We touched on some issues facing Trump and Xi this weekend in With The Fed Behind Us. We also got to talk geopolitics and markets on CNBC yesterday morning.

We published a SITREP on the Houthis Attacks Against Saudi Arabia yesterday and will share some of the GIG’s comments on the upcoming Trump/Xi summit (and the Greenland deal) here in this report. I have been thinking about the important issues facing the U.S. and China this week. What things the U.S. needs some wins on and vice versa. I have been contemplating who has more (or better) cards now compared to a year or so ago when Bessent was negotiating trade with China in Geneva. I believe that China is moving faster on compute than we are on ProSec™ / breaking dependence on China for mission critical “things.” But we have made progress and improved our hand as well on that front. Please see the note below from our GIG on the upcoming summit:

“A month ago, I would have assessed the summit with Xi would have been almost exclusively focused on trade issues with a smattering of Iran/Persian Gulf concerns sprinkled in. Now, it will likely be packed with AI and the Middle East dominating the agenda. President Trump would much prefer to focus on trade and tariff issues and emerge from the meeting with a substantive announcement about economic cooperation. It remains to be seen if Xi will support that outcome. While he doesn’t hold all the cards, concerns over reduced shipping in the Strait (and now the Red Sea), U.S.-based AI company leaders’ doomsday prophecies about the future, data center buildout concerns voiced by a growing number of U.S. citizens, and the pressure the Trump administration is feeling about the pending midterms have all strengthened Xi’s hand considerably. He comes to the White House with far more political leverage than he possessed even a few weeks ago.” – General John Evans

Trump Has Home Field Advantage

We all have places we are more comfortable in. Settings that give us a degree of comfort that can impact how we behave and interact.

The President is a New Yorker at heart. He has been a wheeler dealer in NY all his life. Just like Monty Hall controlled Let’s Make a Deal, it is clear that the President feels most comfortable in NYC. I’d argue that he feels more comfortable at Mar-a-Lago than D.C. (he did have Xi visit him there during Trump 1.0).

Having China’s negotiators meet with Bessent at JP Morgan’s amazing new headquarters fits this view that Trump is most comfortable dealing in NYC.

With the U.N. in town, the President can also talk to Ukraine and Iran’s “civilian” leadership on his home turf.

Add in Europe (including Greenland and Denmark) and you have a recipe for making deals!

The President is in his element and there is every opportunity being presented to announce deals. I don’t think he will disappoint.

The Midterm Convention Launched His Midterm Campaigning

I didn’t pay much attention to the convention in Dallas. I don’t think I even tried to catch it live, and it didn’t seem to take long to catch up on what was said or done (aside from the $5k per person after the election, which I haven’t spent even one minute thinking about, not very much even caught my eye).

But, let’s assume that event was the start of the President’s moves to help his party win the midterms. I like that, because I don’t think it makes sense to think too much about who will win what, until we are much closer to the election. Trump believes that A LOT can be done to shape voting in the month or so prior to the election. That all the “other stuff” that happened before has an impact, but recency bias matters.

So, part 2 of this is that the President has only begun to focus on the midterms and believes it is early enough to shape the election (and prove betting markets wrong).

Higher Stock Prices, Lower Bond Yields, and Lower Energy Prices

Those three things would all help the President and the Republicans heading into the midterms.

Knowing what he would like to see is maybe more important than the details?

Need, Want, or Accept. The World, America, or Markets.

On many of these issues, I’m thinking less about the details, and trying to think about the outcomes with the following framework.

For purposes of today, we will view “want” as being the best possible outcome. We will view “need” as more of a bare minimum. And “accept” is what we will decide to accept is happening, even if it seems unlikely to really occur.

I won’t spend much time on worrying about the World and focus on America (though I think in most cases, the needs and wants are very similar).

Markets are actually the key, at least for me, right now. What markets want, need, or accept is probably more important than the details.

Greenland

• Having a new deal, with refreshed terms, including the possibility that Greenland could gain independence from Denmark is very useful. So even if this was more just a “clarification” than some revolutionary new deal, it is a positive. It also eases the friction between the U.S. and Europe. All good things. Will this also lead to development of rare earths and critical minerals in Greenland? It seems plausible. Can Greenland help with the U.S. buildout of higher latency data centers? Again plausible.
• The deal is good, the timing is great, and the deal itself, depending on how it plays out over time, may even be better than good.
• Admiral Kelly Aeschbach from our GIG believes that “the Greenland deal is a win for the United States and a relief for Europe in the hopes that it will put Trump’s calls for sovereignty over Greenland in the rearview mirror. This deal is vital to United States’ interests in the Arctic, effectiveness of homeland defense, and protection of space interests. The deal appears to prohibit any non-NATO country from establishing a military presence in Greenland and provides a screening mechanism to prevent Chinese or Russian investment on the island.”

Iran

• America (and the World) “want” an Iran with a neutered military. Ideally some path towards a new or softer regime. Certainly, an Iran with no hope of nuclear weapons.
• Markets “need” oil flowing. The more the better. Lifting the blockade on Iranian oil helps. Getting the Saudi pipeline operational helps. If there is an “end in sight” with regards to the flow of oil, it is easier to continue to drain the SPR, while oil flows normalize.
• Markets almost certainly, and the U.S. and the World (likely) would accept anything that sounds a bit better than the MOU that fell apart (there were literally disagreements on clauses before the ink was dry). At this stage everyone seems happy to move on, even under dubious terms, so long as oil is moving.
• The Iranian Hardliners are NOT the ones coming to the U.N. The President will be dealing with members of the Iranian government who seem far more amenable to ending the hostilities than the IRGC or the Supreme Leader. Who knows how much weight the team in New York carries, but I don’t think markets would care. Markets are looking for an excuse to rally.

It is easy to see some sort of “deal” or framework of a “deal” that allows oil prices to continue to drop, which in turn should help bond yields drop (and for many of us, a chance to question again why the Fed hiked into what is largely a supply shock/compute build backdrop).

Ukraine (and Russia)

• The World wants a deal where the war ends, but Putin is not “rewarded” for his aggression. America (this admin) just wants resources flowing and access to those resources in both Russia and Ukraine.
• The world and markets need a deescalation. Peace would be ideal, but some sort of deescalation, coming into the winter, is what is absolutely needed. Both sides backing off of their attacks is key.
• Zelensky seems amenable to what everyone needs, if not to what some people want.
• The President could threaten Ukraine by pulling back on weapons sales, which I don’t think will work. Alternatively, indicating an ongoing ability and willingness to supply Ukraine with the weapons they need but cannot get on their own (increasingly they seem less dependent on the U.S. military except for high-quality interceptors) would put more pressure on Putin.

I’m less comfortable that there is a deal that the market accepts on the Russia/Ukraine front than on the Iran front, but the stage is set. Trump is in his element and the drop in not just oil prices, but also commodities more broadly would be welcomed by markets (even if they don’t believe much will change and nothing is really resolved).

China

Compute, AI, and Cyber might be the most important topic of discussion. But at the same time, does anyone really know what we want? Or they want? We seem to be flip-flopping between can’t build fast enough and the potential that we are endangering ourselves as a species. I don’t mean to be facetious (actually, I probably do), but the discussions on compute are going to be complex. It is far from clear that the U.S. has a unified policy on its own soil, let alone on what to do with China.

Markets (and the World and America) should want a world where China doesn’t create Cheap Compute and flood the world with their AI models like they did with their manufacturing.

We would love to get commitments that Chinese companies won’t “distill” their models with U.S. models.

In the end, on compute, I see no reason why China won’t say all the right things, and then continue to do whatever they were going to do anyways (including distilling their models, dumping cheap compute, etc.). That is probably good enough for markets.

I just find it difficult to see an outcome where China decides to fight in the open with the admin on this, when they are perfectly capable of saying whatever it takes and doing whatever they want.

For much of the rest, I kind of view Xi as being a ‘gentleman’ here as a guest.

Not once during the initial rounds of the trade war did China initiate a tariff that wasn’t in response to a U.S.-imposed tariff. On some rounds they didn’t even respond in kind. If the President doesn’t push on more tariffs, or even eases some, there is no reason to believe Xi won’t respond in kind (which I think is the message Bessent sent on Sunday).

Xi is the guest and Trump is in his element. If Trump plays the “gracious host,” which he is perfectly capable of doing, there is no reason we cannot get some good soundbites on the trade front. That is all it will take for markets to be happy. Probably changes very little, but it is far easier to see positive “deal” headlines on trade from this summit than negative ones (even if both countries just go back to doing what they were doing before the announcements, once the summit is over).

There is a lot of discussion on what China could do in terms of helping with Iran. What they should do. For now, I’ll ignore the details on that, as I’m betting on good noises from the Iranian delegation.

Bottom Line

Bet on deals.

Trump is in his element.

The pieces with China, Ukraine, and Iran are aligned nicely.

Timing fits for the admin to make a big push to improve polling and election odds.

What the World and America really need is far less important than what markets are willing to accept, and I think markets are going to be willing to accept a lot at face value even if the reality isn’t as good (and the reality could be good).

Bet on deals this week. I really cannot get the image of Monty Hall walking through the studio audience out of my head. Maybe that is immature on my part, but I think conditions for “deals” are good and would not be betting against them this week.

If I’m wrong, look out below, but this is a “narrative” rather than “devil in the details” sort of week!

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