“Appear weak when you are strong, and strong when you are weak.” Sun Tzu, The Art of War
Good morning and welcome back to Bygone Relics, I’m C Thomas Printer and today we are going to live recklessly. It can be easy to follow the crowd, and simply repeat what others are talking about and that can be informative. We often do that to better understand the environment that we are in and where the opportunities are lying ahead. Sometimes it pays to be risky- if you have ever played a sport and you throw the ball or kick the ball to where you think a teammate is going to be it can end really well or really poorly. You risk looking very foolish if you are wrong, but you are often Paulina’s dad if you anticipate correctly. I want to share a possible anticipation today. There are clues that this could happen and there are perhaps parts of this that will happen and parts that won’t. But I want to discuss China today.
China’s great reopening is not going well, and it could be because they are operating at less than full capacity. They appear as weak as they have in 30 years was a headline I heard today. But I also heard a podcast a while back and maybe it was a year and I apologize to the author, but I went back looking and couldn’t find it, but they were talking about how China was asking and probably telling companies that you need to set aside “x” part of your company for the war effort. This was a year ago or maybe more, yet it stuck with me. I know how patient they are. I said that I thought they were going to invade Taiwan months ago and I was wrong then and the ball went incomplete as my receiver went the other way leaving my foot in my mouth. However, that doesn’t mean that it isn’t going to happen. Perhaps the Chinese are more patient than I or they got more information that makes a later invasion more productive. They are constantly running drills around the island of Taiwan. Think of the story of the boy that cried wolf. If you always say “here they come” eventually your concern becomes less and less. Eventually, that practice drill will be the real thing, and no one will spring into defense because of apathy. Make no mistake, they are planning and preparing for war. If the country has been asking companies to set aside production capacity to fuel the war effort, then what else are they missing to fight a war. They are missing soldiers or draft age young people. Last week China announced they are no longer going to be listing the unemployment rates for their young people. It seemed a weird statistic to no longer publish and most people thought it was to conceal and “save face” with a glaring demographic and employment problem. What if it is to prepare those kids for war? They will need fighting age soldiers and there is a bunch of them right now that are not working and are of the proper age.
George Gammon over at Rebel Capitalist had a video on Youtube talking about China’s Zhongrong aka China’s Blackstone not making payments on their debt. He said it could be China’s Lehman Brothers moment as Zhongrong is the largest player in the China’s shadow banking system. Everyone is talking about how China’s slowdown could affect the financial markets. What if China is playing a different game. What if we are playing monopoly and China is playing Risk. The yuan is very weak right now, Evergrande and the housing market is very weak, and now it appears that their shadow banking system is very vulnerable. If China were to invade Taiwan, they might catch a country napping. No one would expect it or at least they would be less suspicious considering these drills have been practiced and practiced. China has also watched the US military supply Ukraine with weapons for over a year, and frankly our weapons supplies are very low. Neil Howe, author of the 4th Turning, said that should a war break out in the Pacific rim, the US would be out of missiles in 48 hours. Despite what Inspector Jack Cates and Reggie Hammond can do in 48 hours, it isn’t a lot of time. In June, President Biden was criticized for letting it slip that the US was running low on 155mm ammunition rounds. People in the military were quite upset that he would spill military secrets like that.
What if the Ukraine invasion is a smoke screen? What if it is a rope-a-dope? It is a boxing maneuver where one boxer leans on the ropes and covers up as if hurt and allows the other boxer to exhaust their energy leaving them vulnerable to a counterattack? What if the Ukraine is designed to deplete American weapons inventories. America has repeatedly said that we will defend Taiwan. We also told Ukraine in the Budapest Memorandum in 1994 that if they gave up their nukes, we, along with the UK and Russia, would defend their sovereignty if they were to be invaded. Ukraine has grain and it seems that our obligation to them has been to write a check. Taiwan, though, is another story.
“Begin by seizing something which your opponent holds dear; then he will be amenable to your will.” Sun Tzu
Taiwan is strategically important in the Pacific, but it also produces 70% of the world’s semiconductors and around 90% of the world’s most advanced chips. The chips that go into our most sophisticated military devices and weapons are made there. During Covid, the US couldn’t get enough masks, what do you think would happen if we are out of chips and bullets? As David Sacks writes in the Council for Foreign Relations, “A Chinese attack on Taiwan…would also trigger a global economic depression and shave trillions of dollars off global economic output…leading to a shortage of nearly every product that contains technology, from smartphones to computers to cars.” What about military weapons? The Department of Defense has warned about this issue for years. We are very dependent on China and what happens if we have to go to war with China? If China invades Taiwan what is to happen to Taiwan Semiconductor? That company produces all of Nvidia’s chips. What would happen to the stock market darling if their source of chips disappeared. If Nvidia couldn’t get chips their stock price, which is up 200%, crashes as they can’t fulfill orders. The stock market is being led or held up by the Magnificent seven, that is what they are calling the handful of stocks that are leading the S&P 500 back to the highs of 2001. Apple, Microsoft, Nvidia, Netflix, Facebook, Tesla, and Amazon, do any of those stocks require computer chips? Taiwan is very dear to America’s standard of living, almost scarily so.
“To fight and conquer in all our battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting. Every battle is won before it is fought.” Sun Tzu
Let’s look at this from another point of view. China has quietly been stealing intellectual property from the US for years. I don’t think even the Chinese will dispute that. Look no further than the rare earth material industry which was dominated by the US, and we shared our technology with the Chinese and now they dominate the industry at the mining and assembly level. Along came Donald Trump in 2018, and he put in tariffs against world products and in particular Chinese products to make America great again. China responded with some tariffs in kind, but what I think happened was akin to what happened with Russia. Hold on America, we are good trading partners, and we manufacture the dirty things that your environmentalists won’t allow you to make in your country and then we send it to you in a bright new package with a pair of ear buds or a plug in for your solar panel or a wind turbine to go with the nacelle. What if China felt as violated by our heavy hand as Russia did when we put sanctions on them and stole their foreign reserves.
China knew that Trump was a wild card, but that his biggest weakness was his bluster and his belligerence. Frankly, that’s my opinion on why he isn’t President now. China used this weakness against him. How? Fast forward 2 years and a disease comes out of China and shuts the world down. In hindsight it wasn’t nearly as bad as the hype. It was a serious pandemic, but what was catastrophic was the response to it. In the American consumer driven nanny state, after shutting down our economy and seeing a market crash our leaders like Trump couldn’t stand to see the embarrassment of that happening on their watch so the American government spent more money on Covid than anything in history. For almost $10 trillion dollars they avoided, temporarily, a massive recession or worse. That would be humiliating for Trump. They knew he would do anything to avoid that. Trump has the spending record, but Joe Biden is catching up quickly even when he is doing it at lower levels than Trump did. The American government expanded the money supply so severely that people were paying $3k for stationary bicycles and buying computer code nft’s and meme stocks and the inflation headache loomed and now here it is coming. $32 trillion dollars and Janet Yellen is watching the 10-year US bond go higher and higher when she is needing to sell more bonds to support Joe Biden’s fiscal plans. We are trying to slow down the economy and inflation and Biden is stepping on the gas. China knows Biden’s biggest weakness is incompetence. He pulled the US out of Afghanistan in such a hurry the Taliban almost boarded the planes. He was VP when Russia took Crimea and he and Barack did nothing. He has written checks to Ukraine, which America doesn’t have and can’t afford, since Russia invaded. He is running war time deficits in peacetime and calling it Bidenomics. China even flew a balloon across our country, and nothing happened.
So what if China planned this with some level of precision…game theory style. We make the American government spend right to the edge of their bonds going vertical. What does that mean? It means that if our government lost the ability to sell bonds to anyone else at anything but higher and higher rates then they would have to stop spending because they would be out of money, or the Fed would have to step in and buy the bonds like during Covid. This would accelerate inflation like a prairie fire with a wind. Economically, we are in a very tough spot right now. Let’s say they decide to dump their US treasuries on the market or perhaps just threaten to do so. Who would buy the bonds, and at what price, I ask you again? Who would buy Janet Yellen’s next auction of bonds? What if what China has seized that we hold dear are the bonds that could push our treasury market to break? America is already spending more than it can afford and although the US Treasury market is called the biggest and deepest market in the world, the volatility of moves for the last few months shows you that it is anything but stable. What if they use the threat of using the BRICS currency and dumping the bonds and having all of their new partners dump their bonds? What could a bankrupt spend crazy America do unless it wanted stagflation or worse. Remember that in World War II, the US Debt went up 5x. That would be a 160 trillion debt. Annual US GDP is 23 trillion. All of it. At that point China could take over Taiwan without firing a shot against America, because America would be out of bullets, out of bonds, and not have the manufacturing to produce a wartime response.
“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.” Sun Tzu, The Art of War
Now you may not pick up all of what I am putting down and I might swing and miss on a few points or angles, but consider this: Apple is moving Foxconn I-phone manufacturing out of China as fast as possible, Warren Buffett sold Taiwan Semiconductor after buying it months before, and even Bond King Jeffrey Gundlach called China un-investable just last year. Perhaps you won’t listen to me, but you can always watch what those much smarter than I are doing.
Sincerely Yours,
C Thomas Printer
On this date in history… 2 years ago to be exact the United States withdrew from Afghanistan. People were dangling off planes as the humiliated military left in shambles.
Today’s thought exercise was today’s thought exercise. When you vote for politicians of either party and they aren’t willing to do what is in the long term best interest of the country but instead bow to popularity we get today’s frightful scenarios.
Also born on this date… the greatest, the greatest, and the greatest. An investor, a baseball batsman, and a boxing cornerman. Warren Buffett, Ted Williams, and Angelo Dundee.
US running low on Ammo according to Joe