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A Cold War With China Spells Trouble For Stocks

John Mauldin profile picture
John Mauldin


  • Last week, George Soros said that we are in a cold war with China that could turn into a hot war.
  • Luke Gromen of Forest for the Trees then argued that US national security may be more important than risk asset performance for the first time in decades.
  • If a new Cold War is indeed breaking out, it will have severe implications for the global corporate debt and equity market.

Last week, George Soros said that we are in a cold war with China that could turn into a hot war. While Soros and I don’t often agree on politics, I did find my head nodding at times in his latest CNBC interview.

Then, Luke Gromen of Forest for the Trees wrote about change in the geopolitical climate, which is not his usual beat.

Gromen argues that US national security may be more important than risk asset performance for the first time in decades.

Here’s an excerpt with his summary:

  1. Potential rule change - US national security may be more important than risk asset performance for the 1st time in 35+ years (but risk assets don’t seem to realize this yet).
  2. If we are moving back to a “Cold War” world where US policy is driven more by the national security establishment than the Wall Street/Treasury establishment (as has been the case for the past 30+ years), then it would seem the odds are good that the chart on the front page of the attached pdf would mean-revert, implying as much as a 30-60% drop in corporate profits as a % of GDP just to return to the levels that prevailed during the last Cold War, before cheap Chinese labor & (at least temporarily disappearing) Fed largesse elevated US corporate profitability to all-time high %s of GDP.
  3. If a new Cold War is indeed breaking out, it would, in turn, seem to have severe implications for the global & US corporate debt & equity markets - it is HIGHLY unlikely that any of this money was borrowed, assuming a 30-60% drop in US corporate profits as a % of GDP was even remotely possible, & on many metrics (IG, HY, leveraged loans, US equities v ROW), valuations are quite stretched already.

This article was written by

John Mauldin profile picture
I am a financial writer, publisher, and New York Times bestselling-author. Each week, nearly a million readers around the world receive my Thoughts From the Frontline free investment newsletter. My most recent book is Code Red: How to Protect Your Savings from the Coming Crisis. I appear regularly on CNBC and Bloomberg TV. I’m also Chairman of Mauldin Economics, a research group that provides monthly analysis and recommendations to thousands of readers around the world. I was previously CEO of the American Bureau of Economic Research. Today I am President of the investment advisory firm Millennium Wave Advisors, LLC. I am also president and registered principal of Millennium Wave Securities, LLC a FINRA and SIPC registered broker dealer. When I’m not traveling to speak at conferences and events, I live in Dallas, TX. I’m also the proud father of seven children.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (26)

Moon Kil Woong profile picture
Indeed, one should not blame the Federal Reserve for raising rates. The reason they had to raise is because of inflation and rates rising mainly because of artificial inflation through tariffs. The two issues can't be separated unless you nix the tariffs. Tariffs are the worst type of tax because it hurts businesses a consumption.
@Ben Gee I don't know what the solutions are, or put in another way, I don't know if what I would suggest would help resolve the issues. Nevertheless, I think we need to be clear as to what we are up against: i.e. (1) there are unfair trade balances based upon unfair trade practices; so how do we solve this, i.e. what do we want to accomplish (vision, end result) and how do we want to do this (strategies/tactics); (2) we need to protect our IP - again, what is the end result and how do we what to accomplish this; (3) mutual/reciprocal investment practices - same process - what do we what and how do we get there. But, underlying these objectives and strategies, we have to state what our principles/values are: e.g. do we sell our souls for 30 pieces of silver? etc.I "gave" two major workshops in China and my impression agrees with most that China is on the very long march and they will take whatever they can and many times (some times?) it doesn't matter how they take it. The West hasn't been very good at understanding the ideology/philosophy/etc. that underlies cultures, e.g. ISIS will only be "defeated" by changing their ideology. It's what lies in the hearts of "man" that matters in the long run. So "fighting" will not stop until basic principles are adhered to -- let's see if we can agree on the basic principles ....... so let's agree on what the problems are, what will the end results will look like when these problems are solved, how do we get there, and what values underlie what it is that we are doing. I'm sure there are great minds out there that have already gone through this process, or through another process that will be beneficial.....
Ben Gee profile picture
When people are hungry, they will not worry whether stealing is bad or not. They want to stay alive.
If a country that has GDP per capita 5X, 10X, or 20X tell these countries that can not make the things the rich country make, how are the poor countries get any chance of improving themselves?
Shaduc profile picture

U seem to have no understanding that a higher per capita GDP does not mean greater lifestyle. If that was the case then my life in SanFrancisco ought to been always the best.
Ben Gee profile picture
Most Chinese have great lives in North America. China is a nice place to visit, I do not want t0 live there.
Lots of diagnosis, (and lots of noisy comments) but what are the solutions?
Ben Gee profile picture
If there are solutions, we would have found them. We all want peace, but no one want to stop fighting.
Ben Gee profile picture
Unlike the former USSR, China does not play the cold war game. China made no attempt to match the US on military spending. China spend on infrastructure, which include water works.
China spend barely enough in the military just to make sure a real war not happen.
Shaduc profile picture
China learnt from its $-diplomacy battles with Taiwan ROC onto global.

Same stuff
Ben Gee profile picture
Japan is also in the $-diplomacy game, or try to.
Shaduc profile picture
This was just btw Taiwan & China; I just see ChinA's govt using the same tactics on a global basis (Japan seems handicapped).
wald22 profile picture
China has figured out that debt does not produce the desired economic growth anymore. Having Chinese workers working for low pay for the multi-national corporations is no longer seen as a good thing. So China has decided to grow the economy domestically instead of working to increase exports. We should be doing the same thing.

China is working towards more self sufficiency by building vertical agricultural units close to where the people are. China is doing a lot of reforestation and turning deserts into productive land and places for people to live and work.

Most important to them, is that they are building a new financial system using distributor ledgers technology to serve as a currency for domestic use. China will go through many difficult years, as the old debt gets defaulted on, be it direct or through currency devaluation, but long term they will be a lot better off then we will be as the US$ looses the reserve currency status.
Carson7 profile picture
We will resolve this..
JHHAlpha profile picture
The Chinese economy is losing its high growth rate, both because of cheap competition from other countries and because of the fact that the major economies have peaked after years of buying with cheap debt enabled by the QEs. At this point, China needs the USA market more than Trump needs to import Chinese goods, so the USA has good leverage. The odds favor China making enough concessions to satisfy a trade deal as the US 2020 presidential campaign warms up.

However, a new trade deal with China will not expand global trade, as high business and consumer debt have worked to purchase so much future goods and services that Demand is now slack. And servicing all of the high debt load will become a problem as economies continue to contract.

The world economy is showing signs of having peaked last year, and with debt saturation created by the prolonged QEs, a worldwide recession is coming. Given that debt is higher now than even in 2008, the coming recession may be surprisingly severe.
Ben Gee profile picture
The world will continue to grow by 3+%. The growth rate may peaked, growth will continue.
Ben Gee profile picture
Chinese growth had been sub 7% for 2016, 2017, and 2018 and may not reach 7% again.
Ben Gee profile picture
The trade war is not affecting either China nor the US much, yet.
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