Have we reached ‘peak China’?

Wednesday, 27 April 2022 — Albert Park

[6 min read]

Dear Reader,

In his latest editions of The Daily Reckoning Australia, Jim Rickards has broken down the myth of the Chinese ‘growth miracle’ and explained some of the most significant headwinds the Chinese economy faces. But instead of making us safer, this could actually lead to a bigger threat from China.

This almost inevitably leads to a big question — will there be a war with China?

Jim does his best to answer this below and explains just what it could mean for your investments. It might be one of his most important reads yet…

Read on to learn more.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t forget to check out this latest report from our small-cap team on what they're calling the ‘next lithium’. These are the kind of stocks that can turn $1 into $5…or even more!

Dear Reader,

Chinese aggression and the allied response have inevitably triggered questions about the potential for war between China and the US and its allies. This risk was described in the bestselling book Destined for War: Can America and China Escape Thucydides’ Trap? by Graham Allison. Allison discusses the Thucydides’ Trap, named after the ancient Greek historian of the Peloponnesian War.

Thucydides viewed the Peloponnesian War as an almost inevitable conflict between a long-established military power, Sparta, and a new rising power, Athens. Allison’s thesis is that the established power and the rising power will have many competing interests and eventually come into conflict to see which could emerge as the sole hegemon.

Allison identified 16 cases of the Thucydides’ Trap in the past 500 years. 12 of those cases (75%) resulted in war. That’s not an encouraging track record regarding the potential for a US-China conflict.

An even more sobering analysis comes from political scientists Hal Brands of SAIS, and Michael Beckley, of Tufts, in a recent article called ‘China Is a Declining Power — and That’s the Problem’ in the journal Foreign Policy. Their thesis turns the Thucydides’ Trap on its head.

Brands and Beckley make the point that a rising power should be in no hurry for war. If you’re the rising power, why not wait until your power grows even greater? The stronger you become, the greater your prospects for winning a war. If you become strong enough, you may even be able to dictate geopolitical outcomes without war.

But what if you are not getting more powerful? What if your power has peaked and your prospects are for diminished power on a relative basis? This can be encapsulated in the phrase ‘peak China’.

The dangers of ‘peak China’

Brands and Beckley’s article points to the growth of German power between German unification in 1870 and 1914 and the growth of Japanese power between the Meiji Restoration of 1868 and 1941. Both empires realised that their power had peaked, and they had little chance of gaining further against the British Empire (in the case of Germany) or the US (in the case of Japan).

Germany started the First World War in 1914 and Japan attacked Pearl Harbor in 1941 not because they were getting stronger, but because they were as strong as they were going to get — given natural resource constraints, geographic realities, and the still growing power of their adversaries.

This is exactly the position China finds itself in today. It has grown enormously powerful since 1994. The US seems to be at one of its interim low points under the hapless leadership of Joe Biden. Still, China realises it may be at peak power and will be economically and socially diminished in the years ahead.

If that’s the case, and if China wants to dominate its region, then the best time to start a war is now. It’s not that China has all the power it wants. It’s that China has all the relative power it’s going to get. This creates a now-or-never dynamic that could lead straight to war.

Investor advice? Get out of China, now

A new Cold War between China and the US began in the early 2000s and was plain to the most astute analysts by the global financial crisis in 2008. The global policy elites are just waking up to this reality today.

The New Cold War is already being fought in the arenas of cyberspace, outer space, intellectual property theft, trade wars, and currency wars. If Brands and Beckley are correct (and in my view, they are), then the peak China dynamic could become a shooting war that would turn the New Cold War into a Third World War.

China’s best case is slowing growth, debt defaults, financial panic, and a diminished role in world affairs, as Western powers finally push back against Chinese aggression. The worst case is collapse and disorder inside China as the result of a shooting war, or as the result of Chairman Xi’s lost Mandate of Heaven and regime change.

China’s stock market and its currency have yet to reflect the country’s deteriorating prospects. US Treasury debt, gold, silver, land, fine art, and cash in dollars will be safe havens that investors should look at.

For a speculative bet against China’s stock market and currency, you may consider a small portfolio allocation to the Direxion China Bear ETF [NYSE:CHAD]. It’s an inverse ETF. CHAD returns the inverse of the daily performance of the CSI 300 Index of Chinese stocks and would rise sharply during a China bust. CHAD is a bet against Chinese A-share stocks, which will be on shaky ground.

Investors cannot say they have not been warned. There is still time to get your capital out of China, but don’t wait. Peak China is real. Matters are coming to a head quickly. We will not have to wait long to find out how this story ends.

All the best,

Jim Rickards,
Strategist, Strategic Intelligence Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

Dear Reader,

An advertisement appears on the side of our email. It offers us — in Spanish — ‘fashionable clothes for fat women’.

This appears to be a case of logarithmic disorder. The computer coding that was supposed to identify fat mujeres seems to have stumbled onto a thin hombre.

Another ad served up to us often shows a picture of two gay guys holding hands. It offers ‘Insurance Programs for Every Lifestyle’. Another logarithm is out of tune. The lifestyle it had in mind was not ours.

The promise of the internet was that it could connect an individual more efficiently with what he wants and needs. But we neither want nor need a plus-size summer dress. The ad for an insurance policy that will pay off to a gay ‘partner’ missed its mark too.

But the glories of the internet/metaverse age were always overrated…and overfunded. Too much cheap credit created a monstrously weird and dysfunctional economy, with wealth destroying companies supposedly worth billions and debt up the gazoo.

‘Information’ — ubiquitous and free — was supposed to make real savings unnecessary. Growth was supposed to accelerate…leading to untold happiness and prosperity beyond our wildest dreams.

Instead, we got TikTok, Shiba Inu, NFTs, de-platforming, Uber Eats, and a generation of illiterates. But at least now, we don’t have to think…we just have to see what’s ‘trending on Facebook’. LOL! As for the much-awaited growth, it never showed up. Instead, GDP rates fell and averaged only about half of those of the pre-internet days.

And now, that monstrosity of an economy, created by the Fed’s absurd interest rates, is in trouble.

A casino for lunatics

The Dow sold off nearly 1,000 points on Friday. The futures pointed to more losses this past weekend. The proximate cause, according to the press: the Fed’s long-lost, but now found, desire for more normal interest rates.

But the Fed is ‘hoist on its own petarde’, so to speak. It pushed interest rates down to ultra-low levels…kept them there for way too long…funded the government’s jackass gimmie/stimmy programs…and now finds — what a surprise! — prices are rising.

Jerome Powell, Fed jefe, tried to ignore it, tried to dismiss it, and tried to excuse it; but there was no doubt where inflation came from.

The artificially low interest rates twisted and disfigured the entire economy. Investors became credit-crazed gamblers. Businessmen became short-sighted profiteers. Households rushed to refinance their homes…again and again, trading up each time. And the feds used the cheap money to support the fantasies, caprices, and skulduggeries of the whole elite class. Sex change operations for active-duty soldiers, a US$1,000 a month of guaranteed income to young, unmarried mothers in Baltimore, US$30-plus trillion in capital gains to the rich — what else could you want!

Wall Street was turned into a casino for lunatics, where people borrowed at below zero real interest rates to bid up prices on loss-making companies, using money that didn’t exist.

We remind readers that when a company loses money, it makes the world poorer. And the US’s Silicon Valley losers destroyed more real wealth than any group of companies in history. Zillow, Uber, Airbnb, WeWork, Snap, Pinterest, Peloton, Dropbox, Amazon — the losses were staggering. Even the profitable companies were absorbing and destroying capital far beyond what they were actually worth. Capital was so cheap that billions of dollars were invested in companies that — though ‘profitable’ — could never actually repay the money needed to get there.

It was like borrowing a million dollars — without paying any real interest — and using the money to set up a high-tech lemonade stand. Your customers can sit in special booths and play video games…they can use ultra-high-speed broadband to check their email. They can use your 15 unisex bathrooms and showers to clean themselves up…and use your state-of-the-art conference room for business. You pay an interest rate on the million dollars (in real terms) of MINUS 5%. Then, you sell one glass of lemonade and announce that you are profitable. But the ‘profits’ bear no relationship to the money that has gone into the enterprise. You are ‘profitable’, but you are still destroying wealth, not creating more of it.

But now, inflation is making life difficult for the Fed. Energy, resources, labour — everything is getting more expensive. And from the looks of producer prices (which will be passed on to consumers), ‘double-digit’ inflation will be here soon.

Bounce less

So it’s ‘inflate or die’ time. Either the Fed continues to let the cheap money pervert the economy…or its monstrosity must die.

Wait…here comes another ad:

‘Bounce less with a better sports bra’. Whatever jiggle it was meant to alleviate is not a concern for us.

And over on our telephone, some rascals seem to have planted a virus. About five times a day, it warns us that it is going to reveal our ‘porn history’ unless we do something. We’re still waiting.

After all, if we’re going to look at porno, we’re not going to do it on a telephone…we’ll want a big screen!

Regards,

Bill Bonner,
For The Daily Reckoning Australia