Here's why the U.S. stock market and economy don't need or even miss China - CNBC

Federal Reserve Chairman Jerome Powell, wearing a face mask, testifies before the House of Representatives Financial Services Committee during a hearing on oversight of the Treasury Department and Federal Reserve response to the outbreak of the coronavirus disease (COVID-19), on Capitol Hill in Washington, U.S., June 30, 2020.

Tasos Katopodis | Reuters

Two years ago, the Omicron scourge hit the U.S. hard. The Federal Reserve had been keeping interest rates ultra-low, but it wanted to begin a monetary tightening cycle. Fed Chairman Jerome Powell, though, couldn't be sure how badly the Covid variant would slow the economy because he had no idea how viral the new strain would be. Would it shut down the economy again? Would it be more restrictive, causing the country to revert to the closing of all stores except those designated with emergency status, something that was simply wiping out all shops with stretched balance sheets? Who knew? The thing moved so fast that the last thing Powell could do was raise rates.

Yet, the Fed chief was roundly criticized for avoiding tightening because the economy wouldn't slow down; nor would inflation. He waited four months to be sure before taking rates in March 2020 up to a range 0.25% to 0.50%, a shrewd decision, in retrospect, because at that point Omicron had played out and the crippling impact had run its course.  The U.S. ended its tough restrictions on Covid in the spring of 2022, right about the time the Fed began the most aggressive tightening cycle in its history. (Including the March hike, central bankers increased the fed funds overnight bank lending rate 10 more times to the current range of 5.25% to 5.50%.) U.S. gross domestic product (GDP) grew 2.1% in 2022, a decent rate all considering.

Now consider China. The country adopted a strict Covid policy that prevailed through 2022 causing its GDP to fall to 3% way below the Chinese government's 5.5% target.

In retrospect, that was the beginning of phase two of the slowdown in China, phase one being when then-U.S. President Donald Trump began, and phase two when current President Joe Biden continued, if not accelerated, the economic separation between our two countries. We didn't know it at the time but it wasn't Trump's tariffs as much as his admonitions that it was time to break with cooperation because it had been one-sided. Our continual building of factories and expansion together had failed to make for a level playing field. China could not be counted on as a reliable trading partner. There were really three reasons: (1) the Chinese no longer attempted to change their rapacious ways with American industry; (2) their foreign policy plans were unwavering in their insistence of domination of the lesser developed world via the Belt and Road Initiative; and (3) three their military, always the power behind the throne, decided to go toe-to-toe with the United States by appropriating the most sophisticated semiconductor chips while beginning a policy of intimidation of Taiwan in order to force Taiwan Semiconductor Manufacturing Company, the largest chip foundry, or factory, in the world, to favor the makers of Chinese chips. Given that we had pretty much ceded the making of our best chips to TSMC, the threat was real and nefarious, meant to drive home plans for a one-country strategy, a strategy never abandoned by China and one that had been sub rosa accepted unchallenged until August 2022 when then-House Speaker Nancy Pelosi (D-Calif.) visited the country.

That break proved crucial to the geopolitical strategies of both countries. It signaled that not only was it no longer business as usual but that our nation was going to cease tolerating any designs on Taiwan even as China was unwilling to acknowledge that our policy had changed when Pelosi visited. The one country status that we had tacitly accepted ended – and with it any hope of economic connection with China save Nike and Club names Apple (AAPL) and Starbucks (SBUX), plus existing plants by some multinationals.

New plants seemed and became out of the question, something in retrospect probably seemed unlikely when Biden replaced Trump. The hardline had gotten harder and with it new jobs coming from the U.S.

In retrospect that was crucial to what has become of the two nations, at least as measured by the two stock markets. The S&P 500 advanced 14% over the next two years, but China's market sank nearly 1.5% during the same period. The decline, as minor as it seemed, masked the tremendous rot underneath, as youth unemployment exploded to more than 20% before it ceased to be reported, and the cracks in the Chinese property market became evident and then accelerated to the point where we expect things to grow only worse. Meanwhile, Chinese President Xi Jinping acted as if nothing had weakened and only strengthened his hold on lifetime power.

U.S. President Joe Biden and Chinese President Xi Jinping agreed to resume high-level military communication when they met in person Wednesday for the first time in a year in San Francisco on the sidelines of the Asia-Pacific Economic Cooperation conference.

Brendan Smialowski | Afp | Getty Images

Now, cut to the most recent events, and we seem almost unaware of the significance of Xi visiting San Francisco. The trip seemed far more important to Xi than to us. In fact, we could ask what the heck was he doing here. Was it really about trying to restore more normal relations or was it about bringing American companies back to China and a hoped-for lessening of restrictions on Club holding Nvidia (NVDA), which makes the powerful chips most needed if China is going to be sure to control the thought processes of its industry and its people while bolstering its military. If those were the desires, it was apparently an abject failure on his end but one he can't afford to accept if he is going to restart his economy. No other country is as strong as the U.S. or has the possibility of providing the kind of employment away from property, which we know is a total disaster even as we seem to think that a command economy can't have such a disaster.

Now we find a China that needs us so badly that its president's hat and hand gesture must be followed up on with more enticement. Staying away from the U.S. seems out of the question. Unless Xi adopts Keynesian economics which he seems to rule out at every turn.

The impact on our country is stunningly missing. Have you noticed its lack of import? It's so obvious that we don't need China. We don't want their imports; witness our blocking of their cheap electric cars. We want to wean ourselves off their supply chain as it turned out to be a lot more fragile than we thought. It's taking longer and many are recalcitrant as reshoring costs a fortune. We seem to want to ignore the low cost of doing more business in Mexico. It seems as if it might run afoul of a policy set by Trump. Did you notice how the U.S. auto companies were hesitant to suggest that they might move manufacturing to China? They were toothless in the face of the striking United Auto Workers (UAW) that seemed to know that the so-called nuclear option wouldn't be used. The cowering auto execs lost it all to end the six-week UAW walkout – and yes, it does seem like it all, because they were boxed into the U.S., into the union portion of the U.S. even more so.

What does it all mean to our country? I think it means that our soft landing is, in retrospect, more remarkable because China hasn't helped one bit with commerce that at one point when Trump was president, seemed most needed. We have caught and passed the Chinese and seemed to leave them well behind us DESPITE the most aggressive Fed tightening cycle in our nation's history. The gulf is not metaphorical. We ARE NOT going to help the Chinese. They don't seem to know how to, or can't, help us.

I think the testament of our growth is ignored by those who can't believe that Powell has the gumption to slow inflation far more than slow the economy. We handled Covid better than China. It didn't help the Chinese cause that they refused the Pfizer vaccine. We handled the declines in our oil and natural gas and industrial and financial troubles better, in part because of our gigantic stimulus. Yes, our budget deficit is huge and should be crushing our stock market. But the two don't seem to relate. Maybe something will be done about it, maybe something won't. It just all seems so much more manageable than whatever the hell is going on in China.

But as we close out this 2023 year with a stock market that has such a hard time quitting, we should be thankful that our nation came out of Covid stronger than it came in, while China came out much weaker without a plan to get stronger and without any chance of gaining largesse from the American government and American industry; the latter of which doesn't seem to be suffering from the Chinese downturn. That included, of all companies, Apple, which took whatever share was to be gained from the once toothful colossal that now seems toothless despite our own inferiority complex otherwise.

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Here's why the U.S. stock market and economy don't need or even miss China - CNBC
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