Greens have replaced the SPD in Germany and something Putin and Juncker appear to agree on

Today’s daily is a grab bag of topics that I have been thinking about over the past week. I have a backlog of stories from earlier in the week I missed. So let me add these into the mix today.

But first up today is this chart from German public TV station ARD which bolsters the case I was making about the Green Party in Germany taking over the center-left mantel from the SPD.

German party votes October 2018.png

You can see that the Greens are now the second most popular party in Germany, well ahead of the SPD. Equally noteworthy is that the AfD continue to poll above the SPD.

We now have two parties in Germany with about 20-25% of the vote count who are not natural allies at the federal level. And then we have 4 different parties around the 10-15% range who could slot in to a multi-party governing coalition.

Basically, the German political spectrum is splintering and becoming a lot more like the Dutch system has become. Personally, I don’t think that bodes well for stability. Let’s see where this goes.

A week after Hurricane Michael, rural residents feel stranded

Lillian Chance couldn’t leave her street for days until a neighbor chopped away the fallen trees that blocked her pothole-filled path. She was unable to get inside her trailer until an old friend sliced off branches of the cedar that had collapsed on it. And she and her two children subsisted on crackers and peanut butter until another friend spotted a sign outside the Dollar General with the word “hot meals” and arrows pointing down the street.

Chance, 57, was in her Toyota Tundra following the arrows when she thought, “Thank God for the community.”

“You think the government would have come out to help us country folk,” she said. “But we are still struggling.”

My view: I am amazed that the sense that US residents have not received more help isn’t causing outrage. I don’t get it. I know someone at FEMA. I’m going to ask her what the story is.

Here’s another story that I think is interesting in terms of the political economy. The Honduran/Guatemalan migrant story. The way I understand it, these migrants are going to traverse Mexico and try to enter the US and claim asylum. Trump has threatened to cut aid if they make it to the States. And so most recently, Mexico has sent a load of police in to block their progress and turn them away near the Mexican border.

Migrant caravan: Mexico sends police to southern border

Mexico has sent hundreds of police to its southern border as a caravan of thousands of Central American migrants approaches from Guatemala.

The move came after President Donald Trump threatened to use military force to completely close the US-Mexico border over the issue.

He also said aid could be cut to countries allowing the caravan to pass.

The group of Salvadoreans, Hondurans and Guatemalans say they are fleeing violence and poverty.

Mr Trump has previously threatened to cut Honduran aid. The US sent more than $175m (£130m) to the country in 2016 and 2017, according to the US Agency for International Development.

The question: is Trump right to threaten an aid cut-off to keep them out? Are they actually economic migrants instead of refugees? These are the same issues Europe is facing, even after the end of the Syrian refugee wave.

My view: As long as the gulf in socioeconomic status exists between the US and Latin America, and between Europe and Africa, there will be waves of migrants. Wars and climate-induced devastation will increase those waves.

These next articles are about trade.

Something Putin and Juncker appear to agree on – the euro

In recent months President Putin, the Russian government, its parliamentarians and the country’s business representatives have all called for “de-dollarisation”. Russia’s motivation towards de-dollarisation is mostly geopolitical. It comes in response to what Russian authorities see as “weaponisation” of the dollar, increasingly entrenched and open-ended US sanctions, and the threat to Russia’s commitments to Iran posed by the US’ unilateral withdrawal from the Iran nuclear deal.[2]

Would Russia’s offer to switch to euro in trade with the EU come with strings attached? It is doubtful there would be any catch – Russian authorities are keen to narrow political gaps with the EU, a region they see as their most important strategic partner and neighbour. Uncertainty and pressure emanating from the US makes Russian authorities keener to find common ground with the EU, and the euro would be an important symbolic common project.

The story below is related to the story above because the US dollar and US market access is being used as a financial weapon.

US threatens to bar EU banks from exchanges

One of the US’s top regulators has threatened to stop European banks from using US futures markets if the EU refuses to water down post-Brexit plans to oversee clearing houses.

Christopher Giancarlo, head of the Commodity Futures Trading Commission, said on Wednesday that EU plans — ostensibly in response to the UK’s move to leave the EU — were “completely irresponsible” and could be met with a stern reaction from Washington.

“These are blunt and strong tools,” Mr Giancarlo said, acknowledging that it could have a serious impact on global markets. “None of these options represent a course of action that I wish to pursue.”

Mr Giancarlo’s fierce warning comes as UK authorities try to remove tensions with the EU around the issue of clearing as the UK’s departure from the bloc nears.

If a resolution could not be found, he warned the CFTC could unilaterally take its own action — including barring EU banks from using critical US infrastructure such as the Chicago Mercantile Exchange.

The CME is widely used by banks around the world to hedge their exposures to dollar swaps and US Treasuries.

Juncker and Trump’s transatlantic trade truce falters

Washington is again threatening high tariffs on Europe’s all-important car industry just as U.S. President Donald Trump is seeking to whip up support before midterm elections on Nov. 6.

In an unusually outspoken attack, two top U.S. officials on Wednesday made clear that Trump was growing frustrated with Europe’s foot-dragging over a promised trade deal and was gearing up to roll out car tariffs put on ice in July.

U.S. Commerce Secretary Wilbur Ross, who was in Brussels on Tuesday and Wednesday, was visibly annoyed by the lack of progress in talks and lashed out at the explanation given by European Union trade chief Cecilia Malmström.

This whole next section of stories is about China, starting with trade to continue the flow from above.

Senator McConnell says tariffs hurt, urges trade progress

“The tariffs are beginning to have some impact in a negative way so I hope that we make some progress quickly on some of these other fronts, in particular with China,” McConnell told the roundtable discussion with Reuters journalists, though he said of the overall U.S. economy: “I think it’s red hot.”

McConnell, Trump’s fellow Republican, said he hopes the administration will avoid imposing tariffs of up to 25 percent on imported cars and SUVs, an issue that he noted has raised alarm among automakers, including Toyota Motor Corp, which builds the Camry in Kentucky.

“I hope that we end up in a better place sooner and don’t have to go down that path” of additional tariffs on autos, McConnell said.

Trump’s policies have deviated from Republican orthodoxy that had embraced international free trade agreements. McConnell had previously warned about the possible economic impacts of retaliatory tariffs imposed on the United States.

Why China Shouldn’t Wait Out Trade Feud With U.S.

China would be better advised to follow the approach of South Korea, Mexico and Canada by making concessions to reach an accommodation with the US. Xi could use the G-20 meetings in Argentina next month to offer concessions to Trump centered on three issues: relaxation of joint-venture requirements and other restrictions that limit foreign companies’ operational freedom and force technology transfers; a verifiable effort by China to counter intellectual property theft; and time-specific agreements on energy and foodstuff imports that would reduce the bilateral trade surplus vis-à-vis the U.S.

Those steps would offer a viable possibility for defusing trade tensions, giving China more time to continue to gradually reduce its co-dependency with the U.S. (which it shows every intent of doing regardless of the state of trade relations between the two countries) and strengthen its domestic drivers of growth (now one of the main objectives of China’s long-term strategy).

Making concessions now won’t deliver China’s theoretical “first best,” nor will it be free of costs and risks. Yet it may well be the best feasible option the government has if it is to avoid the bigger threat of seeing its development process derailed.

Wall Street slashes earnings outlook for automakers and suppliers amid concern about China

On Wednesday, Morgan Stanley warned about China exposure and cut earnings estimates for GM, Ford and Fiat Chrysler.

Morgan analysts said they remained cautious on autos and were trimming forecasts and price targets after weak third-quarter China auto shipments data. The firm’s analysts warned that the Chinese government stimulus in the next year may be the biggest driver of earnings and stock prices in the next six to 12 months.

Overall trade worries also continue to weigh on the group. On Tuesday, Goldman Sachs economists said there remains a 35 percent chance that global auto tariffs could be imposed on the sector, and a Commerce department recommendation for tariffs is expected at some point after the midterm elections. The structure of the revised trade agreement with Mexico and Canada suggests the White House is considering higher auto tariffs.

Treasury sends warning shot to China on currency

Treasury is critical of Beijing for not pursuing more market-based reforms that could bolster confidence in the renminbi.

President Donald Trump has accused China of purposefully devaluing its currency to give its exports a competitive advantage on the world market. The report warns that the recent depreciation of China’s currency will likely widen the economic giant’s trade surplus with the U.S. even more.

A lower currency value also softens the sting of U.S. tariffs by making Chinese exports to the U.S. cheaper. The Trump administration has imposed the tariffs to punish China for its intellectual property and technology transfer policies that it says is ripping off U.S. companies.

China will remain on a list of countries the U.S. monitors, along with Japan, South Korea, India, Germany and Switzerland.

China is not a democratic country in any way shape or form. The story below tells you that.

Interpol ex-chief may be dead, wife fears, after capture by Chinese

In an emotional interview with the BBC, Grace Meng said she and her children have been waiting for news of Meng Hongwei, who has not been seen or heard from since 25 September when he flew from France to China. “I tell them Daddy is on a long business trip … We want to hear his voice,” she said in an interview published on Friday.

Speaking of a lack of democracy…

Saudi Arabia Has No Leverage

One of Crown Prince Mohammed bin Salman’s primary objectives is to diversify the Saudi economy and wean his country off its dependence on oil. Unemployment in Saudi Arabia is at more than 12 percent, and some 70 percent of employed Saudis work for the government. The Saudi labor ministry estimates that the economy needs to create 1.2 million jobs by 2022 to lower unemployment to a still dismal 9 percent.

But because the country lacks business experience and special expertise outside of the oil and petrochemical industries, that won’t be possible without foreign — and particularly American — participation…

Saudi Arabia cannot embargo or unilaterally raise oil prices for the United States without doing greater harm to its own industry and revenues. If Riyadh directed the national oil company, Saudi Aramco, to halt exports to the United States today, it would primarily hurt Aramco itself. Aramco owns Motiva, the largest refinery in the United States, and Motiva is more reliant on Saudi oil than any other part of America’s energy ecosystem. If Aramco tried to raise prices by cutting oil production or exports, it would face irate customers in Asia and hurt its own refineries in China and Korea, too.

My view: This analysis makes sense to me. However, as always, I have to point out that the ‘rational’ approach is not always the one that works politically for a given country. Just because trying to use the oil weapon would be self-destructive, doesn’t mean the Saudis won’t try.

I have been meaning to talk Tesla for a while. Elon Musk’s agreement with the SEC is positive news for the company. And it now seems to be moving forward. I predict they will raise money. They have to, at a minimum to fund this new Gigafactory.

Tesla inks deal for Gigafactory 3 in China

Tesla has secured the rights to about 210 acres of land in Lingang, Shanghai, the site of the electric automaker’s planned factory and its first outside of the U.S…

The land transfer marks an important step for Tesla, which recently said rising costs had prompted the company to accelerate construction of its so-called Gigafactory 3. Tesla warned in its production and delivery report in early October that tariffs, combined with the cost of shipping its vehicles via ocean carrier and the lack of access to cash incentives available to locally produced electric vehicles, has put the company at a disadvantage in China…

The Shanghai factory deal marks a shift within the Chinese government to allow foreign companies to build and operate wholly owned facilities there. Foreign companies have historically had to form a 50-50 joint venture with a local partner to build a factory in China.

Chinese President Xi Jinping has said the country will phase out joint-venture rules for foreign automakers by 2022. Tesla is one of the first beneficiaries of this rule change.

Note that the Shanghai Bureau of Planning and Land Resources has revealed that Tesla agreed to pay 973 million yuan, that’s about $140 million, for the land in Lingang, which is near Shanghai’s free-trade zone. Again, Tesla is going to need to raise money.

This next post is from last week. And though I am sceptical about Tesla, I think it shows you the promise, and why it is valued so highly.

Who Needs German Engineering? Tesla Outsells Mercedes-Benz For The First Time—And Has a Plan to Pass BMW Too

When it comes to sales, Tesla beat out Mercedes Benz for the first time in the U.S. last quarter. Atherton Research says Elon Musk’s car company sold 69,925 of its Model 3, S and X cars, while Mercedes Benz sold 66,542 vehicles (excluding commercial vans) in the U.S.

Tesla is on the right path to overtake BMW in the final quarter of this year as well, analyst Jean Baptiste Su wrote. BMW sold 71,679 vehicles in the past quarter from June to September…

Fred Lambert at Electrek points out Tesla is outselling Mercedes-Benz with only three options in the premium segment. “Imagine what will happen when Tesla will launch the base $35,000 version of the Model 3 later this year and then expand Model 3 deliveries to international markets.”

Are you bullish?

I’m going to leave it there for today. Have a great weekend.

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