After consulting numerous Chinese and US intelligence, defence and political experts, I believe the probabilities have shifted materially from the benign modal case in which China and the US resolve a trade deal towards much more polarised, or bi-modal, outcomes involving a deal or no deal with each contingency appearing equally likely. This could elevate volatility, which will beget investment opportunities. The changing probabilities have emerged as President Trump seeks to straddle two conflicting schools of thought on how to manage the challenge posed by the rise of a totalitarian, one party (increasingly, one person) political system that seeks to dominate its domestic and foreign counterparties to secure and sustain its aspirational primacy. To read the full column, click here or AFR subs can click here. Excerpt enclosed:

The 2018 interpretation of Trump’s mercenary character traits reflected the prevailing wisdom in the economics community that getting a deal done was more important to Trump than the substance of that deal. Whenever Trump deviated from the path espoused by this “Goldman Sachs consensus”, he has been punished by markets. And investors have become emboldened by the efficacy of their own "reflexivity" whereby Ticker-Tape-Trump has been forced to sprout more deal-friendly rhetoric every time his hawkish hyperbole precipitates a market melt-down.

The hawks want Trump to resist his more impatient and hedonistic instincts to prevail in the longer-term strategic game. More precisely, they want him to weather immediate financial storms to preserve America’s hegemony, which is predicated on the rules-based, liberal-democratic order where everyone competes on equal terms without extensive state subsidies and/or interference.

This is Steve Bannon’s eloquently-articulated doctrine, which for the first time is gaining bi-partisan currency throughout America. According to the hawks, China is engaged in a multi-decade mission to wrest economic, military and geo-political supremacy away from the US and its allies. The intensity of this mission has accelerated under President Xi, who is the most powerful and ideological Chinese leader since Mao, and in 2018 removed all term limits to establishing a perpetual legacy.

Xi’s ideology asserts that China has always required an existential challenge, if not outright kinetic conflict, to galvanize her people to unite as one to overcome perceived threats to their existence where Xi himself, the Chinese state, the Chinese Communist Party, and the Chinese people are increasingly fused into a single, indivisible entity.

Read the full column here.