The protesting in Hong Kong is in a lull and the ball is in China’s court. I had a talk with my son (10 years old) last night about it and had him work though the logic problem, possible scenarios, and to put himself in both the shoes of the Chinese, people of Hong Kong, and the rest of the world. We discussed all the possible outcomes, including one that would be the most favorable outcome. We realized that China was in a fix, if they back-off they show both weakness and open the door for further protesting by the people and if they pushed forward they alienate the people and hurt further capitalistic growth, it is a no win scenario. My son is a Star Trek fan and knows about the “Kobayashi Maru” scenario, which in Star Trek lore is a test of the “no win” scenario. He said that we can win if we change the rules, just like Captain Kirk.
Courtesy of wikipedia
So how do we change the rules and allow both the people and the Chinese government to win? The word that seems alien to even our own politicians, “compromise”, most likely seems even more foreign to the Chinese. However, if a scenario can be constructed that does NOT look like compromise, but is – then the government can save “Face” and the people get what they want.
So let’s revisit the question again, what does the Chinese government want? They said they wanted to VET the possible candidates in the election and only allow THEIR VETTED candidates run in the election. So let’s give them what they want, let the people of Hong Kong have a preliminary election to decide a field of candidates and then have those candidates go through a government vetting process, before the election. While this is not exactly what the Chinese government wants, it does allow them to save “face” because they can still say they VETTED and ONLY allowed these candidates to run in the election. The people of Hong Kong get what they want, because they get to field a group of candidates. This is how we beat the “No Win” scenario – just like Captain Kirk – sometimes you just have to change the rules. One can learn a lot from Star Trek and from a 10 year old boy.
Captain Kirk and later Captain Pickard (whom was probably more diplomatic) both never accepted a “no win” scenario – there is always a choice. Additionally, small picture decisions have big picture consequences.
The Hong Kong situation is a small picture decision by the government and also the people of Hong Kong, it is far too easy to get lost and laser focused on the present and only a small piece of the larger picture. The big picture is capitalism and trade, China’s expansion. This political fight over a vetting process has far larger and long-term repercussions in the big picture. China forcing the issue will bring into question the validity and safety of foreign businesses in China, risks of interventionism and nationalism. The big picture is the what, when, and how will Chinese be ruled in the future. Hopefully they can see beyond this Kobayashi Maru scenario, if a 10 year old can – why can’t they?
Supply And Demand
We like to call China a communist country and to some extent they are. However, we can’t deny the massive move and general embrace of capitalism. No doubt the “old guard” in the communist party has trepidation about the growth of capitalism; on one hand it has brought China new found riches, technology, and has put China on the world stage of trade, but on the other hand it means relinquishing some control and eventually a lot of control.
Sun Tzu & Tao
In the beginning of Sun Tzu’s famous book, written 2300 years ago and studied in every military academy in the world, he discusses the five Appraisals of one’s army. The first and I believe intentionally, is Tao which is loosely translated as the “path” or perhaps better as the “principal”. He states:
“Tao is what causes the people to have the same purpose as their superior.”
Courtesy of wikipedia
This concept was as true 2300 years ago as it is today. If the people do not have the same purpose as their leader, their leader will eventually fall. I believe it is the Chinese philosophy and understanding of Tao and perhaps the study of Sun Tzu (most likely required by their leaders as well), that has allowed China’s communist party adopt and allow capitalism to grow. They know that one can’t change the people’s will and that even with might – as described by Sun Tzu, can’t win the hearts and minds of the people. Hong Kong has existed for centuries as a trading and free market port and has survived every onslaught of authoritarian rule. The Japanese tried rule Hong Kong by might and that failed.
Sun Tzu recognizes that understanding and applying proper economic theory can lay waste to nations, raise armies, and is the ultimate determining factor in warfare. His book is as much about economics as it is about military tactics. Ultimately, Sun Tzu sees the big picture of the laws of Supply and Demand. While many like to view these ancient texts from a military standpoint, the big picture is the power of economics and understanding and respecting the laws of Supply and Demand.
Absolute power corrupts absolutely!
Communism and other forms of collectivism seemed fashionable after World War I, it was the solver for economic depression. Even our own nation embraced collectivism as FDR in the U.S. brought forth sweeping changes as Socialism was the solver for our economic woes, or so we thought. Germany moved quickly from a socialist party to Fascism, the Soviet Union was far more Fascist than Communist. China’s Mao Zedong was also far more Fascist than Communist in the beginning. Collectivism had grabbed hold of nations to one degree or another. It was collectivism with central planning, combined with a government controlled economics (Keynesian theory) that shifted power to the state – under the guise the state will solve our economic and social problems. Yet, we have seen these collectivist systems be it Communism, Fascism, and even Socialism fail. A government that marches towards a central planning collectivist regime doesn’t understand the message that Sun Tzu communicated 2300 years ago, “Tao is what causes the people to have the same purpose as their superior.” Rome even fell under the weight of failed economic planning, it fought the laws and Supply and Demand – it failed. Might is not always right, especially if you can’t fund it.
Courtesy of wikipedia
There is talk that some of the old guard and the current leader are pining for the previous days of communism and in their mind, days of glory. The problem is if this old guard and leadership move towards a more fascist position it could have damning broader impacts. Communism and Fascism are not the same and are commonly confused. Communism and to some extent the way it is practiced in China includes a change of leadership and ruled by a committee (frequently referred to as “the party”), whereas fascism has one leader and his cohorts are usually hand selected. In many ways the both can look like communism, but they are different. The difference between North Korea and China is one example. Yet I am not sure that neither the people nor the broader party would allow Xi Jinping (current China president) to take a more authority role. In some ways the Hong Kong situation is a test of his leadership. Rumors from inside the communist party are of some infighting in which the broader party wants to continue down the road of moderation and capitalistic growth, while the current administration is trying to reel that in. No doubt that Jinping is in a pickle, perhaps I should send over my son so they can watch Star Trek together and he can give Jinping a way out of the “no win” scenario. Perhaps Jinping has forgotten Tao and needs a revision course on Sun Tzu.
BRIC big picture
The big picture in China and the BRIC nation is one of growing capitalism and trade. If we study history we see that “might” may certainly rule for a decade or even a century, but it is the power of economics that ultimately decide a civilization’s future. The Soviet Union never learned that lesson and continued to try to rule from a strict communist/fascist regime and it was the power of economics and not a single weapon that toppled the Soviet Union and brought down the Berlin Wall. China is a far older civilization, with much more history as well as some phenomenal writers (Sun Tzu) and ageless philosophy. Regardless of the wrongs of any government regimes, China seem to always adapt and are better at seeing the big picture. They had started embracing capitalism long before they were communist, the Market Preview yesterday included the history of Hong Kong, shows that China was a world trading mecca and one only has to read up on Marco Polo and Dutch and British Trading companies histories to understand.
The volatility in Hong Kong may certainly worsen as it will in the Ukraine most likely. However, it is the people and the laws of supply and demand that will eventually triumph. For now we must be prepared for volatility and how order flow moves to seek safer harbors.
Money is flowing into US dollars as a safe haven. We have seen the Hong Kong dollar even under pressure – which I never thought would happen. Perhaps investors are getting a little too panicked. The rise in the US dollar is also putting pressure on equities and commodity prices. It can even seem to cause “deflation” and will certainly show up in the next CPI (government’s model of inflation).
Getting back to the big picture let’s now turn our attention to the Federal Reserve. Their monetary policy aligns with their Keynesian ideology, as they are trying to cause INFLATION and have even set a target. They are trying to devalue the dollar and inflate asset prices to help kick start the economy as well as pay down debt with inflated currency. So a rising dollar is not helping their cause and they will put an end to it.
However the rising dollar in the small picture of the present does have added benefits heading into the mid-term election. It puts more buying power in the people’s pocket. They can buy a little more gas, more food, and perhaps buy a little extra something. It can raise their spirits and give them hope of a “seemingly” improved economy. Yet, that short-term rise in the dollar is having drastic impacts on the longer term plans and even current Fed financing operations. Yellen will let it go for now as long as the market doesn’t sell off to drastically, but they will put a halt to a further rise in the dollar. Pressure from the K-Street lobbyist are marching down on the Hill and you can bet that Congress members are getting an ear-full right now as we head into the holiday season. Rising dollar can impact earnings in the 3rd quarter and that will not go over well.
Support & Resistance
This seems to be the consolidation area – waiting, perhaps for something to materialize from Hong Kong, maybe the next FOMC meeting, or even the mid-terms. No investors want to take a strong stand with too many uncertainties on the horizon.
NDX 4000 – 4100
The tech sector has been ping-ponging around with some large intra-day volatility. I suspect we will be range bond for a while longer.
SPX 1960 – 1980
I suspect we can get up above 1980 and build some support. The market is waiting for certainty and doesn’t like these global risk situations injecting volatility. VIX should remain elevated, at least into the next FOMC meeting this October.
RUT 1110 – 1120
This is starting to become a consolidation range for now – but we could see some volatility and short-term jerk down to the 1100 range if panic ensues. For now it looks pretty stable.
We have enough volatility at home with the Fed FOMC and the speculation of changes to the monetary policy, coupled with a cantankerous mid-term election. The last thing we need is for one of the most free and global financial markets to come under idiotic ideologue pressure from a regime that wants to flex its muscle a little. The stir in Hong Kong has certainly put the world on edge, I hope and believe that cooler heads will prevail and perhaps they can tackle this problem – much like Captain Kirk rather than some bone-headed Klingon looking for glory.
Courtesy of wikipedia