Against the dollar late yesterday. The u. S. Treasury in the day labeling china a currency manipulator. Since then Chinas Central Bank has stepped in we well speak with white house chief Economic Advisor larry kudlow in a few minutes. You and i were talking yesterday, jim, about what we might expect in the market during the course of the day the move down in yields and the 10year in particular also caught a lot of peoples attention. Here we are a day later. We looked like wed be down sharply after other markets opened down. We have now rebounded at least in the futures market. What are your expectations i think that you cant buy enough opening there was a lot of money committed on the sell side i dont know how much short, between when we announced there was going to be designation and probably right to the special last night apple 185, microsoft down 5, facebook down 20 these were very big prints over and over they just kept hitting the bids, hitting the bids, hitting the bids they were obviously wrong but theyre going try to prove themselves to be only early. So people who are buying this market at the opening you must know something no one else does, which often means that youre wrong. As we well know just a tweet from the president , not to mention even a comment from mr. Kudlow during our upcoming interview could change peoples perceptions. Totally and the white house did not think what china did last night was important at all. The white house did not think . No. What do you mean . We know that they took some action, which made it so they were not manipulating last night, so to speak the white house just felt it was nonsense. Theyllprobably just say, look, it shows theyre manipulating its tightly controlled and they can do whatever they want to the currency its worth talking about what it means to be a currency manipulator. Its symbolic, right it doesnt mean anything in practice. Thank you why didnt we say that yesterday . But it does mean that its an escalation right . Its embarrassing. Its kinds of a badge of dishonor for china its not clear whether the imf, which is the next sort of step here, is going to agree with the u. S. So basically what it means is the first time the u. S. Has done this since president clinton in 1994 it means that china is breaking the rules when it comes to currencies we knew President Trump was going in this direction. He said it in a tweet. He spelled it out in a tweet. So youre germany where youre selling bmws and youre selling mercedes into china. At what point, even though you have sheer hatred and contempt for trump, do you join and say, listen, lets say that the chinese should be japan made tough comments why dont the germans act . Or are they that craven that this is about mercedes and bmw and volkswagen markets are they that craven i think if the president were reaching out and trying to build an international coalition, maybe. But he does everything unilaterally, you know that. Will germany agree yeah, theyre feeling the pain they hate the chinese currency being weak but china can make a pretty strong case that theyre just letting it go where the market is telling it to go which is weaker because their economy is hurting. People are asking did they blink last night setting that yuan rate maybe its not in their interest to have a sharply weaker yuan. They worry about capital flight. If they blinked last night, the white house hasnt recognized it, which i think is important. Right, right. This morning they havent recognized it. To saras point, jim, acting unilaterally, many people say if we stayed in tpp we wouldnt be having these conversations. I think that a call to america especial merkel, which is stressful, is warranted right now. But i also think remember, i went to a lamborghini factory in italy. Where do you think those go . They go to china they go to china everybody is volkswagen, porsche, all these companies are focused onto selling into china. The germans want to take advantage of it even though they make less money. I guess the larger point right now for those who are Market Participants in any different Asset Classes is were in uncharted territory it is certainly a heightening of tensions the headlines today, sara, are not just about a trade war but a currency war as well im not quite sure what that means exactly. The strategists and the fx desks are going through some of the scenarios are how this could get even uglier and the market is paying attention. Weve seen these crazy hundredpoint swings in the futures. Jpmorgan spells out two scenarios they think are more likely number one, that the u. S. Could intervene in the currency market it would be highly unusual, may not work at all. Usually we dont go at it at all. We had a bunch of guests yesterday who indicated all the difficulties, or a number of them, of trying to do that given just the size of the market alone. It would be quite a statement, though. And the impact it would make. Also the Commerce Department could change the rules for what it means to be a currency manipulator and pile on sanctions or tariffs with that but again, trump is doing that anyway, the president. The president wants 25 on everything its easier to cut the tariffs if china complies when its elevated at 25 thats the plan. You, me and carl sat at this desk for years now talking about the asymmetric response china might have at some point it hasnt happened. Theres that clear option with selling treasuries. Although many people say that would hurt them. They have whittled down treasuries. Im talking about on the corporate front which is things weve also discussed would there be something they could do to hurt apple or starbucks or any and i mention those names. Huawei is the patriotic buy. Huawei has been the patriotic buy. If you want just a metaphorical stock. And do they really start to try to create a more robust, to your point, patriotic response amongst the population in some way. 50 of the companies are now hurting very badly i think that if you get gdp below 6, then youre going to see someone wanting to be at the peace table. What does all this have to do with the price of earnings multiple for verizon well, the answer thank you. I dont like the ethe real thats fraught with people who sell futures down and stocks down after hours and distinguish themselves as complete morons. What i like here is lets say you focused on earnings for a nanosecond with the exception of marriott, everybody is good. Everybody is good. Tyson had a good number yesterday. Tyson had a good number. Buried in the tyson quarter was how much pork the chinese took from us the pork numbers are up big. Lets say remember they said last night were not taking ag if you look this morning, the only company thats going to come up with an african swine flu vaccine, they cant. They cant so you could argue that the pork is going to go somewhere else. I would argue that the chinese have no choice to buy our pork lets watch. So china recorded 9 billion of Farm Products 18. 5 in 2017. The president tweeting that were in a strong position joining us now first on cnbc is President Trumps top Economic Advisor and director of the National Economic council, larry kudlow always great to see you, larry. Good morning, jim thank you. Appreciate it. All right, larry, are we in a situation where we are struggling for a commercial agreement with the chinese, or do we want a new cold war and contain the chinese . Oh, well, look, the president said many times that hes willing to negotiate were still planning on the chinese coming over here in september. I mean this latest the president was not happy with the progress when secretary mnuchin and ambassador lighthizer went over to shanghai, so he wasnt happy. There were no ag purchases, as you know hes also very unhappy with the fentanyl story hes very heartfelt in his concerns about fentanyl, killing americans as well as chinese and others so he moved toward 10 tariffs on september 1st on the remaining 300 billion but i want to say that in the course of his tweets and his conversations with the trade team, he would like to continue negotiations he would like to make a deal it has to be the right deal for the United States. But, no, we would much prefer a commercial transaction but on the other hand, jim, ill just add this parenthetically, the president is defending the American Economy and china, as you know, has had a lot of unfair trading practices. We can go into that later if you want to. But the point is the president is determined to defend the American Economy by the way, and i hope we get to this, the American Economy is in great shape. It is booming. There is no inflation. Retail sales, even things like cap ex, durable goods, wages, salaries and jobs, were in terrific shape the chinese regrettably are not. Lets go back to this fentanyl issue, which i understand is made not nearly enough in the media. This is something the president feels personally very important and his advisers think it. Wouldnt it be easy for the chinese live up to what they said and go after the companies that are making the fentanyl that are killing our people . Its just a sign that theyre even listening to what trump has to say. Itsa tough point, jim, and youve got your finger on it i was at that dinner at the g20 in argentina, buenos aires, last whenever it was, last december and actually that was the first topic that President Trump raised with president xi and at that time, president xi without hesitating said he would take care of it. He would make the penalties for fentanyl selling the worst perhaps that meant the death penalty. He would stop the sales of fentanyl so youre quite right, this is a heartf heartfelt issue. You know my view on these things i dont understand why the chinese cant seem to get there. We will see. Again, i want to emphasize this morning as much as i can, as difficult as things may be, and i know the markets are a bit volatile, but the reality is we would like to negotiate. Were planning for the chinese team to come here in september things could change with respect to the tariffs the president said if you make a good deal or Good Progress on a deal, maybe hell be flexible on the tariffs. On the other hand if theres no progress on the deal, then the tariffs might get worse. But hes open to it. Thats really the key point. Yeah, but larry, its david in the year and a half or so weve been watching these potential negotiations and the time that youve come on so many times and weve asked you about them, i cant remember a time when its felt worse i mean it cant feel any worse to you than it does right now over these key issues, can it . Well, i dont know. These things go up and down. Theres a lot of disappointment last may, a couple of months ago, when it seemed like the chinese were pulling back. Its ebbed and flowed. Thats all i want to say on that point. And again, the issue is i believe the president is still very much open to the negotiations i do want to say a couple of other things worth noting. On the chinese yuan and the Treasury Departments declaration that they have been accused of manipulating their currency, i mean, look, theyre down 10 in the past year or so. So that is something that we cant tolerate now, ironically, that actually lowers prices. That takes the pressure off any Consumer Price increases at home but thats the wrong way to do it that abrogates a lot of pledges and promises and after all, if china keeps devaluing its currency, then money is just going flow out of there. Its already started we know that production and supply chains are moving out of china. We know china firms are desperately trying to cut prices to mitigate the effects on u. S. Consumers. We dont have to buy you know, a lot of these tariffs, lets narrow in on this because i think theres some misunderstanding theres a lot of elasticity of demand american importers can go elsewhere sure. For certain goods and services so i think were in pretty good shape. I guess im scratching my head, jimmy, im scratching my head at the idea that Consumer Prices are booming because of tariffs the pced flator is up less than 1. 5 so theres no inflation and in special instances where there may be some consumer issues, its a very tiny part of overall Consumer Spending. Jimmy, Consumer Spending is booming. Its the best part of the economy. Retail sales, theyre up like 6 or 7 annually the last three months so i just dont understand why people are harping on that. Larry, its david and we follow that closely as you know here every morning you mention all the leverage in a way that we may have with the chinese. But there are many people who believe they have got leverage with us too, which is just to wait just to wait us out, wait till the election, take their time. Much longer time frame than we have its not a democracy, obviously. Their leadership doesnt have to answer to the people in the same way ours does. Doesnt that give them an advantage here over time if they just say, hey, you know what, were just going to step back and let this thing sit well, look, that may be their political analysis maybe yes, maybe no. I will just say this, the economic burden of these tariffs is falling almost 100 on china. So their economy, which has been deteriorating, you can look at any long chart of chinese investment, retail sales and so forth, and you see a steady downdraft. Their gdp, which is probably inflated by several points, is coming in lower and lower. In other words, my point is with respect to our disagreements and with respect to the president s tough negotiating with tariffs, i think china is getting hurt significantly much more than we are, as i said before. So okay, if they want to wait, maybe so but the chinese economy is crumbling. Its just not the powerhouse it was 20 years ago Everybody Knows that as i said before, supply chains are moving out the demand for their goods is moving to other places a lot of people are coming back home very important, lost in the tax reform debate, lost in the tax reform debate, were seeing now because of our new tax laws companies are repatriating their revenues and their profits and their whole factories and their productions to the United States some of that is coming from china. Who by the way, its about a trillion dollars, which has not been adequately counted yet in the overall revenue flow for the budget gap separate subject but nonetheless, my point is this, with a 21 Corporate Tax rate and tremendous rollback of regulations and much easier tax policies with respect to repatriation, youre seeing american firms move back all those inversions, jimmy mylan is moving back because theyre getting acquired, aller january is moving back because theyre getting acquired but thats not jobs, thats just tax rate stuff thats not anything else theyre both being required. They both inverted and now theyre both coming back. That is correct, but remember youve got home Company Administrative offices and so forth. Youre also going to have factories moving back in from other places around the world, including china. So my generic point, china can wait, thats up to them, but i think they will continue to do great damage to their economy. The American Economy is very strong theirs is not. Youre giving a textbook reason of why the dollar should be strong and the chinese currency should be weak. So why go after them on manipulation their economy is getting hurt a lot more than ours the new threat of tariffs only puts more pressure on things like capital outflows like youre talking about clearly the currency is a very sensitive issue for the markets, larry, so what are you guys hoping to accomplish here . Well, look, the Treasury Department has monitored this very, very closely at the direction of the president secretary mnuchin has been all over this for a long time. At some point in time, if they are violating our laws, wto laws, and frankly g20 laws of currency stability, we have to take the action. We just have to. I mean the issue of law i think you had a better case eight years ago when they actually were artificially keeping their currency weak. Now the dollar is up against everybody and china is getting hurt so it makes sense for the market to guide their currency lower. Well, look, weve seen china in the past defend the currency. We dont see that right now. And as i said earlier, the best we can determine, roughly in the past year its actually been a little more than a year, its about 14, 15 months going back to april 2018, its dropped about 10 in nominal market terms. Thats not acceptable. Again, we have to keep our laws intact theres g20 deals, theres wto deals, so we did what we have to do all right, larry, lets clear up something that happened last week all the press reports, which i think have been pretty inaccurate about the white house, said that you, mr. Lighthizer, secretary numnuchin, were on one side dont do this tariff our old friend, peter navarro, saying do the tariff. I dont have any comment on that what i will say is the trade team, including myself, stands 100 behind President Trump. I went out with that last friday i repeat it today. We understand what hes doing to protect and defend the American Economy, so we stand 100 . Theres always internal discussions. I have no comments on that we are there look, the president you know, let me just make this generic point. The president is a transformative president hes rebuilding the American Economy, and weve had some considerable success these things are not easy. And that includes trade imbalances so what were trying to do is have fair, free, reciprocal trading with china we asked them to abide by International Trading laws with respect to ip theft, voice transfers of technology, cyber tariffs, nontariffs, you know that story as well as i do weve talked about that. The president is trying to defend americas economy farmers, cattlemen, manufacturers, autoworkers, hightech people, you name it. I saw a stat the other day, just ip alone, intellectual property alone, if we were able to reclaim what we have lost by