Dear Reader,

Strap yourselves in for another rough day, folks.

US markets plunged on Friday following yet another escalation in the US/China trade war. The Dow fell 2.4%, the S&P 500 sank 2.6%, while the NASDAQ plunged 3%.

Gold, on the other hand, rallied strongly. The HUI gold stock index surged more than 4.5%. Some of the larger Aussie gold stocks have corrected sharply over the past week or so. But today should see a strong bounce given the performance of US gold stocks on Friday.

If you’re looking for ideas in the precious metals space, you can check out my special report on the sector. It explains why this bull market is likely to run much further than people currently think it will.

Or if you’re the more social type, I encourage you to check out the Gold and Alternative Investments Conference, put on by good friend Kerry Stevenson.  

Held in Sydney from October 24–26, you can hear keynote speakers from around the world (including colleague Shae Russell from The Daily Reckoning), as well as see presentations from more than 35 companies. There are bound to be a few hidden gems in that lot.

[As an aside, this is not a Port Phillip Publishing event, nor do we make any money from endorsing it. But I’ve attended (and spoken at) the event before, and the ticket prices are dirt cheap for what you get. So I encourage you to go along if you can make it.]

Getting back to the markets…

I told you Trump wasn’t mucking around with China. Following his recent conciliatory move to delay imposing planned tariff increases, China saw it as a sign of weakness. As a result, China said it would raise tariffs on US$75 billion of US goods.

Bad move…

Trump responded by doubling down. From the Wall Street Journal:

‘President Trump said he “hereby ordered” U.S. companies doing business in China to explore relocating their operations and stiffened tariffs on Chinese imports after Beijing unveiled its own new levies on American goods, the latest twists in a trade war rattling investors and confounding central bankers.

‘Mr. Trump tweeted late Friday afternoon he would raise the tariff rate on existing and planned tariffs by 5 percentage points. Tariffs already in place on about $250 billion of Chinese goods will rise to 30% Oct. 1. Tariffs planned to take effect Sept. 1 and Dec. 15 on a further roughly $300 billion will rise to 15%, officials said.

‘“We don’t need China and, frankly, would be far better off without them,” Mr. Trump tweeted midmorning Friday after Beijing said it would place added tariffs of 5% and 10% on $75 billion of U.S. imports, phased in from Sept. 1. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME.”’

The magnitude of what is going on here cannot be overstated. This is a reshaping of the international economic order.

Following the Second World War, the US was the world’s largest creditor nation. It helped its former enemies, Germany and Japan, to rebuild their economies. This helped both countries become export powerhouses.

While the rise of Europe and Japan caused tensions over the years, notably in currency markets, it never threatened to blow up the global trading system.

The rise of China is fundamentally different. An authoritarian dictatorship, it plays by different rules to the West. When it joined the World Trade Organisation in 2000, it did so on the proviso that it would liberalise trade and join the liberal economic order.

It didn’t do any of this. Instead of the US benefitting from accessing China’s markets, as Bill Clinton promised at the time, the US manufacturing sector was ‘hollowed out’. Thanks to a weak currency, low wages, and non-existent labour and environmental laws, China provided a cost advantage that the US just couldn’t compete with.

Nor did they try. It was more profitable for US corporates to shift operations to China. US politicians barely raised an objection. It was too profitable for everyone in positions of power to object.

And anyway, the global financial system had no way of correcting the US/China trade balance that quickly developed. The US dollar became the world’s reserve currency back in the early 1970s after severing its link with gold. As a result, the discipline imposed by gold disappeared.

What do I mean by that?

Under a gold standard, countries generating a large trade surplus (like China) would see their currencies rise and interest rates fall, to encourage consumption over production.

But China’s currency peg with the US dollar meant that this adjustment couldn’t occur. To maintain the peg, it printed its own currency and accumulated US dollar reserves. It then used these reserves to inflate credit in its domestic banking system.

This enabled China to create its own credit boom over the past decade. Now, it has a huge debt pile which poses a grave problem for the Chinese economy, and by extension, Australia.   

And with Trump ramping up the trade war, China’s economy is increasingly at risk.

I’ll explain just how in tomorrow’s Rum Rebellion.

Regards,

Greg Canavan, Editor, The Rum Rebellion

The Greatest Political Leader of All Time
By Bill Bonner

Our subject today is politics. Or rather, political leaders.

We were not fond of Bill Clinton…nor George Dubya Bush…nor Barack Obama…nor Donald Trump.

A dear reader asked if there are any we like. And if so, who was the best? Churchill? Lincoln? Gandhi?

Ball of buffoonery

The current occupant of the White House is the most amusing of all.

He is not necessarily the dumbest of the lot…or the most conniving…but he is certainly the boldest. His delusions are right out in front.

Yesterday, for example, he sent out this tweet:

‘Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!’

There is so much claptrap in this ball of buffoonery, it would take a long time to unravel.

Is it a good thing that German investors pay to lend money to their government? Should American savers have to pay too?

How is it a ‘disadvantage’ to have interest rates a shade less insane than other nations? How fast does quicksand move? Fight who? Why?

The tweet can be deconstructed, however, to reveal a simple meaning.

The president thinks the world economy is a zero-sum game where you have to fight for market share.

And he’s afraid others are getting the drop on us by inflating their economies and debauching their currencies faster than we are.

Megalomaniacal blockhead

The Washington Post reports that the Trump team is trying to find new ways to inflate:

‘Ideas that have been discussed include imposing a currency transaction tax that could weaken the dollar and make U.S. exports more competitive; creating a rotation among the Federal Reserve governors that would make it easier to check the power of Chair Jerome H. Powell, whom Trump has blamed for not doing all he can to increase growth; and pushing to lower the corporate tax rate to 15 percent in an effort to spur more investment.’

It would be easy to dismiss America’s president as a moron. But he’s much more than that.

Returning to the dear reader’s question: Trump is probably the most gifted natural politician we’ve ever seen — brazen, reckless, ruthless, blockheaded, megalomaniacal…with a real genius for how to work a crowd.

You can admire the skills and instincts that he displays. You can marvel at how so many people follow his tweets without laughing. And you can even genuinely like the guy…or, at least, the character he plays on TV.

What you can’t do — if you have any sense — is believe him. Or trust him. Or expect him to improve your life.

Because politics is essentially a win-lose game. And it is rigged.

The politician is the one who gets control of the strong arm of government and uses it to whack his enemies, reward his friends, and exploit the masses. Unless you are among the chosen ones, you are a loser.

Every penny he spends…and every life lost in his battles…is one that he takes from the public. And every plan he pursues interferes with the plans of the people who elected him.

The best politicians are the loafers and shirkers.

They retire and plant cabbages, like Emperor Diocletian…or slip out of the White House to play cards and tipple with their friends, like Warren Harding…or get sick and die, like William Henry Harrison.

After only 30 days in office, Harrison was a corpse, and his Vice President, John Tyler, was in the Oval Office.

Tyler deserves at least a small niche in the Pantheon of the Best Leaders.

‘His Accidency’, as his foes called him, steadfastly refused to go along with even his own party’s doofy plans. Most important, from our point of view, Tyler vetoed a bill to create a national bank.

On the other hand, Tyler’s reputation was blemished forever by drawing Texas into the Union.

Vegan in a steakhouse

We’ve known a few politicians personally.

Some were earnest and honest, merely trying to guide the feds toward sensible policies.

Some were empty-headed scoundrels, enjoying the fame and power of the political limelight.

And some were real sociopaths, sure that they knew what was best for people and eager to make sure they got it good and hard.

The trouble with the honest ones was that they never seemed to understand their own métier.

Politics comes from ‘the barrel of a gun’, as Mao put it.

Earnest, well-meaning men and women are disarmed; they have no more place in politics than a vegan in a steakhouse or a virgin in a cathouse. That leaves the field open to the rogues and the criminally insane.

The rascals are sometimes fun to watch. The insane ones are often dangerous.

But a great leader is forever an oxymoron. The more he leads, the more damage he does.

Every decent citizen knows that politicians are the chief threat to his liberty and his prosperity; he despises and distrusts them all.

And one of the great failures of modern democracy is how few of them are hung.

Regards,

Bill Bonner, For The Rum Rebellion