Hedge fund manager Kyle Bass says a US-China trade deal can’t be reached

Hedge fund manager Kyle Bass is doubtful a trade deal between the U.S. and China could be reached and believes the Federal Reserve’s rate cuts are less effective these days.

“Every deal that the Chinese have signed up with us since their inception into the WTO since 2001, China never lives up to their promises,” the founder and chief investment officer of Hayman Capital Management said on CNBC’s Closing Bell on Thursday.

“At some point in time, one of our administrative officials is going to hold their feet to the fire and this is kind of a battle of cultures because the Communist Party doesn’t want to submit themselves to anything measurable or enforceable. I don’t think an agreement could be had,” Bass said.

American and Chinese negotiators will meet for face-to-face talks next week after the negotiations fell through in May. Treasury Secretary Steven Mnuchin said there are a lot of issues for the two countries to work out.

Investors are now betting that the Fed is going to cut interest rates at its policy meeting next week and that there will be more easing this year to sustain the record-long economic expansion. However, Bass said the central bank’s primary tool has lost some of its mojo.

“We believe rate cuts are less and less effective once you’ve been at a zero rate bound…They will have less efficacy. I think in early 2020, you are just going to see softness in the U.S. economy. We might have shallow recession, but if we do and we will immediately go to zero rates,” Bass said.

In such an environment, Bass recommends buying long-duration assets including long-term bonds and real estate.

“The best way to defend your investments in an environment like that is to buy long-duration assets, i.e. you want to own apartments, you want to own office buildings and you want to own long bonds,” Bass said.

He also said the U.S multinational corporations with high dividend yields will outperform. Junior preferreds of Fannie Mae and Freddie Mac is his “highest conviction position,” noting that they are trading below par.

Frustration, Miscalculation: Inside the U.S.-China Trade Impasse

The latest breakdown shows the two countries still haven’t found a way to negotiate effectively. ‘Sometimes you need to say “stop screwing me.”’

The U.S. and Chinese governments both sent signals ahead of their trade talks in Washington last week that a pact was so near they would discuss the logistics of a signing ceremony.

In a matter of days, the dynamic shifted so markedly that the Chinese deliberated whether to even show up after President Trump ordered a last-minute increase in tariffs on Chinese imports because the U.S. viewed China as reneging on previous commitments.

Inside the cloistered Zhongnanhai government compound in Beijing, President Xi Jinping and his close advisers discussed how to respond to the tariff increase, given the talks were just days away, according to Chinese officials with knowledge of the decision-making process.

After huddling Tuesday to analyze a press conference given by the U.S.’s two top negotiators, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, Chinese officials concluded that they should travel to at least avoid a rift that could be difficult to repair.

The recommendation went to China’s chief negotiator, Liu He, and ultimately to Mr. Xi. He decided to send the team even though Beijing was fully aware that the trip held little prospect of progress, given how quickly problems had arisen. “The goal was simply to keep the talks going,” said one of the Chinese officials with knowledge of the matter.

By the end of the week, that was as much as both sides could cite for their efforts: the avoidance of a serious rupture that would doom any prospect of a future deal and a commitment to stay near the negotiating table.

So far, the trade talks have provided little evidence that the two nations have found a formula for how to negotiate successfully since Messrs. Trump and Xi met in Buenos Aires Dec. 1, which paved the way to Washington last week.

China didn’t immediately impose new strictures on U.S. businesses, as it has done when things weren’t going well in the past. Mr. Liu is expected to brief Mr. Xi on the discussions he had in Washington before Beijing decides on the next course of action, according to the officials familiar with the process.

.. Bridging the trade rift may ultimately depend on the personal chemistry between President Trump and President Xi and their willingness to push matters forward after months of negotiations that have been full of positive intentions but thwarted by miscalculations, accusations of backtracking and unfulfilled expectations.

.. “They were playing games with us,” said one senior U.S. trade official of the talks in Washington three months ago. Mr. Kudlow told reporters at the time that Mr. Lighthizer “read them the riot act.”

“The more heated moments have been in situations where we thought we had something and suddenly there was some backsliding,” said one person involved in the discussions on the U.S. side.

“We’ve expressed some pretty serious frustration at times,” this person said. “It’s been a necessary ingredient to success. You can be nice to someone, but sometimes you need to say ‘stop screwing me.’ ”

.. “We were in the process of planning for a signing summit with President Trump and President Xi upon the completion of this agreement,” Mr. Mnuchin later told reporters. One of the issues was where to hold the celebratory moment: Washington or Mr. Trump’s golf estates in Mar-a-Lago, in Florida, or Bedminster, N.J., say Trump aides.

 .. Chinese negotiators let their U.S. counterparts know that they had serious reservations with the text. The Chinese were no longer willing to commit to changing laws covering intellectual property, forced technology transfer, subsidies and other issues at the heart of the dispute. They also objected to publication of all the details of the text, preferring a summary.

To the Chinese, this was a matter of honor: The U.S. should trust Beijing to make the changes they said they would make, even if that meant changing regulations rather than laws. Besides, the U.S. was being unfair in refusing, upon the signing of a deal, to remove tariffs that had been assessed in the yearlong fight, the Chinese believed.

“There is a real desire on our end to keep the tariffs on,” one White House official said. “That is a sticking point.”

Another major area of conflict has been how to deal with what the U.S. sees as Chinese recalcitrance on clamping down on the theft of U.S. intellectual property, said people briefed on the talks. The U.S. initially had sought to appeal to Mr. Xi’s nationalistic tendencies, arguing that if China was as great as Mr. Xi portrayed it, why would it need to steal U.S. technology?

The Trump administration believed it had an agreement that included a satisfactory level of enforcement should the Chinese record not improve. “Not tiger teeth, but real enough to make a deal,” one of the people tracking the talks said.

Then Chinese officials said enforcement procedures would need to go through Chinese law-enforcement channels and couldn’t be guaranteed at the negotiating table, this person said, which U.S. officials didn’t view as a credible option.

In Beijing, as the talks approached, Chinese officials believed they had some leverage, The Wall Street Journal has previously reported, because they saw Mr. Trump’s public criticism of the Federal Reserve and his desire for lower interest rates as a sign that he was worried about the future course of the U.S. economy and therefore may be more eager to do a deal. It was a miscalculation on their part; Mr. Trump has long called for low borrowing costs and also has repeatedly cited the enduring strength of the U.S. economy.

President Xi also was encouraged by a pickup in Chinese growth—the result of Beijing’s aggressive stimulus policies—and by a perception that the American economy is about to enter a down cycle. “Time is on our side,” said a senior official in Beijing. On the home front, Mr. Xi is wary of a potential political backlash as a result of any perception that he is conceding too much to Washington.

Chinese officials were therefore caught off guard, three days before the Washington talks were scheduled, when Mr. Trump said on Twitter he would increase tariffs, to 25% from 10%, on the $200 billion in Chinese goods because he saw the Chinese backtracking—the original threat he had set for a March 1 deadline.

Shortly after Mr. Trump’s announcement of the tariff increase, Beijing’s trade negotiators, who had booked Air China tickets to Washington, received an urgent order: Stay put until further notice. “Looks like we’re not going,” one of them said early Monday morning.

Up until that moment, China’s leadership had expected the trip to bring months of negotiations to a close, according to Chinese officials close to the negotiation process, given that Chinese diplomats were already in discussion with their American counterparts about a possible summit between Messrs. Xi and Trump to finalize a trade agreement.

Now, the pressing question for Beijing became: Should it pull out of the planned talks to adhere to its longstanding public position that China doesn’t negotiate under threat? Or should China bite the bullet and still send the delegation to avoid a complete collapse of negotiations?

The Chinese side wanted more information from Washington before making the decision. But senior officials knew news of Mr. Trump’s tweets would inevitably cause market anxiety. The first order of business Monday morning: China’s central bank sped up a plan to release more funds for banks, a stimulus measure aimed at calming jittery investors and businesses.

State-backed funds were also instructed to buy what was necessary to prevent a free fall of shares. China’s Foreign Ministry spokesman released a statement at Monday’s regular press briefing that said only that the Chinese delegation was “preparing to travel to the U.S.” The spokesman didn’t say when the team would depart or give additional details.

On Tuesday morning, a group of officials at the vice minister level, including Liao Min, a trusted aide to Mr. Liu and a vice Finance Minister, and Wang Shouwen, a vice Commerce Minister, reached the conclusion the talks should proceed, a position endorsed by Mr. Xi though expectations of a positive result had fallen sharply.

The U.S. side made some calls that turned off the Chinese, too. By insisting that it wouldn’t remove any tariffs upon closing a deal, the U.S. gave Beijing little incentive to accept tough conditions. The U.S. position remained firm: no tariff removal until Beijing showed it would carry through on the commitments it made under the deal. On top of that, the U.S. wanted China to pledge not to retaliate if the U.S. were to reimpose tariffs if it found China in violation of some provisions.

Mr. Trump on Thursday let it be known he didn’t want the U.S. to appear soft on China, according to one person briefed on the matter.

The two days of negotiations went amicably nonetheless, according to people tracking the talks. Messrs Lighthizer and Mnuchin, who both were in the discussions, took Mr. Liu to a working dinner at the Metropolitan Club, a ritzy private club near the U.S. Trade Representative’s headquarters that is a Lighthizer favorite. Mr. Liu continued the talks on Friday despite the U.S. implementing the higher tariffs very early Friday morning.

Later that morning, Mr. Lighthizer greeted the Chinese envoy at the door of the USTR office—a gesture he rarely makes, but one which he could be sure would be captured by photographers and camera crews waiting outside.

By then, though, the U.S. team went into the talks not expecting to do a deal, figuring they would have a “non-meeting,” according to one person briefed on the discussions. U.S. officials at least wanted to make sure they didn’t leave with a complete break. The goal of the meeting was to be able to say the U.S. negotiators were still trying, this person said.

In an interview with Chinese media Friday, Mr. Liu disputed U.S. accounts that China reneged on commitments it had already made as part of the trade talks. “We are very clear that we cannot make concessions on matters of principle,” Mr. Liu said. “We hope our U.S. colleagues understand this.”