The Breakdown - The Latest on the Global Economy’s Most Contentious Relationship

Episode Date: August 11, 2020

Today on the Brief: Grayscale launches national digital asset TV ad campaign Rough times for oil as Saudi Aramco sees 73% decline in revenue Kodak crashes as government grant paused amid allegations of impropriety   Our main conversation is a look at the latest skirmishes between the United States and China, including: U.S. sanctions on Hong Kong leaders including Carrie Lam  Retaliatory Chinese sanctions on U.S. politicians  The arrest of a pro-democracy Hong Kong media tycoon Arrest warrants issued for six foreign Hong Kong democracy advocates  President Trump signs executive orders targeting TikTok and WeChat Twitter enters the race to buy TikTok before the Executive Order ban takes effect Impact on banks, the Hong Kong stock market and Huawei 

Joshua Lai, for his part, had sort of prophesied this. In an op-ed in the New York Times at the end of May, he wrote, I have always thought I might one day be sent to jail for my publications or for my calls for democracy in Hong Kong. But for a few tweets, and because they are said to threaten the national security of mighty China, that's a new one, even for me. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture PowerShe.

Ships remaking our world. The breakdown is sponsored by crypto.com, bitstamp, and nexo.io, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, August 10th, and today we are going to look at the latest in the world's most contentious and important business relationship. That is, of course, the relationship between the U.S. and China. There has been a huge number of new developments over just the last week or so, so we're

to look at all of that. First, however, let's do the brief. First up on the brief today, it is not just me who thinks that we are on the verge of a new bull run. Grayscale has launched a new national ad promoting their products around digital assets. The new national campaign is being run on CNBC, MSNBC, Fox and Fox Business, and features this 30-second spot. brain, even shells represented value. Then currency came along. They made it out of copper, gold, silver, wampum. Soon people decided to put all that value into a piece of paper, then proceeded to wave goodbye to value, printing unlimited amounts of money as they passed a buck to the future. That's why it's time for digital currency. In your investment in the Grayscale Fund. Go digital, go grayscale.

I want to talk about this ad in a couple contexts. The first is the timing. Grayscale itself is surging. It raised 905.8 million across its products last quarter, which is almost twice the quarter before. Other bull market signals I've covered on the last couple episodes, but it's not hard to see why this is a indicator of exactly where some of the leading folks in this market think we're headed. Second, let's just for a second talk about the campaign itself. In the good column,

the music and imagery are great. It's a recognizable song. It's got cool, old, fast-moving imagery, which obviously you guys can't see here, but I'm sure that you've checked it out online or we'll check it out online. But if I can put on my marketing and copywriting hat for a second, the copy is just a little confused. It sort of combines two things. On the one hand, the history of money, and on the second, the debasement of money. And it doesn't really make the connection between the two, because you don't really have the space to make the connection between the two. It might have been more effective had it just been focused on the debasement of money argument, which seems to be the main thrust and kind of the point. However, I have to say overall,

I still think it's a lot more interesting and effective than previous efforts, including the drop gold campaign, which I think that as much as it made sense on some level, certainly kind of serve to just isolate one group of people who are a natural ally for this industry. No matter what, though, it's hard not to see a quality ad running nationally as a net win for the space. Next up on the brief today, let's talk the rough times for oil. Saudi Ramcrow, which is the world's largest oil company and the second largest company in the world having just been displaced by Apple, saw 73% decline in quarterly earnings. This isn't the only negative indicator in this space as well, with oil field services sector jobs losing 9,344 jobs

in July in the U.S. These losses were 43% more than June losses, meaning it's going up, and the total since the pandemic began has been 99,253 job losses. This matters because oil is an indicator for demand in a productive activity economy. And what I mean by this is that when people are just sitting around, they're not using oil. When people are moving back and forth, say, between jobs, it means that there's more demand for oil. So these are long-term indicators of just how painful we still are seeing the situation be for the real economy and for long-term growth. Last up on the brief today, the Kodak crash. A U.S. government agency said that it was pausing a planned $765 million loan to Kodak because of questions surrounding the loan.

The company is facing allegations of insider trading after their chief executive received 1.75 million in stock options the day before the deal was announced, which of course caused a 1,000% spike in the stock price. When news broke that this loan was planned pending investigation, the stock crashed 40% in pre-market trading. This is interesting to me, not so much in the context of Kodak, although I am glad that there's at least going to be some amount of looking into this that happens. But more, I think this is a preview of a story that's going to happen a lot more in the context of a reshoring world. As government creates more and more incentive for supply chains to come back to U.S. shores and uses its big balance sheet capacity to try to incentivize those changes,

you're going to see more of this weird, complex relationship between the government and business that is going to cause some issues like this. In effect, reshoring and the political demand for reshoring creates a new mechanism by which government and business interacts, not always with really pretty or positive results. Which I think is also part of the story of our main conversation today, which is about the latest in the global economy's most contentious relationship. We have covered the U.S. and China's growing tense relationship

at length here because I think it sets a tone for so much of what's happening in the larger world of technology and foreign exchange markets and so much more. And today there were so many things that have happened over the last week or so. I wanted to take a minute to just go into some of them and ask what their implications might be for business, for the economy, for markets. So on Friday, the U.S. Treasury put sanctions on top Hong Kong officials, including the Beijing-appointed executive Carrie Lam. Secretary Mnuchin said the United States stands with the people of Hong Kong,

and we will use our tools and authorities to target those undermining their autonomy. Secretary of State Mike Pompeo said that the officials were selected for, quote, for being leaders or officials of an entity engaged in actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong. Basically, what these sanctions mean is that the U.S. will freeze any assets the targets have within the U.S. jurisdiction, and they will prevent travel to the U.S. Of course, for that reason, this sort of makes them somewhat symbolic, as most of these folks aren't going to have a lot of assets within the U.S. jurisdiction, and they're also certainly

not lining up to travel to the U.S. right now. However, they are powerfully symbolic, especially going after the executive, Carrie Lam. In retaliation, China this morning, sanctions on 11 Americans in return. These include Senators Marco Rubio, Ted Cruz, Tom Cotton, Pat Toomey, and Congressman Chris Smith, as well as the executives from the Human Rights Watch, the National Endowment for Democracy, and Freedom House. Notably, there was no one in the Trump administration named, which suggests it was sort of a low-grade tit-for-tat and that the Chinese didn't want to escalate this further. Reinforcing this point, Rubio and Cruz had a different form of sanctions separately placed on them last month, and Rubio even tweeted out this morning,

Last month, China banned me. Today they sanctioned me. I don't want to be paranoid, but I'm starting to think they don't like me. While the impact for these individuals may be symbolic, it is having an impact on business. From a Bloomberg story today, they wrote, Banks operating in Hong Kong are stepping up scrutiny of their customers and at least one US bank is moving to suspend accounts to avoid running a foul of U.S. sanctions slapped on city officials, putting them at risk of violating the controversial security law imposed by China. Asking not to be named discussing clients, people familiar with the decision said on Monday that one U.S. bank is taking steps

to suspend accounts linked to some sanctioned officials. Two major Chinese banks are assessing what needs to be done based on their risk tolerance and compliance requirements, people party to those discussions said, suggesting they wouldn't entirely brush off the sanctions. In other words, these banks are having to adapt to this new reality and not in necessarily positive ways. What's going on, guys?

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NXO also lets you earn up to 10% annually on your Fiat and digital assets. What's more, interest is paid out daily, and you can add or withdraw funds at any time. Get started at nexo.io. We're also seeing this hit the Hong Kong stock market. It closed at a six-week low today, and it hasn't traded at such a discount to global peers since 1999. Meanwhile, previous blacklisting imposed on Huawei having to do with chips being manufactured in the U.S. has actually significantly impacted the company's ability to satisfy demand for the MATE 40 phone. They may not, in fact, have enough chips to satisfy that demand.

Another important event was the arrest of Joshua Lai. So if the individual sanctions seem toothless, the Hong Kong security law is being put into effect in a way that is somewhat more toothful. Joshua Lai is Hong Kong's most prominent pro-democracy media tycoon, at least that's the way the New York Times describes him. His publication is the Apple Daily, and it is a pro-democracy publication that has been a thorn in China's side. In addition to arresting Lai, they also arrested his two sons plus four executives from Next Digital, which is the company that runs the publication. The charge is the, of course, purposefully and extremely broad and vague collusion with a foreign country or external elements.

Now, the New York Times wrote about the actual raid on the publication's headquarters and said, the live footage showed a tense scene in the newsroom. When an editor demanded to know the exact boundaries of the area being searched, he was shoved by shouting officers. Quote, remember his face, an inspector said, raising his index finger. If he still behaves like this, give him a warning. And if he doesn't listen to the warning, arrest him. Joshua Lai, for his part, had sort of prophesied this. In an op-ed in the New York Times at the end of May, he wrote, I have always thought I might one day be sent to jail for my publications

or for my calls for democracy in Hong Kong. But for a few tweets, and because they are said to threaten the national security of mighty China, that's a new one, even for me. Now, the arrest of Mr. Lai follows another action about a week and a half ago where arrest warrants were issued for six activists who promote democracy in Hong Kong. The charges for each of these activists were inciting secession and colluding with foreign powers, but the interesting thing about this was that these were foreign actors, these were not Hong Kong citizens who were

in Hong Kong, these were people from outside. Samuel Chu, for example, has been an American citizen for 25 years after leaving Hong Kong in 1990 to live in the US. The provision of the law that theoretically gives them this authority is article 38, which says, quote, this law shall apply to offenses under this law committed against the Hong Kong Special Administrative Region from outside the region by a person who is not a permanent resident of the region. Now, Mr. Chu, who I just mentioned, wrote an op-ed about this as well and said, Article 38, as presented to the world, can seem outlandish in its claim to have the right and capacity to reach across the globe and arrest critics anywhere. Might Hong Kong agents be

deployed on Capitol Hill to arrest members of Congress who voted last November for the Hong Kong Human Rights and Democracy Act? Could they arrest the American President and other officials who, in support of Hong Kong, impose sanctions on the Chinese Communist Party for its encroachment and suppression there? If Article 38 is read literally, that's the threat. How ludicrous, but that doesn't make the crackdown harmless. For example, I fear that I can no longer travel to Hong Kong or to any countries with active extradition treaties with the Hong Kong administrative government or with China without risking arrest and extradition. I cannot speak to my elderly parents in Hong Kong without opening them to investigations and invasive searches by the police.

When these six warrants were announced, geopolitical strategists and previous breakdown guest, Peter Zan, wrote, a reminder that the primary purpose of the new security law in Hong Kong isn't to target locals but foreigners. Business people still operating in Hong Kong. You should not simply be concerned about reputational legal security and IP risks in China, but also your own personal safety. Now, if you're saying to yourself, damn, that is a lot of juice going on in just a couple weeks in this highly contentious relationship. You'd be right, but that's certainly not all, because of course, we have TikTok and WeChat executive orders.

Last Thursday, President Trump signed an executive order imposing sanctions on both TikTok and WeChat. This order starts in 45 days and basically bans any transactions between the parent companies, in TikTok's case, ByteDance, and U.S. citizens. These transactions are outlawed for national security reasons. Now, to be clear, these are the types of sanctions used on oligarchs in Russia and things like that. These are very toothy sanctions. And what they effectively mean is no advertising from American companies.

It means the app could be removed from the Apple and Google App Stores. And because of that, there would be no longer allowed to send any updates to the existing installs, which means that those apps would cease to function in not very long. The same rules were applied to WeChat, although its impact is a little bit muted because it's more for Chinese nationals in the U.S. In fact, the executive order around WeChat says exactly that. Like TikTok, WeChat automatically captures vast swaths of information from its users. In addition, the application captures the personal and proprietary information of Chinese nationals visiting the United States, thereby allowing the Chinese Communist Party a mechanism for keeping tabs on Chinese citizens,

who may be enjoying the benefits of a free society for the first time in their lives. Now, the race to buy TikTok remains very contentious and fast-moving, especially with this new 45-day deadline, which it turns out, or at least it seems like from reports, most of the folks who were involved in trying to buy TikTok and allow it to continue operations in the U.S. had no idea was actually coming. Microsoft remains at the top of the bidding list, but Twitter is also seen as a dark horse,

although it would need both external investors and given how much this whole thing is likely to be shaped and impacted by President Trump, Twitter's battles with the president are unlikely to help its case. A final story in the contentious U.S.-China relationship is the Taiwan trip from Secretary of Health and Human Services, Alex Azar, who went to Taiwan and lauded their democracy

and their response to the coronavirus. This is the highest-profiled U.S. official trip since 1979 when Washington severed official ties with Taiwan in an homage to the growing relationship with China. You take all this together and you really see this continued trendline of the growing animosity, and not just the growing animosity, and I think this is the point that I wanted to end up on ultimately, which is that the net effects of these actions are that they are making it increasingly costly in a real way in terms of compliance, but also in terms of a risk management way, for businesses to sit in the middle. Imagine being a U.S. Bank based in Hong Kong right now.

That is an absolute tightrope act that is going to create a huge amount of challenge. You have to think that for some portion of businesses, in fact, potentially a meaningful portion of businesses, the only answer ultimately is to pick aside and pack up shop and just focus on one market versus trying to intersect between them. The effect of that, of course, is the unwinding of the economic ties, which people have said make a second Cold War impossible. If those ties unwind sufficiently, there simply isn't a countervailing force that actually creates context

for these two powers to have to interact. They just go about carving out separate spheres of influence and recruiting different powers, businesses, countries, etc., to one side. or the other. As contentious as this seems right now and as growing as the animosity is, it is still very early in this would-be second Cold War, and there are still immense economic relationships that bind these two places together. For anyone who has strong opinions about how the future of this relationship should be shaped, in fact, now is the time to get involved with it, because by their very nature, cold wars, the colder they get, the whole.

harder they are to resolve. Anyways, guys, that is the update from this breakdown episode. I hope that this helped you feel up to speed on this incredibly important geopolitical relationship. For now, I appreciate you listening, and I will catch you tomorrow. Until then, be safe and take care of each other. Peace.