Trump's Ultimatum with China

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The Mar-a-Lago meetings between President Trump and Chinese President Xi have now brought geopolitical, economic, financial and other issues all to a convergence.

The worlds of defense and diplomacy are now converging on global capital markets — stocks, bonds, derivatives, commodities, currencies, gold, etc.

The significance of the Mar-a-Lago meeting extends beyond the historic property and the fact that it is Donald Trump’s main winter residence. Presidents have a protocol of meeting locations with heads of state. They tend to reserve the most important meetings for exclusive venues.

In April, President Xi and President Trump met at Mar-a-Lago. It was a significant one-on-one bilateral conference where trade was always front and center.

Looking back to the campaign, Trump signaled his problems with China on three fronts — trade, tariffs, intellectual property — while also having a financial and currency component.

Since the inauguration, Trump has not been forceful on any of those issues. He has not started a trade war with China. He has not labeled them a currency manipulator. He has not done anything. Why? The answer is that Trump wants and needs China’s help on an even bigger issue — North Korea.

North Korea is pursuing nuclear capabilities that would have an intercontinental ballistic missile (ICBM) program. If you were to combine those two facets by putting a miniaturized nuclear warhead on a missile, it would be possible to kill millions Americans in Los Angeles.

As of today North Korea has achieved the capability of hitting Alaska. This is a threat that presents clear and present danger to the United States.

The conventional wisdom is that China has more economic leverage over North Korea than any other country. While there’s also good reasoning that Russia also has a lot of influence over the North, Trump is first looking to China for help to a solution.

At Mar-a-Lago, on April 6th, 2017, privately, what President Trump said to Xi is believed to be that he would lay off criticisms and accusations currency manipulation, tariffs and trade subsidies if China was to help with North Korea. In exchange China would need to pressure the North Korean regime to change their behavior in such a way that we can avoid a war.

President Xi then indicated he would need a little more time.

This response was a typical Chinese approach to play for time. Building from Trump’s “Art of the Deal,” the president say that he would give 100 days.

The 100 days extending from April 6th is July 15th. That will be when time is up.

While we’re not going to wake up on the morning of July 15th and the world has come to an end it’s a very important date. Trump is going to live up to his word.

It’s become apparent that China has not done anything. In fact,President Trump has even sighted statistics that show trade between China and North Korea has actually increased. In the first quarter along trade is up nearly 40 percent from a very low level.

The 100th day marker might come and go, but the significance once we pass it is that the gloves come off.

The first signs of change have already begun. In aseries of Tweets, President Trump has already to signaled that the Chinese are not living up to what they said at the Mar-a-Lago summit.

At the recent G20 meeting all eyes were on Trump and Putin during their first face-to-face meeting. By nearly all reports, it went well, was cordial and productive.

However, that was not the only take away from the G20 side meetings. It became clear that going forward, the relationship between Xi and Trump was becoming colder because of China’s failure to deliver.

The expectation now is that the U.S will hit China hard on economic, financial and trade fronts. The Chinese can see this coming, and this is going to get very ugly, very fast.

This friction is of big significance for investor portfolios. The history and timeline leading to the Mar-a-Lago 100 Days that end July 15th could signal a major shift in the administration’s approach to China.

Although the United States has not given up hope that China will help with North Korea, the White House will now have greater freedom to act. What that means is the U.S will go after China in two major ways.

China, Sanctions and North Korea

North Korea now has the ability to fire ICBMs, two-stage liquid-fueled rockets, with pretty good accuracy, based on this last test. They’re now in immediate range to have ballistic missiles. Their nuclear enrichment programs are using plutonium right now and making strides for highly enriched uranium.

The question is, where are they getting all the materials? If you can’t get high precision components, you can’t build these types of weapons. The answer is that they’re buying it from all over the world.

The next question becomes, how are they paying for it? They’re paying for it with dollars and gold. However, North Korea has been shut out of the banking system.

So how is North Korea actually conducting business? The answer is that Russian and Chinese banks are fronting for North Korea and have access to the Global Payment Systems that are running accounts for the benefit of secret Northern accounts.

What that means is that there will be a need to sanction Chinese banks operating with North Korea by removing their ability to use the dollar payment system.

The way that is done is that all banks around the world who want to do business in the United States are not allowed to transact on behalf of the specified Chinese banks. In the case that they do, they’re then subject to penalties, fines, being removed from the dollar payment system or even removed from the United States.

By the end of June sanctions against one Chinese bank had already started after the bank was believed to be helping North Korea. There are much bigger Chinese banks than the regional bank that got sanctioned. After July 15, we could begin to see U.S sanctions going after considerably larger Chinese banks.

China will see this as an act of financial war. Retaliation could mean China uses their gold reserves against the U.S or even dumps U.S Treasuries. Although they’re not going to do either of those to an extreme level, they could allow their reserves to pile up.

China could also diversify into euros instead of dollars. They could not roll over their existing dollar holdings, shorten the maturities so that they can get completely out of dollars on a six-month notice.

All of these moves would put upward pressure on U.S interest rates. These kinds of retaliation moves would slow the US economy and reduce the liquidity in the Treasury market.

Trade Wars, Currency Wars and China

Conversely, President Trump has three major trade experts on his team that are all hawks on China. Robert Lighthizer, who is the United States Trade Representative (USTR),  Peter Navarro, head of the National Trade Council at the White House and Wilbur Ross, the Secretary of Commerce.

They’ve been planning a list of retaliation moves against China but have been instructed to wait until the 100-day deal is up.

What the means is the U.S could enter a full-scale trade war with China.

What that also means is that the White House will also begin to focus on Chinese currency manipulation.

Twice a year the United States Treasury issues a report on International Economic and Exchange Rate Policies. What it really does is evaluate global currency manipulation.

President Trump doesn’t have to wait for the report.

Based on past history and their potential behavior, regardless of formal guidelines the Treasury has in place, he can label China a currency manipulator. That begins a two-year process which can result in further sanctions. Beyond sanctions, the US will still have an entire arsenal of other financial weapons it could also use.

The point is, all of these moves are subjective. We reserve the ability to stop Chinese investment in US companies cold.

While President Trump talks about building a border wall with Mexico, we could put up a financial wall with China. Would that hurt the United States? Yes. But it would hurt China more.

Under a financial wall built against China, stocks could be sent racing down 20, 30 percent. We can see this coming. Such moves would have implications for other markets as well. Staying ahead of the curve will be vital.

The issue with most investors, institutions and central banks is that they use obsolete models and wait until it’s too late. They miss the window and the opportunity.

You might not be able to get physical gold in that environment. Expect a very turbulent time ahead that will be extremely bad for stocks and very good for gold.

Increasing your cash components and gold allocations for safe storage will allow you to be protected for the future.

Jim Rickards
for The Daily Reckoning

P.S. North Korea isn’t the only problem. On June 12, Gen. Joe Dunford — the current chairman of the Joint Chiefs of Staff — asserted that the U.S. could become “a hollow force” within the next five years, unable to maintain the country’s current “qualitative and quantitative competitive advantage.”

I don’t believe President Trump and Congress will let that happen. That means you can expect defense spending to pick up dramatically in the years ahead, despite the current government disfunction.

And I, along with my defense insider partner Kevin Massengill, can help you profit enormously from the coming buildup. Past opportunities like this have led to profits as high as 55,000% over the long term.

As Newsweek recently reported, publicly traded companies in the defense and aerospace sectors have seen 15% growth since Trump was elected last November. That’s 50% more than the market overall.

But that’s just the beginning. Click here now to learn how you can ride the coming defense boom to potentially life-changing profits in the days ahead.

The Daily Reckoning