China Risk
is Potentially Far More Than a Trade War; What is the Feds Real Goal?
By Victor
Sperandeo with the Curmudgeon
Introduction
(Curmudgeon):
While the trade war with China is continuing, many may have
missed a new threat from China: the
possible invasion of Hong Kong to quell the protests and unrest there. Last Wednesday, a senior Chinese official in
charge of Hong Kong affairs warned that Beijing would intervene if the local
government proved unable to contain the violent protests, the most explicit
threat of intervention to date from the central government.
At a meeting with Hong Kong representatives in the nearby
city of Shenzhen, the official, Zhang Xiaoming,
issued a dire assessment of the
situation in the territory after more than two months of protests. He called
the situation the most severe since China resumed sovereignty over Hong Kong in
1997.
If the situation worsens further, and there is turmoil that
the Hong Kong government is unable to control, the central government
absolutely will not just watch without doing anything, Mr. Zhang, director of
the Hong Kong and Macau Affairs Office of Chinas State Council, said in
remarks carried by official state media.
China has in recent days expressed its concern that the
protests were spiraling out of control and challenging Chinas sovereignty over
the territory, a former British colony that has limited autonomy under Chinese
rule. The demonstrations started as protests against
an extradition bill proposed by the local government but have turned
increasingly violent and pointedly critical of Chinese rule, with protesters
targeting the national flag and state seal.
Mr. Zhangs warning of intervention was more direct than in
recent days when officials signaled that Beijings patience was wearing thin. A
day earlier in Shenzhen, more than 10,000 mainland China police officers ran
through anti-riot drills, a video of which was circulated widely online as a
show of force.
UNCONTROLABLE REAL RISK
(Victor):
We have pointed out many risks over the years in Curmudgeon
posts. Few paid attention.
The key to understanding real risk is that it has to
be something the Central Banks cannot do anything about it. That implies
geo-political risk that could precipitate an invasion or war.
Over the last 10 weeks, over 1 million Hong Kong (HK)
residents have gone into loud and vast protests, mainly due to a proposed
Chinese law that would force extradition to Beijing to be tried for certain
(political) crimes. That would end their
liberty and institute tyranny in HK.
Carrie Lam, HK Chief Executive since 2017 (and a Chinese pawn), withdrew
the extradition bill after 2 million people rallied in the streets against
it. However, she did not kill it.
As a result, the protests continued with XI Jinping,
President of China for life and Head of the Communist Party threatening the
Hong Kong people with harsh punishments almost daily (see Introduction above).
Memories of the 1989 Tiananmen Square massacre are vivid in
Asias mind, where a reported of 800-8000 Chinese protesters were killed,
although the official number reported by the Chinese government was 241. No one
knows the real death toll, but a secret British cable put it at least 10,000
people.
Chinas President XI has a real dilemma to deal with, which
may literally affect the whole world. If
he allows the protests to continue, he may cause contagion to the China mainland,
where hundreds of millions of Chinese (total 1.4 Billion population) may start
to make demands of freedom. If he sends the Peoples Liberation Army (PLA) into
HK [1], and they start killing
~100,000 HK protestors, that would cause the end of China trade as you know it.
Note 1. The HK army has 2,285,000 active frontline personnel with
2,300,000 in reserves.
Meanwhile, demand for physical gold in mainland China at the
retail level is so extremely strong that many people do not mind paying the
reported 7% premiums above spot prices there. Also, there are reported to be
developing shortages of gold bullion in mainland China at the retail
level. Check out this YouTube
video for more details, insight and perspective.
..
Chinas Future and What
Might Happen in HK:
Chinas future is partially based on the Belt and Road Initiative (BRI), which is a global development
strategy adopted by the Chinese government involving infrastructure development
and investments in 152 countries!
"Belt" refers to the overland routes for road and rail
transportation, called "the Silk Road Economic Belt;" whereas
"road" refers to the sea routes, or the 21st Century Maritime Silk
Road. It is estimated to cost just under $1 trillion a year for the next 10
years.
If the Chinese PLA [2]
kills innocent protesters, who are totally unharmed (selling guns in HK is a
Capital Crime), the end of this long term BRI plan would be in question, as many nations would not deal with mass
murdering communist oppressors.
Note 2. The PLA carry fully automatic rifles (e.g. QCW 5.8 suppressed
sub-machine guns).
But what if Chinas Communist authority is questioned? One observation
that President Trump is learning from the trade negotiations is that the Chinese dont back down, and they dont
bluff!
It appears the HK people are willing to die for autonomy from
China and democracy within HK, as the law prescribed in 1997 ("One
Country, Two Systems") when China obtained control of HK and Macao from
Britain.
This will be an important an interesting development. It also
raises huge questions for Macao and Taiwan (both claimed to be an integral part
of China, but Taiwan government doesnt accept that)?
·
If China sends troops and
many people die, I suggest China (and the world economy) will suffer greatly.
The Renminbi (RMB) aka Yuan will spike to 9-10 from the current 7 RMB=$1.00.
·
Gold will hit $1800 fast.
·
Equity Markets across the
world will be down 20-25%.
·
U.S. Bonds will make all-time
highs in price (lows in yield).
·
Oil will go below $50 towards
$40 and stay there.
·
The dollar should decline (?), but that is a question I dont
feel with confidence. I do know the world will be much different than it is
today.
ALTERNATIVE VIEW
(Victor): Does anyone really care if
China was to invade HK?
The world does not care about HK, only themselves, and would
not dare hurting their own economies to rattle let alone condemn China. Its possible... as everything these days is
about power.
I say this because a
trader I respect offers great skepticism of the world and the people. He could
be right and I am wrong. You all can form your own opinions here. World leaders love
condemning people who have no effect on them. But everyone does business with
China? Would they stop doing business?
If one wishes to understand XIs mind I suggest readings
from Chairman Mao Zedong. Im told
by a historian and brilliant Chinese philosopher, who grew up in Beijing, that
XI Jinpings idol was Mao who stated: Every Communist must grasp the truth -
Political power grows out of the barrel of a gun." This is a slogan popular among
Marxist-Leninist-Maoists.
COUNTER-POINT from
Geopolitical Futures: Mainland Chinas government does not seem
to feel compelled to intervene Tiananmen-style in Hong Kong
Spokespersons for
Chinas Hong Kong and Macau Affairs Office gave a fairly
bland press conference on Monday, repeating some platitudes about how
bad the demonstrations are for Hong Kong and scolding foreign countries that
have criticized China over the protests. That is remarkable on the face of it.
One of the primary roles of the Chinese state is to maintain social harmony. A
Chinese state that is unwilling or unable to ensure social harmony will not
remain in power for very long. But this Chinese state is neither of those. This
is a Chinese government that has elevated Xi Jinping to the de facto position
of emperor-in-chief and is busily attempting to remake Uighurs in the image of
the Han via reeducation camps. China is not intervening in Hong Kong because
it chooses not to.
ADDENDUM - NORMAL RISK
and CENTRAL BANKS:
For the past 10+ years, normal risk of economic and financial
market weakness has been subverted by ultra-easy monetary policies pursued by
the Fed and Global Central Banks. In the
past week, Australia, New Zealand, India, and Thailand all cut short term
interest rates.
On August 7th, the Reserve Bank of New Zealand
(RBNZ), cut its short-term rates 33% - or by 50 bps -from 1.5% to 1.00%. RBNZ was unique in stating WHY it was cutting
rates by one third, without the usual made up excuses, like from Fed Chairman
Powell) about a mid-cycle adjustment. The RBNZ stated reality in listing the
specific reasons for their rate cut:
Inflation is below
target; GDP is slowing; Employment outlook is also slowing; Global economic
conditions weakened.
It is almost surreal to
read a Central Bank saying something honest for a change. This is the issue that the U.S. Fed has verbally ignored
since at least late last year.
It may be interesting to note that from 1926 to date the
spread between 30-year U.S. Treasury bonds and one-month T-Bills was 213 bps.
U.S. Bonds compounded at 5.47%, while 30-day T-bills compounded at 3.34%.
Today, long term bonds yield 2.25% and one-month T-Bills
yield 2.05% for a spread of 20 bps or 11 times lower than the 93-year
norm?
It takes a deaf, dumb,
and blind man (or a lying fool fed official) to not see something is terribly
wrong with this rate comparison. Not to mention, the U.S. has an inverted
yield curve: The Fed funds rate is 2% bid, while the 10-year T-note yield is
1.72%. The FOMC obviously has a different agenda than the country or what they
say in public.
What about Inflation? The Commodity Research Bureau Index (CRB Index) made a yearly low
(-1.12%) this week on August 7th.
That is a low going back to August 2017. The Feds preferred inflation gauge is the Core PCE
Price Index, which excludes prices of food and energy. It increased 0.2% month-over-month in June of
2019 and 1.6% Year-over-Year.
Truly, all of the above begs the
question: what is the Feds real goal?
Closing QUOTE:
Bill Murphy, Chairman of the Gold Anti-Trust Action Committee
(GATA), says the market manipulators and price suppressers of gold and silver
are fighting a losing battle. Gold is at all-time highs in 73 different
countries.
Good luck and till next time
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies and government
policies. Victor started his Wall Street
career in 1966 and began trading for a living in 1968. As President and CEO of
Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and
development platform, which is used to create innovative solutions for
different futures markets, risk parameters and other factors.
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