattle-Short Hogs…Storage Numbers Are Better For Beef vs. Pork In Terms of Tighter Supplies & Potentially Keeping Cash Prices More Underpinned.

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