Something Wicked This Way Comes

Monday, January 14, 2019
By Paul Martin

By: John Mauldin, Mauldin Economics
GoldSeek.com
Monday, 14 January 2019

Shaky China
Brexit Breakage
Helpless Europe
DC, Back to Dorado, more Florida, and Boca Raton

For a couple of years now, the economic narrative has shown a comparatively strong US against weakness in Europe and some of Asia (NOT China). The US, we are told, will stay on top. I agree with that, as far as it goes… but I’m not convinced the “top” will be so great.

Americans like to think we are insulated from the world. We have big oceans on either side of us. Geopolitically, they serve as buffers. But economically they connect us to other important markets that are critical to many US businesses. Problems in those markets are ultimately problems for the US, too.

Last week I gave you my Year of Living Dangerously 2019 US forecast, but I didn’t discuss important events overseas. Summarizing last week quickly, I think the base case is that the United States economy slows down but avoids recession in 2019. That said, there are significant risks to that forecast, mostly to the downside.

Today we’ll make another literary metaphor to frame our discussion. “Something Wicked This Way Comes” is a 1962 Ray Bradbury novel about two boys and their horrifying encounter with a travelling circus. Later it was a movie.

In our case, something wicked most certainly is coming this way. Several somethings, in fact, approaching from all directions. The real question is how much damage this circus will do before it leaves town.

Shaky China
Many of our risks emanate from China, and as I wrote this section, I realized it deserves a longer treatment. I will do that in next week’s letter. For now, let’s touch on the big picture.

By most measures, the US and China are the world’s largest and second-largest economies. They are also entwined with each other in so many ways that it can be hard to know where one stops and the other starts. Some call it “Chimerica,” which may be an apt description. That’s basically good, in my view. International trade promotes peace and prosperity for all, albeit not always smoothly, evenly distributed, or without issues. Such is the nature of great entanglements. But seen over decades? China’s growth has made the world better. Literally billions of people globally have been lifted out of poverty and destitution.

All that said, the US and China are also separate nations with separate interests. We compete as well as cooperate so differences naturally arise. While we need to resolve them, the Trump administration’s methods aren’t helping. They seem not to grasp that intentionally weakening an economy so tied to our own risks weakening the US as well.

The US is demanding (rightly, in my opinion) that China respect intellectual property rights and let foreign companies compete fairly, just as we let Chinese companies operate here. But achieving that isn’t like flipping a switch. Entire regions and industries are now optimized for a model we want to change. The change, however necessary, will cause problems if it’s not managed well.

Worse, China’s economy is already on shaky ground. Its unique blend of “communism” (whatever that now means in China) and capitalism, along with sheer size, has produced enviable growth rates and I think will keep doing so, but a slowdown is inevitable. China is still subject to the law of large numbers. They can’t maintain 6% or higher GDP growth indefinitely.

The Rest…HERE

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