Cold War II will escalate on Thursday

Thursday could be one for the history books.

I won’t beat around the bush. Let me tell you why I think an event that day is worthy of your attention, be you an investor or an observer with an interest in where the world is heading.

Back in June, the US Vice President Mike Pence was scheduled to give a speech. It was to be his second major presentation on how his administration was going to take on China. However, it was cancelled at the time for being too incendiary.

But the day after tomorrow at 4pm UK time, he’s gonna do it. And he won’t be beating around the bush either.

Why is this important?

US engagement with China is what has driven the world’s economic growth for the last 40 years. Entire industries have been born from the two powers trading together. Entire investing careers have been built on taking the products of this relationship for granted: ever more globalisation, financialisation, higher corporate profits and low inflation.

As that relationship shifts from co-operative to competitive, if not outright confrontational, all of those conditions stand to either stop or go into reverse – ie, every stone investors have come to stand firmly upon could crumble.

What makes you so sure Pence’s speech will antagonise China?

For an idea of what the VP will say in his second China speech, it’s well worth remembering what he said during his first major speech on China, a little over a year ago. Here are a few notable excerpts, I’ll link to the original speech at the bottom of today’s letter:

“I come before you today because the American people deserve to know. As we speak, Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States.

“… previous administrations all but ignored China’s actions – and in many cases, they abetted them. But those days are over.

“America had hoped that economic liberalization would bring China into greater partnership with us and with the world. Instead, China has chosen economic aggression, which has in turn emboldened its growing military.

“We will not be intimidated; we will not stand down.”

I said his remarks back then were the opening shot of Cold War II, a formal declaration by the US that China’s rise must now be confronted.

I expect his second speech will further up the ante, and make it ever clearer to investors that this is not a “trade war” at all, and nor is it a phenomenon that’s limited to the Trump presidency. It is a clash of great powers that will split the world which I’ve known all my life, a grinding of tectonic plates which will produce all manner of earthquakes.

What makes you so sure his stance hasn’t changed?

Consider that Pence’s speech was originally scheduled to be made 4 June – the 30th anniversary of Tiananmen Square – prior to being postponed due to its aggressive nature.

Consider that since then an independent tribunal here in London concluded that the “indescribably hideous” practice of forced organ transfer was ongoing in China. A crime against humanity in which religious minorities and other enemies of the state are murdered for their organs, being given a thorough health inspection upon their internment in “re-education camps” (DNA, ultrasound, tissue and blood test) to assess the quality of their organs to then to be killed when a bidder arrives in a diabolical disassembly line.

US intelligence estimates up to 3 million people are in those camps, and crematoria have been rapidly constructed nearby, along with job adverts for “stouthearted” security guards to man them.

The governments of developed countries around the world have turned a blind eye to this in order to get a slice of China’s growing economy. This US administration is not – a couple of weeks back the US Department of Commerce blocked 28 Chinese companies from buying US products or importing US tech.

Pence brought up the oppression of those religious minorities in his first speech. Pence may use his second speech to shame other developed governments into joining the US’s side in containing China, and broadcast the crimes against humanity as loud as possible. He may even go “nuclear” and make a direct comparison between how the West views Xi’s China with Nazi Germany in 1940, as an Australian MP did recently (a further indicator that we’re in Cold War territory).

But what about Trump’s trade deal?

You may not think that the VP would do this as it could jeopardise any hopes of a “deal” from Trump, and hurt his re-election chances. I don’t believe any such deal will be forthcoming anyway, but further antagonising China may be an election gambit in itself.

Countering China’s economic and military rise has become a bipartisan issue, as all large threats to government eventually become. Mercantilist economic policy is being drawn up by Democrats and Republicans alike, like Elizabeth Warren’s “economic patriotism” initiative.

Its protectionist principles include “Deploying the massive purchasing power of the federal government to create markets for American-made products”, “actively managing our currency value to promote exports and domestic manufacturing”, “Aggressive Intervention on Behalf of American Workers”, and “Increasing export promotion to match the efforts of our competitors.”

With economic integration with China ever less politically protected, when Pence shows up at the Conrad Hotel on Thursday, his aim may be to portray his administration as the most hardline on China.

The man is an interesting character. During the run-up and after the 2016 election some observers were saying Trump had made Pence his VP as an insurance policy against being assassinated or otherwise being removed from office. As the people who hate Trump likely hate Pence more for his socially conservative attitudes, they’d be less likely to oust Trump as it would lead to a Pence presidency. I got the impression they were only half joking.

I spoke to a former “swamp denizen”, who worked in the DC think tank bubble, about the man a while back. He’d met Pence a couple times, and wasn’t convinced the guy had much going on upstairs. I’m not so sure. Time will tell.

If I’m right that his speech brings the reality of this Second Cold War more sharply into focus to markets and the media, I reckon the renminbi will weaken as will US and Chinese stocks (especially companies reliant on the opposing countries market) on the day. Let’s watch.

You’ll be able to see his speech here when it goes live on Thursday.

And in the meantime, if you haven’t watched it already, I highly recommend you watch the first speech he gave on US/China relations last October if you have a spare 40 minutes – it’s as red a flag you can get that a Second Cold War is upon us.

Your thoughts always welcome: [email protected].

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Market updates

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