The collapse of capex is troubling to say the least. Capital spending growth is non-existent. What’s crazy is that the cost of borrowing is already so low so any additional lowering of short-term interest rates is unlikely to spur additional capital investment. Inventories have been built to unsustainable levels in preparation for an escalating trade war.

Regarding China trade negotiations, the Chinese now have the upper hand as their strong position is that unless the U.S. wants to make most of the concessions, there will be no trade deal before the 2020 Presidential election. President Trump already gave away too much when he agreed to allow Huawei to purchase U.S. made silicon chips which was a Chinese pre-condition to re-enter trade negotiations. But wait. Even national security and Huawei is up for negotiations? Whatever. Dictator Xi made himself leader for life, while President Trump has 16 months before he faces an election so this gives the Chinese the upper hand when it comes to timing.

So role play this out with me. Capex is down when then pulls industrial production down, which pulls employment down, and you have the beginning of a global recession that starts in tech, then in manufacturing, then in industry and then it goes to services.

The trade and tech war between the U.S. and China is going to get worse. Manufacturing is already in a recession globally and it’s affecting services. Have you noticed that restaurants are not as busy as they were a couple of years ago? The tech sector is in a slowdown and is so desperate to keep growth going that they are doing whatever it takes to keep access to the Chinese markets open like deleting hundreds of apps.

The consequences of this trade and tech war is de-globalization and the decoupling of the global economy. All these rich billionaires are going to have to redo the global tech supply chain. And eventually by next year, if this escalates, there will be a global recession.

Think about it. Why would corporations increase capex when their looking down a double barrel shotgun? One barrel is losing product sales in China. The other barrel is having to spend millions moving supply chains out of China. Companies are not spending on capex and are cash hoarding until an outcome is reached with the trade war with China.

Check out what Nouriel Roubini, chief executive officer at Roubini Macro Associates told Bloomberg a couple of days ago:

Nouriel Roubini is spot on and what I’ve been saying for years is that you’ll know when Trump is successful against the Chinese because the stock market will crash. It’s simply not possible to have a zero trade balance with China and to bring manufacturing back to the U.S. without a stock market crash.


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