Crossing Red Lines

Doug Nolan

The Shanghai Composite traded as high as 3,382 during Tuesday trading, before reversing 5.5% lower to end the week at 3,192. The Shanghai Composite previously surged 16% over eight sessions (June 30th to July 9th), highlighted by a 5.7% jump on July 6th. This index sank 4.4% on July 16th – and then fell 3.9% in Friday trading. China’s growth-oriented ChiNext Index sank 6.1% Friday.

COVID stimulus stoked Bubble Dynamics for global risk assets, certainly including Chinese equities.

This Bubble has turned unstable. Chinese stocks reversed sharply lower after the U.S.’s shocking closure of China’s Houston consulate. Fundamentals and geopolitics do matter.

July 23 – Reuters (Fred Imbert): “China said the U.S. move to close its Houston consulate this week had ‘severely harmed’ relations and warned it ‘must’ retaliate… Washington… gave China 72 hours to close the consulate, which it said was ‘to protect American intellectual property and Americans’ private information,’ a dramatic escalation of tension between the world’s two biggest economies. Chinese Foreign Ministry spokesman Wang Wenbin described the U.S. allegations as ‘malicious slander’ and said the ‘unreasonable’ move had ‘severely harmed’ relations. ‘China must make a necessary response and safeguard its legitimate rights,’ he said…”

It has been an alarming deterioration of U.S./China relations over recent months. Bubble markets have been content to disregard what has been a virtual collapse in relations over recent days and weeks.

The unfolding U.S./China cold war is most regrettable. The only surprise, in my eyes, is that the relationship held together as long as it did. It was destined to mature into an intense superpower rivalry.

From a Bubble Analysis perspective, the boom cycle fostered the perception of an expanding economic pie. Cooperation and integration were considered mutually beneficial. It was also unsustainable.

Stark changes in perceptions and relationships are fundamental to the bursting global Bubble thesis. The economic pie is stagnating rather than expanding. It’s become a zero-sum game – an inevitable new zeitgeist accelerated by COVID. Even as their respective Bubbles floundered over the past 18 months, an attitude persisted that the two sides needed to work together to ensure stability. No more.

A local Houston television station Tuesday broke the story of fire engines responding to smoke coming from the Chinese consulate. Aerial photographs captured fires in three burn barrels in the consulate’s courtyard. Wednesday the State Department announced they had given the Chinese 72 hours to close the Houston consulate and leave the country. China is fuming.

From the New York Times (Keith Bradsher and Steven Lee Myers): “In the Chinese telling, Beijing is under assault, as the Trump administration goes after it with increasing intensity on trade, technology and human rights. All in a matter of weeks, the United States has sanctioned Chinese officials over the ruling Communist Party’s policies in Hong Kong and the western region of Xinjiang, cut off Chinese companies’ access to American technology and challenged Beijing’s claims in the South China Sea. The party’s propaganda outlets struck a nationalistic note on Friday, vowing that Beijing would hold firm in the face of mounting pressure from the United States.”

There’s no longer a shred of doubt. Beijing can blame its problems on the United States – and it will be credible to its riled citizens. The U.S. over recent weeks has been frenetically Crossing China’s Red Lines (like kids skipping over cracks in a sidewalk).

We’re in the thick of election season – and the current administration might be short-timers.

But huge – likely irreparable – damage is being wrought upon the most paramount of global relationships.

July 23 – Wall Street Journal (Kate O’Keeffe and William Mauldin): “Secretary of State Mike Pompeo called on the Chinese people to alter the ruling Communist Party’s direction in a speech explaining the Trump administration’s full-throttle response to an assertive China. Chinese leader Xi Jinping is a ‘true believer in a bankrupt, totalitarian ideology,’ Mr. Pompeo said. He stopped shy of explicitly calling for regime change, urging allied countries and the people of China to work with the U.S. to change the Communist Party’s behavior. The Communist Party ‘fears the Chinese people’s honest opinions more than any foe,’ Mr. Pompeo said… at the Richard Nixon Presidential Library… The U.S. ‘must also engage and empower the Chinese people,’ he said.”

It was crafted with history in mind (and to poke China in the eye). I’ve pulled significantly from Secretary of State Mike Pompeo’s Wednesday speech, believing it is both historic and unsettling. Pompeo may have “stopped shy of explicitly calling for regime change,” but in the eyes of China’s top leadership he surely Crossed the Reddest of Lines.

Pompeo: “Next year marks half a century since Dr. Kissinger’s secret mission to China, and the 50th anniversary of President Nixon’s trip isn’t too far away in 2022. The world was much different then. We imagined engagement with China would produce a future with bright promise of comity and cooperation. But today – today we’re all still wearing masks and watching the pandemic’s body count rise because the CCP failed in its promises to the world. We’re reading every morning new headlines of repression in Hong Kong and in Xinjiang. We’re seeing staggering statistics of Chinese trade abuses that cost American jobs and strike enormous blows to the economies all across America… And we’re watching a Chinese military that grows stronger and stronger, and indeed more menacing.”

“Look, we have to admit a hard truth. We must admit a hard truth that should guide us in the years and decades to come, that if we want to have a free 21st century, and not the Chinese century of which Xi Jinping dreams, the old paradigm of blind engagement with China simply won’t get it done. We must not continue it and we must not return to it… The free world must triumph over this new tyranny.”

“The truth is that our policies – and those of other free nations – resurrected China’s failing economy, only to see Beijing bite the international hands that were feeding it.”

“…A quote from the speech that General Barr gave…‘The ultimate ambition of China’s rulers isn’t to trade with the United States. It is to raid the United States.’ China ripped off our prized intellectual property and trade secrets, causing millions of jobs [losses] all across America.”

“President Nixon once said he feared he had created a ‘Frankenstein’ by opening the world to the CCP, and here we are.”

“…We have to keep in mind that the CCP regime is a Marxist-Leninist regime. General Secretary Xi Jinping is a true believer in a bankrupt totalitarian ideology. It’s this ideology, it’s this ideology that informs his decades-long desire for global hegemony of Chinese communism. America can no longer ignore the fundamental political and ideological differences between our countries, just as the CCP has never ignored them…”

"That the only way – the only way to truly change communist China is to act not on the basis of what Chinese leaders say, but how they behave… President Reagan said that he dealt with the Soviet Union on the basis of ‘trust but verify.’ When it comes to the CCP, I say we must distrust and verify. We, the freedom-loving nations of the world, must induce China to change, just as President Nixon wanted. We must induce China to change in more creative and assertive ways, because Beijing’s actions threaten our people and our prosperity.”

“We know too that if our companies invest in China, they may wittingly or unwittingly support the Communist Party’s gross human rights violations.”

“…Our Department of Defense has ramped up its efforts, freedom of navigation operations out and throughout the East and South China Seas, and in the Taiwan Strait as well. And we’ve created a Space Force to help deter China from aggression on that final frontier… We reversed, two weeks ago, eight years of cheek-turning with respect to international law in the South China Sea.”

“But our approach can’t just be about getting tough. That’s unlikely to achieve the outcome that we desire. We must also engage and empower the Chinese people – a dynamic, freedom-loving people who are completely distinct from the Chinese Communist Party… The CCP fears the Chinese people’s honest opinions more than any foe, and save for losing their own grip on power, they have reason – no reason to… For too many decades, our leaders have ignored, downplayed the words of brave Chinese dissidents who warned us about the nature of the regime we’re facing. And we can’t ignore it any longer. They know as well as anyone that we can never go back to the status quo.”

“But I call on every leader of every nation to start by doing what America has done – to simply insist on reciprocity, to insist on transparency and accountability from the Chinese Communist Party. It’s a cadre of rulers that are far from homogeneous. And these simple and powerful standards will achieve a great deal. For too long we let the CCP set the terms of engagement, but no longer. Free nations must set the tone. We must operate on the same principles.”

“We cannot repeat the mistakes of these past years. The challenge of China demands exertion, energy from democracies – those in Europe, those in Africa, those in South America, and especially those in the Indo-Pacific region. And if we don’t act now, ultimately the CCP will erode our freedoms and subvert the rules-based order that our societies have worked so hard to build. If we bend the knee now, our children’s children may be at the mercy of the Chinese Communist Party, whose actions are the primary challenge today in the free world. General Secretary Xi is not destined to tyrannize inside and outside of China forever, unless we allow it.”

“So we can’t face this challenge alone. The United Nations, NATO, the G7 countries, the G20, our combined economic, diplomatic, and military power is surely enough to meet this challenge if we direct it clearly and with great courage. Maybe it’s time for a new grouping of like-minded nations, a new alliance of democracies. We have the tools. I know we can do it. Now we need the will. To quote scripture, I ask is ‘our spirit willing but our flesh weak?’

If the free world doesn’t change – doesn’t change, communist China will surely change us. There can’t be a return to the past practices because they’re comfortable or because they’re convenient.

Securing our freedoms from the Chinese Communist Party is the mission of our time, and America is perfectly positioned to lead it because our founding principles give us that opportunity.”

“Indeed, Richard Nixon was right when he wrote in 1967 that ‘the world cannot be safe until China changes.’ Now it’s up to us to heed his words. Today the danger is clear. And today the awakening is happening. Today the free world must respond. We can never go back to the past.”

The U.S. has Crossed China’s Red Lines – have U.S./China relations crossed the Rubicon? I’ve for years now feared this rivalry risked deteriorating into confrontation. Such analysis doesn’t seem as wacko these days. And sure, U.S. stocks ended down slightly for the week, as manic markets somewhat began to take notice. It was fascinating to contrast market complacency with regard to collapsing U.S./China relations, to analysts histrionic response to the EU agreeing to debt mutualization (and grants to nations) as part of its COVID stimulus package.

July 20 – Associated Press (Raf Casert and Samuel Petrequin): “Weary but relieved, European Union leaders finally clinched an unprecedented 1.82 trillion euro ($2.1 trillion) budget and coronavirus recovery fund early Tuesday, somehow finding unity after four days and as many nights of fighting and wrangling over money and power in one of their longest summits ever. To confront the biggest recession in its history, the EU reached a consensus on a 750 billion euro coronavirus fund to be sent as loans and grants to the countries hit hardest by the virus. That comes on top of the seven-year 1 trillion euro EU budget. At first the grants were to total 500 billion euros, but the figure was lowered to 390 billion euros.”

Italian yields ended the week below 1% for the first time, with Greek yields down to a record low 1.05%. The euro closed the week at 1.1656, the high since September 2018. “Whatever it takes” ECB stimulus finally has its faithful partner: EU debt mutualization. As bullish thinking goes, no longer must markets fret a collapsing Italy seeking to exit the euro currency. European monetary integration’s weak link has been fortified.

Count me skeptical that this week’s EU compromise opens the floodgates for years of joint Eurobonds, with finance flowing freely to Italy and its “Club Med” neighbors. COVID created unique and pressing issues – and in four tough days of negotiations leaders from the 27 member nations mustered a compromise.

But we haven’t heard the last from the “frugal four” (Sweden, Denmark, Austria and the Netherlands). Markets shouldn’t go too crazy in their mental extrapolations and “fiscal union” dreams. Deep philosophical divisions have not been resolved. Indeed, bitterness and animosity were likely reinforced. Going forward – post-COVID - I don’t expect widespread public support for fiscal union or EU handouts.

July 23 – Bloomberg (Joe Light): “Hedge funds and mutual funds are among bond holders that could lose $2 billion as a consequence of U.S. lawmakers letting millions of homeowners delay their mortgage payments… At stake are so-called credit-risk-transfer securities whose owners include fixed-income funds run by Franklin Resources and AllianceBernstein Holding LP. The securities, which threaten to lead to estimated losses of between $1 billion and $2 billion, are intended to shift the risk of borrower defaults on Fannie Mae and Freddie Mac mortgages to private investors. The issue is an unintended side effect of the response to the global health crisis. As the U.S. economy shut down in March, Congress rushed to pass the $2 trillion CARES Act, which included a provision that allowed forbearance on loans backed by Fannie and Freddie for as long as one year if borrowers were impacted by the pandemic.”

We’ve only begun to scratch the surface of COVID ramifications.

Perhaps a small silver lining - it should quell the idea of privatizing Fannie Mae and Freddie Mac. The CARES Act provision for forbearance on Fannie and Freddie mortgages offers a timely reminder that the bulk of U.S. mortgage risk is nationalized.

And in difficult times this nationalization will be explicit – and costly for the U.S. taxpayer. I am opposed to private sector skimming of “profits” during the good times only to leave skin and bones and worse for when things turn bad. We’ve seen enough of that.

COVID is accelerating myriad trends and dynamics: bursting global Bubbles, Fed and global central bank inflationism, global economic structure, U.S./China relations and the world order more generally.

The U.S. dollar index dropped 1.6% this week to the low since September 2018. The dollar fell 2.0% versus the euro and Swiss franc and 0.8% against the Japanese yen. Interestingly, China’s renminbi was the only major currency down versus the dollar this week (0.37%).

Against the euro and Swiss franc, the renminbi lost a notable 2.3%. The renminbi fell 1.2% versus the yen.

Meanwhile, gold bullion surged $92, or 5.1%, to $1,902 – just below the all-time high from September 2011.

It’s intriguing to see both the dollar and renminbi underperform global currencies in a week when U.S./China relations took a turn for the worse. “The truth is that our policies – and those of other free nations – resurrected China’s failing economy,” Pompeo asserts.

How China was capable of rising to global superpower status in only a couple decades will be debated for decades to come. Many were complicit. Virtually everyone wanted to participate in the historic boom. Who wasn’t willing to overlook longer-term ramifications, while disregarding red flags flying in abundance?

I’m not confident history will fault the Federal Reserve and decades of unsound money. The U.S. has run persistent Current Account Deficits for going on thirty years, flooding the world with dollar liquidity. Serial Bubbles began in Japan in the mid-eighties, then to Mexico, SE Asia, Russia, Brazil, Argentina, Iceland and so on. It would eventually make it to China.

Here at home, the bursting on the ‘90s “tech” Bubble spurred reflationary policymaking and the resulting mortgage finance Bubble. What was not to like about “globalization.” The U.S. could deindustrialize – and clean its air in the process. Services suited policymakers just fine.

And all the cheap imports kept CPI low, ensuring endless easy money to inflate equities, bond and asset prices more generally. Besides, all those dollars flooding the world from Current Account Deficits would just be recycled back to U.S. Treasuries and financial assets.

Miraculous. What could go wrong?

China ended 2002 with international reserve holdings of less than $300 billion. U.S. Bubble period trade deficits saw Chinese international reserves spike to almost $2.0 TN by the end of 2008. Things then went crazy. QE1 was instrumental in China’s reserves inflating another $1 TN by 2011 – on their way to 2014’s $4.0 TN.

I seriously doubt China’s banking system inflates from $8 TN to $43 TN during this cycle without Trillions of “Bubble Dollars” flooding the world.

U.S. crisis and QE1 provided China a blank check for a massive $600 billion 2009 stimulus plan. And Chinese Credit – along with investment, manufacturing, apartment Bubble, economic boom, technological advancement, military buildup, global influence peddling, and ambitions for superpower status – never looked back.

For years now, CBB analysis has focused on the interdependence of historic U.S. and Chinese Bubbles. “Decoupling” has commenced – spurred on by COVID. Myriad uncertainties and fragilities ensure intense pressures on both the Fed and PBOC to keep their respective systems afloat. Crazy equities, for now, luxuriate in the thought of ultra-easy money for as far as the eye can see.

Meanwhile, the safe havens sense one hell of a crisis brewing.

Ten-year Treasury yields this week traded below 0.6%, with German bund yields holding at negative 0.45%. And the metals are on fire. Gold was up 5% and silver jumped almost 16% this week.

Surging industrial metals prices add further intrigue. I doubt prices are surging on economic prospects. In a world of such uncertainty and unfolding mayhem, all the metals are viewed as Stores of Value.

Will future historians see this week as pivotal for Red Lines Being Crossed?

What if water shortages destabilise China?

The painfully unequal distribution of water in China reawakens intra-regional resentments not seen in decades. An imagined scenario from 2050


The deadly heatwave that has gripped Asia for five months has had many unexpected consequences. One of the more surprising has been Chinese political and business leaders feuding, semi-publicly, about the unequal way China’s water is shared out.

This was supposed to be a quiet year for Communist Party rulers, who spent 2049 noisily celebrating their regime’s 100th anniversary. Instead they are on high alert.

The spark for the current political crisis was the success of “Yu the Great”, a two-hour documentary about a nobleman whose flood-fighting genius saw him named emperor 4,000 years ago. The film was watched more than 4bn times before censors cracked its cryptomorphic packaging.

Its producer and narrator, one of China’s richest technology magnates, was detained last month in Shenzhen and has not been seen since.

The film was understood by many viewers as a coded complaint about chronic water shortages that have blighted China in recent years, despite ever-larger investments in dams, flood-defence barriers and desalination plants, and campaigns to move millions of people from one side of the country to the other.

In the documentary, Yu the Great is praised for realising that floods cannot be defeated with man-made barriers—the failed approach repeatedly tried by his own father, Lord Gun—but must be harnessed and guided, by building channels.

Viewers could not fail to grasp that stubborn, purblind Gun is a proxy for China’s ageing rulers, who draw their authority from the military high command and from Xi Jinping, the country’s unseen and silent 97-year-old paramount leader.

Archeologists have found no physical traces of Yu the Great, but that is not the point. Worshipped for centuries as a deity, Yu is hailed in the documentary as a sort of philosopher king, who bound nine provinces into a single empire by carefully balancing the needs of each.

That, too, is a complaint about regional inequalities that have left present-day China a rather resentful, unhappy place. Only a few regions, such as western Sichuan and northern Yunnan, have seen agricultural productivity gains. Climate change has turned much of northern China into an arid semi-desert.

The Hai, Liao and Yellow rivers, which once watered great tracts of the North China Plain, the country’s breadbasket, run dry each summer. Farther south, even tributaries of the mighty Yangzi, such as the Han river, flow too slowly in the summer to flush away toxic algal blooms.

In contrast the most southerly provinces, including the high-tech powerhouse of Guangdong, seesaw between having either too much water or not enough. The south is lashed by frequent super-typhoons and flash floods, while storm surges and landslides have destroyed multi-billion-dollar industrial zones and housing developments around the Greater Bay Area, a sprawling, sweltering, permanently gridlocked megalopolis that is home to 120m people, made up of such formerly separate cities as Guangzhou, Shenzhen and Hong Kong. At other times, scorching temperatures have left the south gripped by extended droughts.

Scarcity of water even complicates China’s hold over the great territorial prize of the Xi era, the island of Taiwan. Seven years after being retaken in the short, brutal war of 2043, after an isolationist America said that it would no longer defend it, the island is a harshly policed shadow of its former self. A lack of water has thwarted plans to bring over more mainland settlers.

At emergency global summits to debate climate change, China has talked about playing a leading role as a responsible great power. It is true that it has invested massively in renewable energy. But powerful economic interests have made China cautious. When it comes to dismantling coal-fired power plants, or closing carbon-spewing factories built by Chinese firms in Asia and Africa, China has consistently kept an eye on what rival powers are doing.

It has matched American efforts and commitments on greenhouse-gas emissions, but not gone further. In the words of a European diplomat: “China does not do altruism. The approach is to seek maximum credit for minimum effort.”

When it comes to regional diplomacy, China has taken a more conciliatory stance, at least where its largest neighbours are concerned. Swallowing traditional doubts about Chinese settlers overrunning its sparsely peopled east, Russia has worked with China to exploit Arctic sea lanes that are now ice-free for much of the summer.

Protective Russian and Chinese icebreakers now lead convoys of oil tankers heading eastward to China, and of container ships steaming westward to European markets. Six states that border the Arctic—Canada, Denmark, Finland, Iceland, Norway and Sweden—have all seen Chinese cargo and cruise ships bring lucrative business to once-sleepy northern ports, tempering domestic political opposition to China’s presence in the high North.

China’s relations with India have been patched up and water-sharing treaties signed between the two nuclear powers, as glaciers high in the Himalaya melt at a dangerous rate. Smaller neighbours have been less fortunate.

Brushing aside complaints from Myanmar, Laos and Vietnam, China has hoarded water behind its dams in the upper reaches of the Mekong and other vital rivers, then bought an uneasy peace by selling neighbours cheap electricity from those dams.

At home in China, government scientists do not dispute the dangers posed by man-made global warming. But the response of the Communist Party has been to pour more concrete and to put still more faith in state planning and social controls. Engineering works intended to tame nature and redistribute water, in a country where 80% of it is found in the south, have been a pillar of Communist rule since the days of Mao Zedong.

Chinese officials cited Mao’s observation from 1953—“Water is abundant in the south and scarce in the north, so why not borrow a little from the south?”—in 2014 as a giant series of canals and pumping stations, the South to North Water Diversion Project (SNWDP), began carrying water from the Yangzi river system to Beijing and other parched northern cities.

Counting every drop

In 2035, with water in ever-shorter supply, China conducted its first Water Census, estimating available water resources per resident of each city and county. Those places with plenty were colour-coded green. Areas suffering from water stress were given an orange code, while those with dangerously few resources were coloured red.

The populations of arid, red-coded places may not grow, by law. In practice, many arid areas have emptied, as locals realised no new government funds would be forthcoming for roads, schools or hospitals or to support economic development.

At first, many Chinese did not pay close attention, because a first wave of forced relocations disproportionately affected ethnic minorities living in western regions. In all, perhaps 8m members of the Uighur, Kazakh, Hui and Mongol minorities have now moved from red-coded areas. Some ended up as workers in high-walled factories run with paramilitary discipline.

Others, carrying identity cards branding them as migrants from “arid” areas, have suffered discrimination in their new homes. These environmental migrants—though China rejects that label—often struggle to register children in schools or access public services.

Wider public opinion began to sour on the Water Census when a second survey, completed in 2042, handed arid, red-coded identity cards to millions of Chinese from the majority Han ethnic group, triggering a fresh wave of coerced relocations. Farmers from northern and central provinces were obliged to sign family plots of land over to the government in exchange for subsidies to help them start new lives in green-coded regions where the population is allowed to grow.

China’s rural areas are ageing rapidly, though, and many farmers said they were too old to move. Impatient with such talk, officials in some red-coded villages are accused of forcefully moving “retired” farmers to hastily built housing blocks.

Water has caused trouble in Hong Kong, the former British colony that has been under strict political supervision since anti-government demonstrations in 2019. Defying local police and mainland security agents, environmental activists staged a string of lightning protests in the late 2030s to block the construction of a nuclear-powered desalination plant, one of dozens being built along the coast. Not only was the plant built but, in a show of force, it was opened in 2047 to mark Hong Kong’s formal absorption into Guangdong province, 50 years after the handover.

The latest Water Census, made public this year, prompted rage on Chinese social media when it emerged that Beijing and its nearby administrative annexe of Xiong’an, a new “smart city” built at the behest of President Xi, both enjoy green codes on the basis of projected deliveries of water from the snwdp.

That is a convenient fiction. In reality the scheme has repeatedly missed its delivery targets as droughts have hit the Yangzi basin. According to government statistics leaked to a news outlet in Guangdong, Xiong’an is desperately short of water. Yet because Mr Xi’s prestige is at stake, its population is still being allowed to grow.

To the central government, it is a special provocation that the leaked Xiong’an water statistics emerged in Guangdong, a wealthy, self-confident province with a mutinous history. The furious response of leaders in Beijing to “Yu the Great” is in part explained by the filmmaker’s close connections to powerful southern politicians.

Millions on social media posted images of Yu the Great and his mausoleum near the eastern city of Shaoxing. When those were banned they began sharing pictures of the Zhong Hai and Nan Hai, ornamental lakes inside the party leadership compound in Beijing, labelled “sweet waters”.

Such expressions of grievance may seem somewhat arcane. But in a closely watched surveillance state those voicing them are taking real risks, and their anger should not be ignored. The painfully unequal distribution of water in modern China is reawakening intra-regional resentments not seen for more than a century.

Outsiders have spent years speculating what China might do about climate change. Now they are asking: what might climate change do to China?


Chris Vemeullen´

This second part of our multi-part article researching the massive upside price move in Silver recently should cause skilled technical traders to begin sweating a bit. In our opinion, nothing moves metals more than fear and a move like this in Silver, recently, is a very clear indication that global traders fear the current global economic ability to sustain market valuation levels in the face of bigger and more sustained economic and COVID-19 virus crisis events.


A series of potentially destructive economic events are lining up over the next 6to 12+ months and they all relate to the efficiency of the economic recovery many traders have banked their long positions on. Will the COVID-19 virus subside before the end of 2020? Will the US consumers/workers resume their ability to earn incomes? 

Will the US and global businesses survive the contraction event taking place throughout the globe? Will local city, state, and other entities survive the contraction in tax revenues, fees, and extended costs related to this massive destructive economic event? Will the stock market continue to rally in the face of all of these issues and what other “unknowns” are about to befall us?

The reality of the situation is that Precious Metals have already fired a massive warning shot across our Bow and skilled technical traders need to start paying attention. Precious Metals don’t move higher by 12% to 15% like Silver just did for no reason at all. A massive new level of fear must have hit causing global traders to push Silver prices above $23 recently. 

Silver, the “other precious metal” has been stalled below $19 for many months – even while Gold pushed well above the $1750 level and higher. This big breakout in Silver is nothing more than a phenomenal warning for all traders and investors – BE WARNED: RISKS ARE SKYROCKETING HIGHER.


This Daily Silver chart highlights the series of “measured moves” our research team wrote about on July 13, 2020. These $5.40 price advances seem to happen with some degree of regularity and we believe they will continue until an upside parabolic break out of this range takes place. That means when an upside move extends beyond the $5.40 measured move level and price attempt to move dramatically higher, then the continuation of these measured moves may be over.

Ultimately, our earlier research into technical patterns in Silver suggests a $25.50 to $26 upside price target. Yet, broader market research suggests a move above $75 to $85 in Silver ($3750 to $4995+ in Gold) is not out of the question. What would it take for Silver to rally above $70 per ounce you may ask? Our research team believes a broader economic, credit, and consumer event would likely have to take place for Precious Metals to rally to these levels. 

Fear drives a lot of price action in metals and when investors fear valuation levels or future expectations, they often hedge their portfolios by investing in Precious Metals. When a big move happens, like what we’ve just seen in Silver, we interpret it as “fear has materialized”. 

What are traders so fearful about? They are likely fearful of the current high price levels in the US stock market and future expectations related to consumers, trade, credit/debt, and other factors of the global economy.


We’ve been writing about the potential for a series of economic events to unfold over the next 6+ months where consumers, cities/states, and businesses simply collapse because of the lack of earning capabilities associated with the COVID-19 virus event. Many years ago, we wrote that “isolated economic events that disrupt smaller segments of the markets are more manageable than prolonged destructive events”.

We believe the current COVID-19 virus event will transition into a prolonged economic event where a 20% to 30%+ extended contraction in revenues for many businesses, consumers, and city/state/federal governments could produce massive future risks that are still somewhat “unknown”.

We’ve also written about Super-Cycle events and warned all of our followers in August 2019 to prepare for a massively destructive Super-Cycle event to take place late in 2019 and early in 2020. We authored this research post in July 2019 warning all of our followers of the pending collapse in the US and global markets related to Super-Cycles and other technical patterns. What we expect to happen now is an extension of the crisis event until a bottom is established.

This SPY Monthly chart highlights some of the research our team recently completed and also suggests that a broader market failure (downside price rotation) event may take place over the next 3+ months (prior to the US Presidential Elections), where new deeper lows may be established. 

The GREEN ARCING LINE on this chart represents our proprietary Fibonacci Price Amplitude Arcs, an adaptation to traditional Fibonacci Price Theory, which suggests price levels are already 7% to 9% above major resistance. 

If the US stock market falters near current levels and begins to move broadly lower, we should expect a series of moderately violent downside price moves to target the $208 level on the SPY while Gold and Silver extend their upside price advance. Fear will drive metals higher while the potential downside price event in the SPY takes place.


Our next upside price targets in Silver are near $28 (a full 24%+ higher than current price levels). These measured price moves act as a stair-step process for the price to consolidate/base, begin a moderate upside move, peak, then repeat the process all over again. Beyond the $28 price target level, the next measured move target is $32.50. 

If Silver reaches the $28 or $32.50 level, you can assume fear is very present in the global markets and Gold should already be trading above $2100 (or higher). The combination of Gold and Silver moving higher in unison should be a very clear warning that global traders don’t trust the current valuation levels of the global stock markets.

This Weekly Gold chart highlights the next measured move targets for Gold. Although Gold
has yet to reach the current measured move target, we don’t believe it will take more than 3 to 4 weeks for Gold to print a price level above $1950. 

After this big move in Silver, we are moderately confident that Gold will continue to rally as well. The bigger question for Gold is what happens after $2000? Will it rally to $3750 as we predict? Will it rally to $5500 or higher?

Ultimately, the upside price peak levels in Gold will relate to the extent of the fear and uncertainty that is present as a result of the continued fallout from the COVID-19 virus event and the series of revenue/earnings-based contractions we believe are just below the surface right now. Over the next 6+ months, we believe a series of new crisis events till unfold which will highlight just how destructive the COVID-19 crisis has been. 

When consumers and businesses lose 25% to 35% of their earning capacity (or more) and more than 15% of the total US population has been displaced from work/business because of these economic shutdowns – one has to expect some type of economic contraction to take place. 

Honestly, it would be foolish to think the US Fed can offset 150+ million US consumers spending activities, home buying, rentals, loan payments, and other activities. 25% of the normal US GDP levels represent over $5.5 trillion – that’s a big hit to the markets if it turns out to be real.


We urge all of our followers to stay very cautious and to properly position your portfolios to address the risks that we feel are pending. Yes, the US stock market has rallied substantially recently, but if you were paying attention to Precious Metals and what was really happening to US businesses and US consumers, you’ll suddenly realize the US Fed and foreign investors piling into technology stocks is not the same things as a healthy and robust US economy (like we had in 2017 and 2018).

The ultimate peak in the US economy took place in January/February 2018. After that peak, our proprietary price modeling systems continue to suggest the US stock market and economy has been contracting. 

The longer-term Super-Cycles suggest the real bottom in the markets won’t happen until somewhere between 2021 and 2023. 

 We have a long way to go before we see where this ultimate bottom is really going to set up.

Turkey's Defense Industry and the Projection of Regional Power

A history of mistrust compels Turkey to fend for itself.

By: Hilal Khashan

Turkey’s relations with the West have never been smooth, not even when it adopted secularism and became a member of NATO. This has had a profound effect on the country’s defense industry. A history of arms embargoes and, alternatively, vast supplies of sophisticated weaponry convinced Ankara that it needed to fend for itself.

Indeed, when the West imposed an embargo after Turkey invaded Cyprus in 1974, Ankara established the Turkish Armed Forces Foundation, a significant enterprise that coordinates the activities of 14 arms manufacturers.

It’s been busy ever since. In 1975, the Turkish Armed Forces Foundation established the Aselsan Corporation to meet the country’s rapidly expanding military electronic needs, such as advanced automated systems, guidance, electro-optics, communication and information technologies. Roketsan, which specializes in missile launchers and sea defense systems, was founded in 1988 and is Turkey’s leading defense contractor.

In 2007, Turkish Aerospace Industries, in collaboration with British AgustaWestland, launched the T-129 helicopter project. The government also established the Presidency of Defense Industries in 1985 to oversee the country’s defense needs and ensure national security.

It’s now under the Office of the President. Since President Recep Tayyip Erdogan assumed power in 2003, domestically made military equipment rose from 20 percent to 70 percent.

The plan is for Turkey to become self-sufficient in providing for its military hardware needs and independent from external pressure by 2053. And since the country boasts some first-class manufacturers, it may well be able to.

Inherent Fragility

Turkey is the 14th-largest arms exporter in the world and accounts for 1 percent of total global military exports. It exports mainly wheeled armored vehicles, attack helicopters, howitzers, unmanned aerial vehicles and frigates.

It has a fixed customer base in majority-Muslim countries like Pakistan, Kazakhstan, Indonesia, Malaysia and Oman. (Poor relations with Saudi Arabia and the United Arab Emirates deny Turkey even more lucrative Muslim markets.)

Its sales to Guatemala, Guyana and Trinidad and Tobago are insignificant, and except for minor sales to the U.S., Germany and the Netherlands, NATO countries tend to not buy Turkish military hardware. Even so, Turkey believes its military exports will bring in (a very optimistic) $25 billion in 2023.

Top Destinations of Turkish Arms Exports, 2019

The future of Turkey’s defense industry hinges on the success of its domestic tank and fighter jet projects. The tank is manufactured with technical assistance from South Korean Hyundai Rotem and expected to gradually replace the obsolete Leopard and M-60 tanks. Barring unforeseen technological hurdles, the Otokar company will put the battle tank in service before the end of 2021.

Founded in 1984, TAI specializes in earth observation and surveillance satellites and manufacturing components for the Airbus A350 and Airbus A400M programs. TAI and SSB are involved in a large project to manufacture the TF-X, a fifth-generation fighter that will replace the F-16. The program has gained greater importance for Turkey after the U.S. decided to halt F-35 jet deliveries.

Erdogan’s controversial decision to purchase the S-400 surface-to-air missiles angered the U.S. and drove the Trump administration to punish Turkey for turning to Russia for military procurement. The U.S. successfully pressured BAE Systems and Rolls-Royce to withdraw from partnerships with Turkey to build the engines for the TF-X.

Turkey opted instead to manufacture its engine and subcontracted Aselsan and TR Motor to develop an indigenous engine. The United States’ punitive measures will delay the launch of the TF-X maiden flight from 2023 to 2029. Turkish officials tried to market the TF-X project as the first Islamic jet, but their attempts to make the TF-X jet a multi-partied program did not succeed. Ankara invited Malaysia to become a partner, and Kuala Lumpur did not respond. Perceiving the project as a black hole, Pakistan, Indonesia and Kazakhstan chose to stay out of it.

The Turkish defense industry faces serious challenges that include brain drain, currency devaluation, uncertain foreign supplies and regional disputes. The financial crisis in Turkey caused purchasing power for the majority of citizens to plummet. Talented Turkish scientists left the country to pursue lucrative employment offers commensurate with their qualifications. Turkey’s poor relations with most countries in the Middle East dampened the outlook for its arms exports.

Moreover, the defense industry is inherently fragile because it relies heavily on foreign inputs, many of which come from Europe. In the last quarter of 2019, the European Union placed restrictions on the export of raw material and components used in Turkish arms. Frequent sanctions and embargoes hamper its arms production and deny it access to advanced military technology. Its military products are mostly conventional, outdated and poorly made.

Projecting Power

In criticizing the U.S. for excluding Turkey from the F-35 program, Erdogan said Washington awakened a sleeping giant determined to achieve self-sufficiency in fulfilling its military equipment needs.

He boasted that Turkey is involved in executing some 700 arms projects. In December 2018, Erdogan signed a decree to privatize the famous Tank and Pallet Factory to be run by a joint Turkish-Qatari firm for 25 years. Many Turkish nationalists have become convinced that involving a foreign country in its operations undermined Turkey's national security interests.

Erdogan sees beyond national security in the narrow sense and aspires to establish a greater role for Turkey in regional affairs.

Erdogan believes that a deterrent military capability is essential for achieving regional power status.

Already there is evidence to suggest it has. Turkish military support for the Tripoli-based Government of National Accord recently turned the battle against the forces led by Khalifa Haftar, backed by the UAE, Russia and Egypt. A few months ago, Turkish UAVs inflicted heavy casualties on Syrian regime forces and halted their advance on Idlib.

Erdogan does not trust the weapons suppliers in the West and has a political vision that distances him from NATO. He is bitter because eight NATO member states sent troops to Lithuania to deter Russia from intruding into the Baltic states, but none of them expressed interest in sending troops to northern Syria to protect the southern flank of the alliance.

In that sense, Erdogan’s defense industry is part of his larger regional ambitions. He sees himself as a reformer and architect of regional power. To that end, he has reined in the Turkish military, which had previously been seen as the guarantor of secularism and republicanism, and he has dismissed from service all the participants in the 2016 coup attempt, including their supporters in the bureaucracy and academia, jailing about a third of the top brass in the army and air force.

Erdogan’s policies have drawn comparisons to Mahmud II, who became Ottoman sultan in 1808 and endeavored to modernize the ailing empire. The problem is that he is remembered for massacring thousands of Janissary soldiers for dominating the public sphere and corrupting the state machinery.

In Latin America, the Pandemic Threatens Equality Like Never Before

By Julie Turkewitz and Sofía Villamil

In Medellín, which considers itself the region’s Silicon Valley, there have been widespread job losses and hunger. / Photographs by Federico Rios

Over the past two decades, inequality in Latin America had fallen to the lowest point in its recorded history. The pandemic threatens to reverse that. We traveled 1,000 miles across Colombia to document this critical moment.

BOGOTÁ, Colombia — Sandra Abello grew up poor, left school at 11 and spent her teenage years scrubbing floors as a live-in maid. But by this year, something remarkable had happened.

Ms. Abello, now 39, finally had a home in a decent neighborhood. One of her daughters, Karol, was about to finish high school. Another, Nicol, was turning 15, and they were planning a party with a big dress and many guests. They were saving for a washing machine. Ms. Abello was proud of all she had accomplished.

Then the pandemic hit, and Ms. Abello lost her cleaning work. By May, she had been evicted, forcing her to move her children into a tin shed in an illegal settlement high above the city. At night, a bitter cold pushed its way in. A lifetime of effort had evaporated in a matter of weeks.

Ms. Abello’s oldest daughter, Karol, an aspiring nurse, called it the “great regression.”

Not long ago, Colombia — and Latin America more broadly — were in the middle of a history-making transformation: The scourge of inequality was shrinking like never before. Over the past 20 years, millions of families had marched out of poverty in one of the most unequal regions on earth. The gap between rich and poor in Latin America fell to its lowest point on record.

Now, the pandemic is threatening to reverse those gains like nothing else in recent history, economists say, potentially upending politics and entire societies for years to come.

Police evicting residents of an illegal settlement in Bogotá.

Jean Carlos Mosquera and Diana Vargas lost their jobs when Colombia went into quarantine. Ms. Vargas, a preschool janitor, said her goal had been “to give my children a better life, the better life we never had.”
Jean Carlos Mosquera and Diana Vargas lost their jobs when Colombia went into quarantine. Ms. Vargas, a preschool janitor, said her goal had been “to give my children a better life, the better life we never had.”

We — two reporters and a photographer with The New York Times — wanted to understand what this meant for the region’s future, and in particular for the families that had been so central to that march toward economic equality.

So we began to drive, packing the car with masks and traveling more than 1,000 miles from Colombia’s capital to the northeastern border and back, interviewing dozens of people about the way the pandemic was changing the course of their lives.

As we went, leaving the mountain-flanked high-rises of Bogotá for the tropical regions beyond, it became clear that the engines of upward mobility were failing, choked off by an economic shutdown that began in March and fell hardest on the working poor and vulnerable members of the middle class.

Small businesses had closed for good. Universities were hemorrhaging students. Schools that had turned the children of construction workers into engineers were near collapse, unable to pay teachers. Farmers were burning their crops, ruined by disrupted markets.

Teenage boys had turned to selling drugs to feed their siblings. Young women and girls had been pushed into prostitution to pay the bills. Mothers and fathers began rationing medicine to their children, unsure when they would have money for more. Wealthy people retreated to countryside homes, while other families sold their cellphones to buy dinner.

“It was never my dream to go backward,” said David Aguirre, 32, who had risen from a low-level bodyguard to the boss of his own strawberry farm.

He had poured his life savings into his business, opening just a few months before the pandemic struck. Now it was unclear if the farm would survive. When we met, he’d just fired his four workers and killed off a quarter of his crop — unable to find a buyer and unable to pay his employees to pick it. The berries lay dry and cracked around us, poisoned with Roundup, and he worried about returning to the dangerous work of protecting the wealthy.

David Aguirre’s dying strawberry crop in El Rosal.
David Aguirre’s dying strawberry crop in El Rosal.


Even on the first day of our journey, we could see the distance between the rich and poor widening.

We drove into the hills above the capital, to an encampment of hastily built sheds that had long been a last resort for desperate families.

When the lockdown began, the settlement quickly swelled with people like Ms. Abello who had been moving up — bakery employees, preschool janitors — but lost their jobs and apartments. The pandemic hadn’t just stalled their progress. It suddenly made them squatters.

That day, the police arrived with a wrecking crew, saying that the settlement was illegal and too precariously built to live in, even if tearing it down exacerbated the pain of the pandemic.

Ms. Abello’s walls fell with a terrifying clatter.

For the second time in the brief life of the crisis, she and her family had nowhere to go.

Sandra Abello inside her shed as city contractors tore it down. 
Sandra Abello inside her shed as city contractors tore it down.


Eight hours outside of Bogotá, the school appeared like a sanctuary on a hill, ringed by an expansive lawn and a gate.

The institution, Mi Segundo Hogar, had played a life-changing role for families of modest means over the years, offering low-cost, high-quality education. It produced flight attendants and pharmacists in families where the parents had walked barefoot to class.

Now, the school sat empty, with in-person classes canceled across Latin America. Unemployed parents had stopped paying fees, sometimes apologizing profusely through text message, and the school was barely paying instructors.

On the patio, the rector, Lina Castrillón, said Mi Segundo Hogar was in danger of closing. Technically, classes had moved online, but only a fraction of the students were able to connect every day. Many didn’t have computers, or tried to log on via cellphone, and data was expensive.

It was not just that her students were going to slide backward in their learning, Ms. Castrillón said. She worried this interruption would fundamentally reshape their lives, leading to dropouts and lower pay, stunting an entire generation. At home, disconnected from school, she said, “they are losing their vision” of a better future.

The auditorium at Mi Segundo Hogar. The school, a gateway to a better life for many poor children, faces possible closure.The auditorium at Mi Segundo Hogar. The school, a gateway to a better life for many poor children, faces possible closure.

For years, Colombia was a glaring example of the region’s wealth gap — and of the struggles to narrow it.

The nation’s generations-long war with rebels grew out of anger over inequality. Class divisions are so baked into society that poorer people refer to wealthier ones as “your mercy” in casual conversation, a relic of colonialism. Cities are divided into “estratos,” which signify one’s social class.

The rich live in estrato six. The poor live in estrato one. Those in informal settlements — which legally don’t exist — live in what people colloquially call “estrato zero.”

But life had been changing, considerably. Colombia, one of the most unequal countries in an extremely inequitable region, cut its poverty rate nearly in half, to 27 percent, from 2002 to 2018. The country signed a historic peace deal with the main rebel group, promising to help thousands on the economic and social margins join the nation’s success.

The gulf between rich and poor was still stubbornly wide compared with much of the world. In the 1990s, the wealthiest 10 percent in Latin America and the Caribbean earned about 50 times more than the poorest 10 percent, according to Matías Busso, an economist with the Inter-American Development Bank.

By the time the pandemic hit, top earners made an average 22 times what the poorest made. So while inequality clung to the region, it had fallen to a record low, he said.

Now, the pandemic could push poverty and inequality back to what they were at the turn of the 21st century in Colombia, according to an analysis by professors at the Universidad de los Andes. “A setback of two decades,” they called it.
Economists are predicting similar regressions around the region, with the World Bank warning that more than 50 million people in Latin America and the Caribbean could fall into poverty this year alone.

“The current crisis is probably the biggest threat to inequality that we have experienced,” Mr. Busso said.

In Medellín, we watched hundreds of single mothers line up outside a food bank that expanded significantly when the crisis began. One woman, María Camila Salazar, 22, said her mother, María Eugenia Carvalho, 53, had become so dangerously malnourished that her thin shoulders now jutted from her frame.

“We go to bed without eating, without giving anything to our children,” she said.

María Eugenia Carvalho, center, at home in Medellín. Ms. Carvalho collects recycling for a living, but her buyers shut down amid the pandemic.
María Eugenia Carvalho, center, at home in Medellín. Ms. Carvalho collects recycling for a living, but her buyers shut down amid the pandemic.

Before the pandemic, Carolina Urda, 31, who runs the food bank, had been working to expand a sewing and washing business meant to move women in unstable jobs — nannies, recycling collectors — into something more secure.

The women now had no jobs at all, and Ms. Urda was spending hours each week gathering food to feed their families.

“But we don’t want more food,” she said, shaking two fists in frustration. “We want empowered, self-sufficient, autonomous businesswomen.”

 Roraima Daversa, left, and her son Amado, in a mask, walked about 250 miles from Bogotá to Bucaramanga, trying to get back home to Venezuela.
Roraima Daversa, left, and her son Amado, in a mask, walked about 250 miles from Bogotá to Bucaramanga, trying to get back home to Venezuela.


Perhaps the most glaring image of Latin America’s backslide was the highway.

We had expected to find empty routes. Instead, mile after mile, we met processions of Venezuelan migrants pulling suitcases toward home.

They had come to Colombia only a few years or even months before, part of an exodus of migrants escaping Venezuela’s political and economic collapse. Many had hoped to learn a trade or finish a degree in Colombia, or just make enough money to help their families back home.

Now, because of the pandemic, the people we met had lost whatever small hold they had on a life in Colombia — a job, an apartment — and were migrating in reverse, returning to a nation where they were almost certain that disaster awaited. Most said they had family in Venezuela who could help them, while in Colombia they no longer had anything.

“Hope is over,” said one man, Rafael Decena, 50.

Annahe Alvarez, right, and her daughter Anneris Rey slept at a transit terminal in Medellín for a week, hoping to get a bus back to Venezuela.
Annahe Alvarez, right, and her daughter Anneris Rey slept at a transit terminal in Medellín for a week, hoping to get a bus back to Venezuela.

Venezuelan families waiting for a bus to the border. They had walked for weeks, often carrying children on their backs.
Venezuelan families waiting for a bus to the border. They had walked for weeks, often carrying children on their backs.

Since the pandemic began, more than 80,000 Venezuelans have crossed back into their country, according to Colombian authorities.

In Bucaramanga, a midsize city in Colombia, hundreds of migrant families camped outside a park to rest. One night, a parade of buses arrived, a fleet sent by the Colombian government to take people the last 120 miles to the border.

Roraima Daversa, 26, and her son Amado, 9, climbed aboard, their feet cracked and blistered.

They had spent night after night sleeping on the side of the road. As Ms. Daversa took a seat, tears began rolling down her face. She felt relief. She and Amado no longer had to walk. “Every day he asked, ‘How much longer?’”

But there was also grief.

Ms. Daversa, who had studied environmental management in Venezuela, had hoped to save money in Bogotá and return to her country to open a business. Now, she was headed back, worse off than when she left.

In Cúcuta, the economic shutdown has pushed women and girls to local parks where men pay them for sex.
In Cúcuta, the economic shutdown has pushed women and girls to local parks where men pay them for sex.


In Cúcuta, a town pressed up against the Venezuelan border, a 17-year-old stood in a cranberry-colored T-shirt and jean shorts, tugging at a purse with a shiny bow, swinging one heel nervously. A few men approached. A ribbon of cars roared past.

When the lockdown began, her father lost his job in construction and the refrigerator emptied. Pushed to desperation, she made the excruciating decision to head to a local park, where men began to pay her for sex, $6 an encounter. She was not even the youngest one there to do so.

Somebody had to bring in money, she said, “and it turned to me.”

Before the crisis, she had been selling small items — cigarettes, candy — in the street. But she had always dreamed of returning to school, of becoming a criminologist like those powerful women on television. Having sex with strangers is “horrible,” she said, and when she has to, she imagines herself in a classroom, with her friends, to distract herself.

Over the past two decades, school attendance and rising access to birth control played a crucial role in shrinking the country’s wealth gap, allowing millions of women to study and work, when so many of their mothers had been forced to stay home.

When the pandemic hit, though, the number of women forced into prostitution swelled in Cúcuta, said Alejandra Vera, the director of a local advocacy group. So did the number of unwanted pregnancies, as travel restrictions and job losses made it difficult to get condoms and other types of birth control.

One morning, the 17-year-old, whose name is being withheld because she is a minor, woke before dawn to the pleas of her son, six months old, who wanted to toddle along the floor and play.

The 17-year-old and her son, before she left for the park.
The 17-year-old and her son, before she left for the park.

The young woman heading to work. 
The young woman heading to work.

She made coffee and dropped off her son with his father at a house down the road. Her mother, 54, saw her off from their patio. She knew what her daughter was doing. It is hard for her to talk about.

“I don’t criticize or condemn,” the mother said.

“There’s no work now,” she added, breaking down. “This is not a life.”


Back in Bogotá, Ms. Abello, the mother who had been evicted twice amid the pandemic, had moved in with a friend, both families crammed together.

Karol, the aspiring nurse, was trying her best to keep up with classes, but she couldn’t log into the school website without the internet, so a friend was downloading the assignments and texting them to her. She then completed them by hand, took pictures and texted them back. But it was hard, and she worried she was falling behind.

Nicol, the younger daughter, turned 15. They had a small celebration, just family, and she wore Karol’s old dress, black, with tulle.

As the quarantine loosened, Ms. Abello finally returned to her job cleaning a bakery. But her housekeeping clients never asked her back, and she was earning about half as much as she did before. It wasn’t clear when they’d be able to move into their own place.

“This has been hard on my mom,” said Karol. “As soon as this is over, I hope she gets new work and we can go back to our old lives.”

“Well,” she said, “God willing.”

Jenny Carolina González contributed reporting from Bogotá.

The Political Logic of China’s Strategic Mistakes

For the first time since the end of the Cultural Revolution, the Communist Party of China faces a genuine existential threat, mainly because its mindset has led it to commit a series of calamitous strategic errors. And its latest intervention in Hong Kong suggests that it has no intention of changing course.


pei65_Anthony KwanGetty Images_cpchongkongsecuritylaw

CLAREMONT, CALIFORNIA – Some of the Chinese government’s recent policies seem to make little practical sense, with its decision to impose a national-security law on Hong Kong being a prime example. The law’s rushed enactment by China’s rubber-stamp National People’s Congress on June 30 effectively ends the “one country, two systems” model that has prevailed since 1997, when the city was returned from British to Chinese rule, and tensions between China and the West have increased sharply.

Hong Kong’s future as an international financial center is now in grave peril, while resistance by residents determined to defend their freedom will make the city even less stable. Moreover, China’s latest move will help the United States to persuade wavering European allies to join its nascent anti-China coalition. The long-term consequences for China are therefore likely to be dire.

It is tempting to see China’s major policy miscalculations as a consequence of over-concentration of power in the hands of President Xi Jinping: strongman rule inhibits internal debate and makes poor decisions more likely. This argument is not necessarily wrong, but it omits a more important reason for the Chinese government’s self-destructive policies: the mindset of the Communist Party of China (CPC).

The CPC sees the world as, first and foremost, a jungle. Having been shaped by its own bloody and brutal struggle for power against impossible odds between 1921-49, the party is firmly convinced that the world is a Hobbesian place where long-term survival depends solely on raw power. 

When the balance of power is against it, the CPC must rely on cunning and caution to survive. 

The late Chinese leader Deng Xiaoping aptly summarized this strategic realism with his foreign-policy dictum: “hide your strength and bide your time.”

So, when China pledged in the 1984 Joint Declaration with the United Kingdom to maintain Hong Kong’s autonomy for 50 years after the 1997 handover, it was acting out of weakness rather than a belief in international law. 

As the balance of power has since shifted in its favor, China has consistently been willing to break its earlier commitments when doing so serves its interests. In addition to cracking down on Hong Kong, for example, China is attempting to solidify its claims in disputed areas of the South China Sea by building militarized artificial islands there.

The CPC’s worldview is also colored by a cynical belief in the power of greed. Even before China became the world’s second-largest economy, the party was convinced that Western governments were mere lackeys of capitalist interests. Although these countries might profess fealty to human rights and democracy, the CPC believed that they could not afford to lose access to the Chinese market – especially if their capitalist rivals stood to profit as a result.

Such cynicism now permeates China’s strategy of asserting full control over Hong Kong. 

Chinese leaders expect the West’s anger at their actions to fade quickly, calculating that Western firms are too heavily vested in the city to let the perils of China’s police state be a deal breaker.

Even when the CPC knows that it will incur serious penalties for its actions, it has seldom flinched from taking measures – such as the crackdown on Hong Kong – deemed essential to maintaining its hold on power. 

Western governments had expected that credible threats of sanctions against China would be a powerful deterrent to CPC aggression toward the city. But judging by how China has thumbed its nose at the West, and especially at the US and President Donald Trump, this has obviously not been the case.

These Western threats do not lack credibility or substance: comprehensive sanctions encompassing travel, trade, technology transfers, and financial transactions could seriously undermine Hong Kong’s economic wellbeing and Chinese prestige. But sanctions imposed on a dictatorship typically hurt the regime’s victims more than its leaders, thus reducing their deterrent value.

Until recently, the West’s acquiescence in the face of Chinese assertiveness appeared to have vindicated the CPC’s Hobbesian worldview. Before the rise of Trumpism and the subsequent radical shift in US policy toward China, Chinese leaders had encountered practically no pushback, despite repeatedly overplaying their hand.

But in Trump and his national-security hawks, China finally has met its match. Like their counterparts in Beijing, the US president and his senior advisers not only believe in the law of the jungle, but also are unafraid to wield raw power against their foes.

Unfortunately for the CPC, therefore, it now has to contend with a far more determined adversary. Worse still, America’s willingness to absorb enormous short-term economic pain to gain a long-term strategic edge over China indicates that greed has lost its primacy. 

In particular, the US strategy of “decoupling” – severing the dense web of Sino-American economic ties – has caught China totally by surprise, because no CPC leader ever imagined that the US government would be willing to write off the Chinese market in pursuit of broader geopolitical objectives.

For the first time since the end of the Cultural Revolution, the CPC faces a genuine existential threat, mainly because its mindset has led it to commit a series of calamitous strategic errors. And its latest intervention in Hong Kong suggests that it has no intention of changing course.

Minxin Pei is Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States.

$600 Unemployment Bonus Could Push Millions Past the Brink

A weekly supplement has helped the jobless to pay their bills and cushioned the economy. As it expires, Congress will determine what comes next.

By Ben Casselman

Credit...Rebekka Dunlap

When millions of Americans began losing their jobs in March, the federal government stepped in with a life preserver: $600 a week in extra unemployment benefits to allow workers to pay rent and buy groceries, and to cushion the economy.

With economic conditions again deteriorating, that life preserver will disappear within days if Congress doesn’t act to extend it. That could prompt a wave of evictions and inflict more financial harm on millions of Americans while further damaging the economy.

Even the threat of a lapse in benefits could prove harmful, economists warn, by forcing households to make precautionary spending cuts.

The benefits program, Federal Pandemic Unemployment Compensation, expires at the end of July. But because of a quirk in the calendar, workers in most states won’t qualify for the payments after this week. Most will be left with regular unemployment benefits, which total only a few hundred dollars a week in many states.

That means that more than 20 million Americans could soon see their weekly income fall by half or more at a time when the unemployment rate remains higher than in any period since World War II.

Economists warn that it isn’t just individual recipients who will suffer if the benefits are cut.

The federal payments are injecting billions of dollars into the economy each week, money that flows to landlords, grocery stores, retailers and countless other businesses. Ernie Tedeschi, a former Treasury Department official and an economist at Evercore ISI Research, has estimated that if the payments ceased, the U.S. gross domestic product would be 2 percent smaller at the end of 2020 and there would be 1.7 million fewer jobs nationwide.

“These unemployment benefit checks are really doing a large job in propping up spending by these unemployed households,” said Joseph Vavra, a University of Chicago economist who has been studying the impact of the benefits. If they expire, he said, “there’s a good chance that what is now an unemployment problem becomes a foreclosure crisis and eviction crisis.”

Congress returned from recess this week to consider a new relief package, which could include at least a partial extension of the extra unemployment benefits. Senate Republicans and the White House are considering a roughly $1 trillion package that would retain the program but scale it back. Democrats are pressing to continue paying the full $600 a week.

But Congress seems unlikely to act before benefits lapse. And because of the antiquated computer systems in many state unemployment offices, which do the processing, it could take weeks to restart payments. That means that millions are likely to see their income drop at least temporarily.
For people depending on the checks, that uncertainty is frustrating.

“I have no idea why Congress would wait until a few days before the checks are going to run out,” said Jacob Perlman, a benefits recipient in Chicago. “This should have been done a month ago.”

Mr. Perlman, 26, earned $12 an hour as a housekeeper at a fitness club, making him one of the millions of Americans earning more on unemployment than they had on the job. But he is eager to return to work.

“The jobs simply are not there right now,” he said.

Mr. Perlman’s regular benefits from the state of Illinois total $159 a week, barely enough to cover his $500 share of the monthly rent, let alone food or other expenses. So he is already trying to save as much as possible.

Decisions like Mr. Perlman’s to curtail spending even before the benefits expire, multiplied across millions of households, are a sort of uncertainty tax on the broader economy, damping the stimulative effect of the payments.

“There are people who are on the precipice of financial disaster here,” said David Wilcox, a former Federal Reserve official who is an economist at the Peterson Institute for International Economics. “We may think that the odds are that Congress will come to a reasonable conclusion. But for a person who is on the precipice of financial disaster, it’s very low comfort to be told, ‘You know, I think there’s a 70 percent chance that this is going to work out fine.’”

The risk is particularly acute for Black and Latino workers, who have been disproportionately affected by job losses and are less likely to have savings or other assets to fall back on. A recent working paper from researchers at the University of Chicago and the JPMorgan Chase Institute found that Black and Latino households cut spending by far more than white households when their income drops.

“When 30 percent of your population has no wealth, this has real implications,” said William E. Spriggs, a Howard University professor and the chief economist for the A.F.L.-C.I.O. “There isn’t a piggy bank. This is it. So when you cut their benefits, their drop in consumption is going to be huge.”

The extra unemployment payments were part of a multitrillion-dollar federal response to the pandemic’s economic devastation. Congress expanded eligibility for unemployment benefits and food stamps, sent $1,200 checks to most households and offered forgivable loans to millions of small businesses.

Together, those programs did much to offset the damage: Average personal income rose in April, the worst month of the crisis to date, and consumer spending rebounded quickly once federal dollars started flowing into the economy. Mortgage delinquencies, credit card defaults and other signs of financial stress rose by less than many forecasters initially feared.

When Congress created the various programs, it still seemed possible that the pandemic would have begun to ebb by summer and that the economy would no longer need as much federal help.

Instead, after falling steadily in May and early June, virus cases are rising in much of the country, and states are reimposing business restrictions. Real-time measures suggest that the economic recovery that began in May has begun to lose momentum, and some economists expect the unemployment rate to start climbing again.

The threat of an economic stall has led some Republicans in Washington to embrace more aggressive federal action than they were considering a few weeks ago. Larry Kudlow, a top economic adviser to President Trump and a critic of the $600 payments, said this week that there was “no way” Republicans would allow the benefits to expire entirely. But the congressional outcome remains unclear.

Some economists, particularly on the right, say there are good reasons to wind down the payments as the economy improves. But even economists who have been critical of the extra benefits say it would be a mistake to cut them off entirely.

“That’s a lot of income to just withdraw from the economy really suddenly,” said Michael R. Strain, an economist at the conservative American Enterprise Institute. “Right now there’s no question that the positive economic effects of those payments are outweighing the negative economic effects.”
Mr. Strain and many other economists would like to see the benefits linked to economic conditions, ideally at the state level. That would allow payments to shrink as local economies improve, while eliminating the uncertainty that comes with setting a fixed end date and then waiting to see if Congress extends it.

Progressive economists also favor linking benefits to economic conditions. But they dismiss concerns about discouraging work when there are millions more unemployed workers than available jobs. And they argue that cutting benefits now would set off economic ripples that would lead to more job losses.

“When they can’t pay their rent, now it’s the landlord whose business is hurting,” said Sharon Parrott, a senior vice president at the progressive Center on Budget and Policy Priorities. “Those are all dollars that are not circulating through the economy.”

Cutting off benefits could also increase the spread of the virus by forcing people to take jobs in which they might be exposed to it or expose others.

“When that $600 goes away, people who live week to week, paycheck to paycheck, they’re suddenly going to be unable to pay basic expenses and will be desperate for work,” said Michele Evermore, a senior policy analyst for the National Employment Law Project.

For now, people like Mr. Perlman, who lost his job at a fitness club, are left to wonder what comes next.

“I just want security,” he said. “That’s what I want. I’m not looking to profit off this. If there was a job out there, I would take it.”

Emily Cochrane contributed reporting.