“US-China” relations is a term that has been overly saturated to now mean “Trade War” as it relates to the common knowledge narrative dictated to us by mainstream media.
However, the US-China relationship is the single most important variable in the immeasurably complex equation that is world affairs, and specifically, where things go from here and how it affects billions of daily lives.
We’ve entered a new stage where narrative is set to shift very dramatically and rapidly. As such, it is apparent that now is the time to position for this shift.
Let’s begin with a story about the man that helped shaped innovation and its role in the architecture of the American military complex: Vannevar Bush.
Bush received an education in mathematics and electrical engineering from Tufts, MIT, and Harvard around the time that the US entered into World War I. As a result of the war, Bush spent the early part of his career working on antisubmarine research as a member of the American Radio and Research Corporation (AMRAD) and National Research Council (NRC).
Once the war had finished and the funding for both AMRAD and NRC had subsided, Bush became one of the five founders of Raytheon, in addition to becoming a professor of mathematics and electrical engineering at MIT. During his tenure at MIT, he helped to develop the differential analyzer, the first computer of its kind able to solve complex multi variable and differential equations. For this work, Bush received the Franklin Institute's Louis E. Levy Medal in 1928.
In 1938, Bush became central to a number of influential organizations driving scientific research and development across the highest channels in the US, including the Carnegie Institute for Science (CIS) and the National Advisory Committee for Aeronautics (NACA), a predecessor to NASA.
At the earliest stages of World War II, Bush realized just how advanced the German war machine was becoming, and he warned President FDR that without cooperation between US scientific researchers and US military, the US would soon be outmatched and would not win the war.
In what is now a famous note, “OK — FDR” gave Bush the approval to create the National Defense Research Committee (NDRC), and later the Office of Scientific Research and Development (OSRD), to accelerate the creation of military technology to combat the Germans. The chief task of the NDRC and OSRD was to coordinate and facilitate information flow across the many military and scientific research channels, while prioritizing research and development resources on the ideas that would play the most significant role in winning the war.
One of the first things these institutions developed were microwave-based radar systems. Versus their much larger counterparts in long-wave radar systems developed by the US Navy during the 1930s, microwave-based radar systems were small enough to be equipped on US planes patrolling the Atlantic Ocean for German U-boats.
Up until this point in World War II, the German U-boats had been dominating the Atlantic Ocean, virtually cutting of any, and all, supply lines between Western Europe and North America. The German U-boats were months away from starving the British war machine out of oil, food, and basic necessities required to continue the war.
With microwave-based radar equipped air planes, the US Navy and Air Force were able to sink roughly 1/3 of the German U-boat force over the course of 4 weeks. The Germans called all U-boats back in retreat, as a result.
This left the Atlantic Ocean open for Allied supply lines, and led to the eventual Allied invasion of Western Europe at Normandy.
Throughout the course of the war, these Bush-created institutions went on to discover how to mass produce Penicillin, and even how to create the world's first atomic bomb in the Manhattan Project. And after the war's conclusion with an Allied victory, these very same institutions saw to it that all leading German scientists were brought to the US via Operation Paperclip.
The saga continues. And it appears that the saga of innovation lies at a major turning point in the coming years.
I want to preface the remainder of this article with a terminology clarification.
Just as with any sovereign nation, it is healthy to distinguish between the government / ruling elite and the everyday person. You would not find it appropriate to compare a LA based construction day laborer with that of a US Senator; likewise, it is not appropriate to lump 1.4 billion people together under the term “China” and “Chinese”.
While China has made it absolutely clear that they will abide by nobody’s rules but their own internally-defined rules, they are openly stating that they will challenge the US and the existing global order across the board on technological innovation: AI, 5G, quantum computing, nuclear, space, bio-engineering, economics, social engineering, take your pick.
Seem a bit sensationalist? Just review what has been happening in the Northwest of China and in Hong Kong. Does this strike you as the actions of a group who give a damn about international opinion?
Of course not.
Winning is so deeply embedded into Chinese culture that many Westerners underestimate the ends to which Easterners will go in order to achieve their winning means. Suffice it to say the concept of participation trophies flies directly in the face of everything that is Chinese.
Of course, on a granular level one could very reasonably argue that East and West are identical. In fact, they are. Just as with any human, or living organism, it is sequenced into our DNA to compete, win, to survive. So, in this sense of the individual, East is just like West when it comes to winning.
However, that is not what I am intending to discuss. Rather, we are focusing on the structural trends, the developments being done at scale of entire nation-states that supersede whatever any individual may have in mind. The CCP and the Chinese elite have flipped the script on capitalism and are using the Western version of winning (making money) against itself.
The Chinese use access to their massive consumer economy as a carrot to lure in foreign investment, foreign companies, foreign bankers, foreign politicians, and foreign influences.
They then give the individuals in these groups “special access” to deals that always win. How do they always win? Well, the CCP just redirects capital towards these deals so its virtually impossible to “lose”. Unless, of course, you do not follow through with what the CCP wants you to do in return.
Bribery, across the board, in its most flagrant form.
The NBA Twitter expose is only the most recent in a long string of public apologies, knee bending ceremonies, and mouth shutting processes that has seen Chinese capital pocketed by Westerners in the name of the “winning = make money” game. The favored game of capitalism.
Of course, the Chinese game of “winning” is so much more than simply “making money”. It includes things like return to world superpower status, maintain central power, ethnic cleansing, economic dominance , mass propaganda, and the like. You know, the things that come to the forefront in nearly all empires throughout history.
The US-China relations are at an inflection point. There is bipartisan support for a more aggressive, confrontational stance against China among the US political class, yet, the narrative has not yet hit the mainstream because corporate America and Wall Street are still monetizing on China, and these factions own US media.
It is clear is that US-China relations are set to deteriorate. Gross human rights violations against Uighurs is slowly seeping into the mainstream:
It will become increasingly difficult for the media vanguards to ignore this narrative as it becomes common knowledge. One would be well within reason to question the incentive for the timing of an impeachment inquiry that is so lopsidedly dominant in US headlines.
Is it because the American president is targeting the cash-cow of so many?
Wall Street monetizes each and every Chinese IPO in the US market, the MSCI inclusion of Chinese A-Shares is making every banker and wealth management firm money, and it goes without saying that one of the primary funding avenues of Silicon Valley and major media firms is a Chinese one.
Just as we have seen the sentiment shift with regards to the ethics associated with accepting Saudi Arabian money this past year, we will see a major narrative change and sentiment shift associated with accepting Chinese capital.
And just as with any other development, it will be a slow leak, until it becomes a major over-correction.
George Soros values open societies (see his Open Society Foundations) and is one of the largest proponents in investing in democratic societies. For Soros to so plainly openly state that China is now the largest threat to democracy across the world is a major narrative change worth noting.
Soros is a major donor within the Democratic party, in addition to being one of the voices among the US ruling elite that carries weight ($$$) to it.
Leading voices inside of the US Military and its arm of capital managers, including the former Head Admiral of the US Navy, are sounding the alarm on the fact that the hard-earned savings of US armed forces, when invested in any China-affiliated companies, are being redirected towards funding Chinese military applications. Imagine that, the funding of Chinese companies is being directed by the CCP towards funding Chinese military technological innovation – the very thing that will become the focal point of US-China relations moving forward.
Still not convinced we are at an inflection point?
How about listening to the words of Vice President Mike Pence? I recommend you listen to these two speeches, in their entirety, straight from the horse's mouth.
While bullish investors state the MSCI’s inclusion of Chinese A-Shares over the coming decades will create a majorly bullish trend for investing in China, I think this assessment is overly simplified and avoids all short to medium-term nuance. The next metric that bullish investors state is the fact that China's economy is growing at stupendous rates and bucking the trend (aka not extrapolating recent trends out into the future in a linear fashion) is a smart move.
With all of the seeds planted among the US ruling elite, it’s only a matter of time until the common knowledge variable shifts and mainstream opinion becomes one where China and the CCP are not as benign a force as they are currently regarded. This mainstream narrative directly affects the assets under management (AUM) for these investment managers, so they will toe the line only after the shift takes place.
The reality is that in a timeframe more immediate than the MSCI story, capital inflows into China will taper from rates that we’ve been seeing over the last 10 years, and these flows will be redirected to North American shores and the USD.
The US government is clearly on a track now that looks to re-assert the common knowledge of its dominance financially, militarily, and intellectually.
Trump needs to win a re-election, while Xi needs to secure his supply lines (food, resources, energy) and shore up his domestic credit markets.
It seems reasonable to expect that team Trump will do everything in its power to ride a "Trade Deal" and "strong" US economy into a re-election. Upon re-election is where reality will set in, and counter parties will understand who they are dealing with over the next 4 years.
And this is where I expect things to become truly volatile.
This is the time horizon one ought to be positioning now. Look no further than long energy, long security, and long shipping. Trump will have solidified himself as the US President (although I do not anticipate domestic backlash to this presidency to subside any) and the military advisers and economic strategists will have had more time to analyze asymmetric moves the White House can take against the CCP. Given the plethora of options, it does not take the brightest tool in the shed to come up with an actionable game plan.
On the flipside, Xi will likely have consolidated his own power base and will have re-directed resources into the areas that matter most: food supply, energy supply, and reigning in a reckless credit supply.
On the US end, things are more open ended. The Trump administration has the flexibility to acquiesce to CCP hardball, if this aligns with his PR campaign of closing deals and restoring jobs leading to a strong election campaign. Should the trade deals or campaign begin to move sideways on the Trump administration, they’ll have to exercise their ace in the hole.
Folks, the leaders of the free world are equating the leaders of the Communist world to the worst stains of the century. The rhetoric only goes one way from here, and that’s why I suspect the negotiations between the White House and CCP will take much longer than many currently suspect, with the elephant in the room being whether or not the US side decides to make it common knowledge that human rights violations are transpiring, which will unite the international community against the CCP using the Magnitsky Act as cover fire.
Instead of being an if question, it appears to be a when question. When will the White House begin outlining the nature of these human rights violations? Will it be hawkish and release PR barrage to gain the upper hand in the negotiations? Or will it be dovish and keep this ace in hole reserved as leverage in ongoing talks that will shape the global economy and the power balance after the US election is over?
I suspect the latter, yet politics and domestic elections could throw a curve ball into this.
Regardless, it also seems apparent that the next US election cycle appears to be developing as one of the most nasty, divisive ones in recent memory. All throughout history the only thing that supersedes and internal enemy (in this context politics) is an external enemy (China).
Whether this outline becomes common knowledge within the next 12-18 months or within the subsequent 4 year term, what is evident is that the technology sector is topping.
The headwinds have been touted ever since 2009 and VC’s have deflected (and been proven right by the market) this perma-bear style prognostication for quite some time.
However, the risks associated now include sovereigns moving forward with examining monopoly structures, data rights, censorship, cybersecurity and IP theft concerns, the two largest economies upon the verge of entering very dangerous rhetoric, while the rest of the world watches and will have to pick sides.
All this while US military willfully leaves it’s legacy world order police role and withdraws troops from the Middle East and NATO outposts. After the Saudi attack, the Saudis paid the US to deploy forces. We’re now a mercenary force.
While the morals behind this will be debated all day, the economics make sense. And moving forward it appears that economics are beginning to matter again.
And within tech, specifically, this means profits; something that’s a rarity these days.
Chart of unprofitable IPOs
The other major lever that Western governments and lobbyists can pull with regards to bringing public perception around on this anti-CCP agenda is one of the environment. Nobody is more egregious in its environmental impact than China.
Without going too deeply into this, I’d rather just leave a bread trail for you to do your own research on this matter and draw your own conclusions:
China is not a leader in environmental protection, they are its biggest antagonist: https://thediplomat.com/2019/10/is-china-still-the-global-leader-on-climate-change/
Bond markets refer to the debts of governments around the world. Currently 15-17 TRILLION in debt, which offers you virtually no interest (yield), meaning they are very vulnerable to losses.
Greek bonds just began trading at a negative yield. In 2012, Greek bonds had a 35% yield, now they are at -0.2%. The way to think about it is the higher the yield on a bond, the higher the risk. So in 2012 after the entire nation went bankrupt, Greece had to offer investors a 35% yield (return) just to buy their bonds. Only 7 years later and still financially distraught Greece has bonds that are trading as if they are safer than US treasuries.
The whole bond market is distorted, and we are talking hundreds of trillions of dollars (taking into account correlated derivatives). Take down the bond market, and everything levered on top of it will collapse, as well. This is the nuclear option, but the US has exercised the nuclear option multiple times throughout its history as world hegemon.
In the interim, crypto-assets remain intact for a blow off top as the broad bond and equity markets remain in a bull run, particularly those that are US based. The cracks are emerging all across the globe (Lebanon, Chile, Argentina, Syria, etc.) and let us not forget the economic (bond) dumpster fire that is Europe.
All eyes are on US-China in the championship finale match, and it seems naïve to expect the US to hold any punches moving forward beyond the upcoming US election cycle. The military industrial complex and the greatest weapon of all, the USD, will be leveraged in step with the longest ebb and flow throughout man’s history: “communism v democracy.” “socialism v liberalism”
The next stage of this battle will take place in digital battlefields.
https://www.coindesk.com/tencent-says-libra-would-pose-serious-threat-to-alipay-wechat-pay
From a practical sense, it's certainly time to review your exposure to big tech stocks and bonds (including pension, insurance, retirement accounts, etc.). If you are passively invested in any 401k funds, ETF's, mutual funds, etc. I can virtually guarantee most of your holdings are tech stocks (i.e. Facebook, Apple, Amazon, Alphabet - Google, etc.) and bonds (US treasuries are one thing, but make sure you don't hold any European or Emerging Market bonds). Both bonds and equities are now correlated to each other when most financial "experts' will tell you that they are uncorrelated, but this is an outdated model.
To be clear, I am not suggesting you panic and sell off all of your big tech stocks and bonds, rather simply suggesting reviewing where your money is currently being stored and re-allocating and diversifying some of these holdings over into energy stocks as a smart move for the next ~ 5 years.
While everyone talks about trade wars, the anti-China narrative is picking up big time. I imagine this narrative will reach new heights once the Dems select their running candidate and Trump hits the campaign trail (only a few months away). The major winners over the last 5-7 years stand to take a notable hit as Chinese capital retreats and "woke" US investors start to retreat from US businesses who bend the knee to Communist China in the name of maintaining profits and international growth metrics.
For reference, I am personally long tech (via cryptocurrencies + career choice) and remain heavily hedged with energy stocks, commodities, and liquid cash. This is my barbell strategy.
Here are some of my pieces I recommend reading:
(1) Commodities
(2) Gumption of Growth
(3) Energy
(4) Cryptoassets
“Progress in the war against disease depends upon a flow of new scientific knowledge. New products, new industries, and more jobs require continuous additions to knowledge of the laws of nature, and the application of that knowledge to practical purposes. Similarly, our defense against aggression demands new knowledge so that we can develop new and improved weapons. This essential, new knowledge can be obtained only through basic scientific research.” - VBush
