I've said in my daily notes here that it seems like we are on path for some military action with China, before the election. 

The election is drawing closer.  Nothing yet.  Though China has made many provocative moves (handling of the virus, expansionist actions in the South China Sea, Taiwan and Hong Kong).

And the U.S. has stepped up rhetoric and action, with bans on Chinese technology companies, condemnation of China's human rights abuses, and calling out the broad threat of the Chinese Communist Party to the future of the free world.

Add to that, Trump has laid out, as part of his second term agenda, a plan to decouple the U.S. and Chinese economy.  

So, what could be the trigger to turn rhetoric and a 'cold war' into a 'hot war?'  

At this point, it looks like, if anything, it could be the border dispute in India. 

For the past several months, China has ramped up the bullying of India, over a long disputed stretch of Chinese/Indian border.  It has resulted in plenty of military flexing.  There were 20 deaths from a ground fight back in June.  And shots were fired last week, for the first time in 45 years. 

The CCP's voice on Twitter, the Editor of the Global Times, has been posting threats and war propaganda.  Below is the latest, from this morning …  

The tech giants have all given up significant ground over the past seven trading days.  And as a proxy on global risk appetite and the global economy, broader markets have followed the lead of the big tech giants. 

With that, let's take a look at the chart of Apple, and some analysis (my view) on the story …

With 53 days until the election, as we discussed on Tuesday, we have a vacuum to be filled with uncertainty and speculation.  

That's a formula for choppy markets.  That's what we're getting.

Let's take a look at how the election is sizing up …

Despite the reports that the polls have swung in recent weeks to a very tight race, Reuters still has it at a seven point spread in Biden's favor.  The FT has it a eight points.   

One of the great macro-traders of all time, Stan Druckenmiller, was interviewed this morning. 

This is a particularly interesting interview because, 1) he tends to understand the big picture as well or better than anyone, because 2) his view is shaped by global liquidity … and 3) he has a lot of influence.   

As we know, with the Fed and Treasury acting in coordination (together and with other global central banks and governments), the world is swimming in money. With that, in environments where central banks are active, Druckenmiller tends to have very valuable perspective. 

Back in early December of 2018, Druck said he was "on red alert" for markets to crack.  At the time, the Fed and the ECB were combining to land a one-two punch for global markets and the global economy.  The Fed was overly aggressive in tightening into a slow growth, low inflation economy, while the ECB was simultaneously ending its three-year QE program.  Liquidity was being extracted. 

Despite some warning signals, the Fed went through with another rate hike in mid-December, and stood its ground on the policy path — that was the gut punch. U.S. stocks collapsed 18% in fifteen days, and by the beginning of the year the Fed was walking it back and ultimately reversed course.   

As we headed into 2020, Druckenmiller was interviewed again.  This time, he thought the Fed was on the wrong side again — swinging the pendulum to far in the opposite direction (overly easy). He thought global growth would positively surprise.  And he thought the Fed would be caught behind on inflation.  

A month into the year, all appeared to be on the path, until the pandemic hit.

So, for a "liquidity" driven investor, we now have trillions of dollars of new money in the economy.  This is his wheelhouse.  What does he think now? 

He thinks we are set up for an inflationary boom (if they get it right), or a deflationary bust (if they don't) — with a low chance of getting it just right (perfect). 

He says valuation on stocks doesn't matter, because of the Fed/Treasury liquidity. 

And he says he thinks inflation could hit 10% in the coming years. 

This is in line with much of what we've been discussing here in my daily notes.  For what it means, let's look back at an excerpt from my Aug. 27 note …

"Remember, this will be a recovery juiced by trillions of dollars of excess money from the policy response (well in excess of the damage).  That means the Fed will likely have to chase inflation at some point, to contain it, with a rapid succession of rate hikes. But they will still let it run hot, early on. This is still a good scenario.  That bad scenario, is deflation, due to economic collapse, which means a very bad outcome for all, and unlikely salvageable by even aggressive policy actions. 

Let's stick with the optimistic (high probability) outcomes …

Guess what will 'inflate' along the way in these inflation scenarios:  Nominal GDP. 

GDP measures the market value of the goods and services.  So, price goes up, GDP goes up. 

If we look back to the inflation spikes of the early 70s and early 80s, nominal GDP grew by an annual rate of better than 10% during those periods. 

If we had a similar spike, we would regain peak levels of GDP by middle-to end of next year, and we would be on the way to a $30 trillion economy by 2024, which would (by design) go a long way toward repairing, if not resolving, our debt as a percent of GDP problem."

Yesterday, Trump laid out an agenda for the second term in a prepared speech. 

This was an important speech, as he laid out the path forward with China.  And it’s an aggressive one. 

Remember, we’ve been talking about the likelihood of seeing the U.S. and democratic global allies taking a stand against the Chinese Communist Party, putting China in the “penalty box” – a global retaliation against China’s multi-decade predatory economics. 

That seems to be the gameplan. 

Here’s what the timeline looks like on this escalation …

After plenty of jawboning and tweeting, for years, back on May 29th, Trump formalized his threats against China in a prepared speech, following China’s takeover of Hong Kong.  He made his case to the American people. 

From that point, Pompeo has been out building a coalition (of global allies) against China.  Within that effort, he made a speech at the Nixon Library calling on “every leader of every nation,” for the “future of the free world,” to set the standard for dealing with the Chinese Communist Party.  He called for an alliance of like-minded democracies, to “act now” against the CCP, or let them “erode our freedoms and subvert the rules based order that our societies have worked so hard to build.”

With that backdrop, yesterday Trump got more specific about the scale.  He said would “make America into the manufacturing super power of the world.”  That’s a big statement.  And with that, he said he would end our reliance on China.  No federal contracts for companies that outsource to China. And a “big tax” for those that do.  This is not just moving the supply chain out of China, but it’s bringing the supply chain home.  

Lastly, he said “we will would hold China accountable for allowing the virus to spread around the world.”  This probably means Trump and company have some leverage to get allies on their side for, at best, sanctions …or at worst, military action. 

For market, this leaves a 55 day vacuum to fill with uncertainty and speculation.  Markets clearly don’t like it.  Let’s take a look at how stocks behaved throughout the U.S./China trade war (from the announcement of the first tariffs, to the signing of the “phase one” deal). 

We had another good jobs number this morning.

More than 3 million people that were on temporary layoff have returned to work.  The net number of jobs lost has now been halved, bringing the unemployment rate down to 8.4%.

And people are working longer hours (average weekly hours worked are up, higher than expected) and they are working for a higher wage (wages came in hotter than expected). 

As you can see in the chart below, wages are up 4.7% year-over-year and, importantly, sustaining as the job market improves. 

Stocks were hammered today, following the 64% run off of the March 23rd lows.  Yes, that's a 64% bounce, in a little more than five months.

This was the biggest move in the vix today since June 11, when the media sent the country into a stir about a second wave. 

Stocks continue to move higher, for the reasons we've discussed here daily (namely, a policy response that is far bigger than the economic damage).

Yet, the media and some of Wall Street continue to seem perplexed. 

What continues to be ignored is the rhetoric slinging back and forth between Pompeo and China.  As we've discussed, Pompeo's speech at the Nixon Library, back in July, sounded at best like a cold war declaration at worst, like a 'hot' war declaration.  

In fact, yesterday Pompeo was asked about the 'cold war' analogy and he said it has some relevance, but "this is different than cold war." 

There are a number of "flashpoints" that continue to build in tension in recent months, all provoked by China:  expansionist actions in South China Sea, Taiwan and Hong Kong. 

Now we have the Pentagon talking about China's nuclear capabilities.  And this morning, a mouthpiece of the CCP, the Editor of the Global Times, said the U.S. government is underestimating how many warheads China has.

As we’ve discussed back in July, it seems like we are on path for some military action with China, before the election.  Remember, incumbent Presidents, when they’ve actively sought a second term in war time, have a 6-0 record. 

With the health crisis, when we wanted to know how things were progressing, we had to ignore the experts and the politicians and look at the data. 

The data told us the health crisis peaked in April, when the daily change in intubations in New York hospitals started to decline, and soon thereafter, went negative.  Something (a treatment) was working.  This wasn’t going to be another Spanish Flu, with millions, if not tens of millions of deaths. 

Again, in June, when the experts, the media and the politicians were telling us a second wave was beginning, we looked at the data, and while cases were rising, the deaths relative to cases were falling sharply.  The data told us that more aggressive testing was simply revealing the degree of asymptomatics in the population. 

So, just as the data has told the story on the health crisis, the data is also telling the story on the economic crisis. And the story is a positive one. 

Nothing tells the story of reality versus perception like the Citi Economic Surprise index.