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While Russia Fights, China Prepares for War
History doesn’t repeat itself, but it often rhymes In March 1936 the Germany’s Army reoccupied the Rhineland region of Western Germany. The Rhineland had been demilitarized under the Treaty of Versailles in 1919, to create a buffer region between Germany and France in the aftermath of the Great War of 1914-18. For Nazi Germany in March 1936 the “retaking” of the Rhineland was a hugely symbolic event, and its relative lack of reaction from other powers emboldened German Chancellor, Adolf Hitler who’s armies moved on to invade Czechoslovakia almost exactly three years later, setting the World ablaze in another global conflagration. However, as the Great War had illustrated, it takes more than one event, one leader or one country to create a World War; it tends to be a culmination of multiple factors that cause the worst outcomes. A year after German troops reoccupied the Rhineland, Japan mounted an invasion on a politically divided China. Japanese imperial troops mounted an attack on the fractured forces of the nationalist Kuomintang and the insurgent Communist Party, which (temporarily) allied to resist it, in a conflict against Japan that raged from 1937 to 1945. The temptation is to be mesmerized by Russia and its invasion of Ukraine - a country divided by an 8 year civil war and run by an (at the time) unpopular government - but it is also worth thinking further East, to other, apparently disconnected events, that make the global situation more uncertain than just the direct byproducts of the first “tank war” in Europe since 1945. Now it is Russia, rather than Germany taking on unfinished business on its Western flank in Europe, and it appears China, rather than Japan, is intent on dominating the East China sea. It has unhappy echoes of the late 1930’s. China and Taiwan - the Unfinished Civil War Taiwan (the Island of Formosa) had been under Chinese imperial control since the 17th Century. It was ceded by Imperial China to the Empire of Japan under the Treaty of Shimonoseki after the first Sino-Japanese War in 1895: a strategic byproduct of Japan’s invasion of the Korean peninsular. This added to the pressures on the imperial Qing Dynasty of China, which had in prior decades already suffered the humiliations of losing both Opium Wars (1839-42, and 1856-60) and control of Hong Kong (ceded by the Qing to the British in 1841). By the time the Qing administration had been further knocked by territorial losses to Imperial Russia in the Sino-Russian War of 1904-5, the light was fading on centuries of imperial rule. Despite belated attempts at reform the Qing Dynasty and the imperial throne itself was deposed by a revolution in 1911, resulting in the abdication of the last Emperor Puyi, and the creation of the Republic of China. It was this Republic of China that was riven by internal divisions when Japan attacked it in 1937. The mainstream Kuomintang (KMT) and revolutionary Chinese Communists (CCP) had been fighting each other since 1927 but allied - not always coherently - to resist the Japanese invasion. Global power politics played a hand, and the KMT was backed by the US and the CCP by the Soviet Union. The CCP tended to be more successful in their military operations than the KMT, and when the Japanese surrendered to the Western Allies in late 1945, the friction between the two groups reignited in violence. After several more years of conflict in which the KMT suffered a series of reverses the KMT and its leader Chiang Kai-shek escaped to Formosa in 1949, leaving mainland China to the victorious CCP. The mainland became the Communist People’s Republic of China (PRC), and the nationalists remained the exiled government of the Republic of China (ROC) in Taiwan. Nancy Pelosi Visits Despite the warm rhetoric of the US and others, the ROC is diplomatically recognized by only a handful of countries (14 to be exact, mainly in the Caribbean and Latin America, but also including the Embassy of the Holy See (Vatican); compared with the 172 foreign embassies hosted by the PRC). The USA continued to recognize the ROC in Taiwan until 1979 and then cut its formal recognition in favor of the PRC on the mainland, and now has no formal diplomatic relations with the ROC. The US may not have an embassy but it does have a significant presence in the form of the American Institute in Taiwan, a unique body mandated by the Taiwan Relations Act of 1979; a “strategic ambiguity” that is more complex and subtle than the foreign policy stance of the Pope, it would seem. However, Taiwan is the United States’ eighth-largest trading partner, a globally important manufacturer of microchips, and the United States is Taiwan’s second-largest trading partner (ironically after the PRC, which is the largest). With this background in mind, the visit of House of Representatives Speaker, Nancy Pelosi to Taiwan last week was strange for at least three reasons: The Speaker has therefore ignited more tension between the US and PRC - one must assume deliberately - but it is not clear for what strategic purpose. The PRC responded in predictable manner, by increasing the number of its military air sorties in to or near ROC airspace ; but it also engaged in a new escalation by commencing a series of live-fire exercises in the waters around Taiwan itself. The PRC Arms Itself The PRC exercises around Taiwan resulting from Speaker Pelosi’s visit differ in nature from the type of exercises that have gone before: The PRC increased its defense budget by 7.1% this year to Yuan 1,45 trillion ($230bn), despite its economy being under pressure from “zero covid” lockdowns, reduced domestic demand and some food inflation (2 - 6% depending on the food - still modest compared with the inflation seen in the G7 economies). This is still dwarfed by US defense spending of circa $700bn. However, in context, the Chinese defense budget has more than doubled in the last decade. The Creation of AUKUS and Japan Rearms In September 2021 the governments of the US, UK and Australia announced the creation of an “ enhanced trilateral security partnership called “AUKUS ” - Australia, the United Kingdom and United States ”, much to the chagrin of other countries with historic ties to the Indo-Pacific region, notably France. The military pact is more like a series of agreements starting with the US and UK helping develop nuclear powered submarine capability for Australia and extending to collaboration on a number of other security related capabilities, including cyber, AI, quantum computing (useful for a number of things) and “ additional undersea capabilities ” (which is likely to be a euphemism for undersea drones or UUV’s, Unmanned Underwater Vehicles). The late, great Shinzo Abe, who was so tragically assassinated on 8 July, had as Prime Minister of Japan urged rearmament as a priority, in a rejection of the constitutionally imposed pacifism since the Second World War. His quiet urging led to Japan converting helicopter carriers to fully fledged aircraft carriers, and in October 2021, two locally stationed US Marine Corps F-35B’s landed on the deck of JS Izumo, the first operational aircraft carrier Japan has had since the end of the Second World War. The US has its largest permanent overseas military presence in Japan; as it nearly invariably has been since 1945. More than 55,000 military personnel occupy around one hundred and twenty bases throughout Japan’s islands, including a large part of Okinawa. The US has another 26,000 troops stationed in South Korea. As I write the USS Ronald Reagan carrier strike group is bobbing about on the South China Sea: the USS Ronald Reagan is a Nimitz class nuclear powered super-carrier, accompanied by cruiser USS Antietam and destroyer USS Higgins and - one would have to assume - one or two nuclear powered submarines, lurking darkly beneath the surface, listening. Wake Up Call With war in Europe and military rearmament in East Asia, Western politicians - distracted by inflation and domestic issues - should have a more strategic eye on the risks of an increasingly confident PRC and an increasingly frustrated Russia. As slowness to build military capability and strong diplomatic relationships proved in the 1930’s, mistakes now will prove costly in years to come. Further Reading
Duncan Wales
Aug 16, 2022 · 9 min read
Investing is Suffering from Growing Information Asymmetry
Researching Investments used to be a pro sport I have written before about how the world of investment related information has changed: https://the-perspective-pool.scriber.to/article/the-reason-we-built-scriber . Since the advent of the smart-phone in particular - the iPhone hit the market in 2007 - access to information, investing and other services has been transformed. The news at the moment all seems pretty grim, but in 2009, when I started thinking about what would ultimately become Scriber, the world was different: The world of financial research and data was a specialist sport played only by people who worked in financial services and was entirely invisible to everyone else: it was not (and still is not) possible to find the research that investment professionals use on the web. Professional and specialist research resides on closed platforms, designed - and priced - for professional, institutional users, such as Bloomberg, Refinitiv and S&P Global. There was literally a closed loop of information within the financial world: only professionals produced it and only professionals consumed it; in those days it made sense to play the entire investment game behind closed doors - it was complex, expensive, expert stuff - who else would possibly need access to it? Power to (all) the People The transformation in the demographics of investing has been rapid and dramatic. Armed with smartphone distribution, disruptive technology has put the ability to trade shares, futures, options, FX, and crypto in to the hands of at least 300 million people who have a trading account. That is before you include all the people who care about how the financial world works because they have a self-invested pension, a 401k, a mortgage, run their own business, or take a pro-active interest in their and/or their dependents’ financial position. Trading in some investments genuinely has been democratized. However, access to the information people need to make trading decisions has not. Professionals and the new class of semi-professional investor use very different tools for accessing insights: the professionals use Bloomberg, Refinitiv, FactSet, CapitalQ and other systems to access professional insights. Everyone else relies on Google and social media. But - ironically - now so do professionals: Twitter is a venue for serious thinkers and a vehicle to build an investment or business track-record in public. And even the Discord - a social platform designed for gamers - hosts a thriving community of investors and commentators. And as we at Tellimer know from our institutional clients, professionals turn to Google to find difficult to find information and expertise. While investing remained a rarefied and exclusive activity, finance professionals used to enjoy a huge information advantage over everyone else. However, the era of access to investing has created a new information asymmetry - perhaps counter-intuitively - that creates a problem for professionals as well as the new classes of semi-professional and democratized investors. Because there is a hard, opaque barrier between the professional networks - which are very good at what they do but were designed and built for the old world and have proportionality less access to unique information than they did - and the growing pool of expertise in the wider economic environment, both are separated from each other, to everyone’s detriment. Information is still too hard to find. More To Invest In - Less Research A feature of the rise in technology is that it has grown along side - and arguably actually created - new asset classes and themes for investment: not just DeFi, but all the complex dimensions of ESG, alternative energies, food production, cleaner extraction industries, alternative energies, evidence based ethical investing and procurement, e-commerce, food delivery apps, online shopping, super-apps, electric vehicles and also the economic rise of large developing economies such as China, India, Brazil and many others. There is much more to understand than ever before, and less and less coverage of it all from the traditional world of finance. It should be possible for a single person or small team, with big firm experience or equivalent quality to reach anyone who is searching for guidance on how to think about their personal - or professional - investments/economy/business. Much as everyone who needs it should have access to sophisticated thinking on financial and economic matters, but the traditional community of finance also needs new and different sources of expert information as well. Traditional Finance meets the Creator Economy The creator economy - in which individuals rather than platforms have control of their editorial agenda - now permeates a number of industries: journalism (think Substack or Medium) e-commerce (think Shopify), music (think TikToc), TV (think YouTube) and fashion (think Instagram): “influencers” have not brought an end to the platform model - the FT, WSJ, HBO and even Netflix still exist - but have added to and changed the landscape forever. The opportunity exists to give the increasingly savvy population at large as well as the frustrated professional audience access to the right expertise. The new democratized creator model will not replace the old, but rather interact with it in a controlled way: users of professional systems will still use those systems, but need more access to more and different information. Individuals will value high quality access in accessible forms. The new wave of tech will transform access to financial, economic and business expertise: the creator economy will provide selected permeability to the hard structural barriers that currently separate expertise and demand. It will; The free-for-all romance of a Web3 world in which everyone owns part of the internet may not quite come to pass, but it is entirely realistic to think of a world in which more professionals and experts have the ability to monetize their expertise without the need to be employed by a huge company. That still sounds like freedom to me. Further Reading:
Duncan Wales
Aug 9, 2022 · 6 min read
Turning Thoughts in to Dollars
Scriber - the new infrastructure of investment information We have just launched the operational version of Scriber - https://scriber.to/ - which has been in open beta since the end of March. Before launch Scriber has attracted 500 writers who are already delivering their own unique insights to circa 150,000 of their own subscribers via Scriber’s tech. From today they and any new user will not just be able to create professional emails, web-presence and a structured way to share insights through social channels, but also introduce a paywall and get paid for their work. Scriber gives experts the ability to set up and grow their own subscription businesses, giving anyone who needs it access to their expertise for a fee. Financial information and insight is no longer trapped in the opaque world of traditional finance or on systems that most people have never heard of and do not have access to. By the same token even the investment professionals who do have access to those systems are increasingly separated from new markets and have less access to research than they used to: a combination of changing market dynamics, regulation and costs has meant that there is less research and analysis available at a time when the investment universe is in fact expanding: fintech, biotech, crypto and DeFi, deep dives on companies and the complex of opportunities and risks in sustainability, climate and ESG. That is the gap that Scriber will close. It dramatically lowers the access point to high-end expertise for the new class of semi-professional and retail investor and gives greater range and diversity of analysis to investment professionals, everywhere. The Power of Ideas Humans are good with ideas. We use concepts that are entirely fictional to create reality and drive civilization and our lives: money, ownership, contracts, qualifications, jobs, pensions, insurance and laws - the components that hold together society - are all human fictions. So powerful are these concepts that they start to feel very real to us all: a friend challenged me on this point, and I reminded her that there are plenty of places in the world now - and of course in the past - where humans abound but none of these concepts exist (at least not in a way that most of us would recognize). Humans used to transmit ideas and information with speech, stories, songs, drawing and writing. Each step in technology increases the potency of ideas: the creation of the mechanical printing press by Gutenberg in 1450 (movable type printing had be pioneered in China long before that), revolutionized the transmission of ideas and information and paved the way for the Enlightenment and Industrial Revolution: because the printed word does not just facilitate the transmission of ideas and information through space, and the words of the author through time, it also allows the rapid, mass multiplication of ideas and duplication of information. The revolution in ideas preceded the revolution in industry. However, the means of creating publications was expensive and controlled by companies and institutions, who charge for access to information and decide what to pay the writers and experts. In the new digital era, we can not just separate ourselves from the shackles of physical paper, or closed tech systems, we can liberate expertise and insights from people outside a big franchise platform - former and aspiring professionals and subject matter experts: no one to edit you out, not select you for a role, or tell you what to write. We can all be judged on what we do, and the value we create with greater transparency than every before. That is what Scriber is for. Turning Thoughts in to Dollars The digital revolution of the 21st Century means that anyone, anywhere with expertise and ideas can be accessed by anyone else, anywhere else, at any time who is searching for information or ideas. I am writing this on a machine no bigger than a medium sized book, sitting at the kitchen table of a cottage in the rural UK - the sun is shining, sheep are bleating in the field next door and a dog is asleep at my feet - and you, dear reader, are reading it on email, the web or via social media, wherever you are. Technology has truly collapsed the time, space and geography gap between us. As the erudite and eclectic Jim O’Shaughnessey pointed out “Bill Gates figured out a way to turn his thoughts in to billions and billions of dollars”. Scriber now let’s anyone, anywhere perform the same alchemy. Further Reading:
Duncan Wales
Aug 1, 2022 · 4 min read
Pariah Swap: Biden reverses on Saudi and Russia
Biden’s first overseas trip In June 2021 the newly elected US President Biden made his first overseas trip, which included an in-person meeting with President Putin of Russia. The pair met with their foreign ministers, Anthony Blinken and Sergey Lavrov, in Geneva, in what was supposed to be two meetings; the first, in a small group with interpreters, and a second longer - less confidential - meeting with more officials discussing a longer agenda. Biden used the more discreet of the two meetings as an opportunity to ask Putin to stop cyber attacks on the US, and provide a lecture on the importance of human rights, while Putin used it as an opportunity to size up Biden’s personality and resolve. As far as anyone can tell from outside the room the two Presidents quickly ran out of things to talk about. To both Biden’s own officials and the Russian delegation it was painfully clear that Biden’s rather indistinct approach represented a significant shift in the conduct of US foreign policy. It was certainly less robust than that of the prior Administration, which for all the unhelpful eccentricities of former President Trump was otherwise remarkably coherent. Saudi, Oil, Standards and Values The foreign policy issue that Biden was very robust about during his election campaign in 2019 was on the Kingdom of Saudi Arabia (“KSA”). Biden said it deserved to be made an international “pariah” as a result of its involvement in the murder of Saudi journalist, Jamal Khashoggi. In a policy volte face President Biden has just visited KSA, and met with its ruler, Crown Prince Mohammed Bin Salman (MBS) with a jovial fist bump, whom he had previously blamed for the Khashoggi murder. In the period since Biden’s original rhetoric the price of oil has nearly tripled, Russia has invaded Ukraine and put its nuclear weapons on alert, the deal to prevent Iran developing nuclear weapons of their own torn up by the Trump Administration is no nearer being rehabilitated, relations with China remain fraught, and USD rates and inflation are rising at their fastest in a generation. A cynic might say that Biden has conveniently ditched is moral outrage in order to ask the KSA to produce more oil to bring down its price and curb inflation in the US. The first duty of government is to maintain the economy and prevent rioting in the streets; standards and values matter of course, but not as much as the price of gasoline or inflation, as it turns out. It is far from clear that he will succeed in this objective; there are limited reasons for KSA or any other GCC country to release more of their reserves of oil to depress the price. in fact as I write the price of oil (Brent crude benchmark) has just pushed back above $100 per barrel because the market doesn’t believe the KSA will release more reserves. However, the general entente between the US and the KSA - even if Biden’s key request has been rejected - is also despite the fact that due to limitations on processing capacity the KSA is buying more fuel oil from Russia to generate power than before the conflict in Ukraine. KSA doubled its imports of Russian fuel oil in Q2. In February of this year, President Biden said that Russia should be made a “pariah” because of the invasion of Ukraine. Biden obviously likes dishing out pariah status, but perhaps nobody should take the epithet too seriously. Iran, Oil and Nuclear Proliferation The other reason for President Biden’s trip to the Middle East was to try to reignite the Iran nuclear deal: the Joint Comprehensive Plan of Action (JCPOA). Under the JCPOA - which involved the UK, France, China, Russia, Germany and the EU, but President Trump tore up in 2018 - Iran was allowed to export more of its oil in exchange for limiting its nuclear ambitions, which again would help the US with inflation. However, now the deal is dead, it has strong resistance from both KSA and Israel, who have been on better terms with each other than ever before - in large part due to their distrust of Iran. Both are key political and economic allies of the US in the region. In a recent news interview the Saudi Minister of State for Foreign Affairs, Adel al-Jubeir was asked about the meeting between President Biden and MBS and what was said about the Khashoggi case. With his customary and disarming charm, Adel al-Jubeir alluded to the fact that what is said on the campaign trail “ sometimes doesn’t get reflected in terms of being in office, because [Presidents] have access to more intelligence and because they have access to a fuller and broader picture ”. Having swept that diplomatic embarrassment to one side as an understandable feature of the real politik it seems that the KSA team wanted to focus much more on what Adel al-Jubeir described as the “ threat from Iran ”. US Foreign Policy Mistakes have Driven both Russia and Iran in to the Arms of China Just as Russia’s pariah status has driven it to do more business with China, and the energy crisis has caused the KSA to buy more Russian fuel oil, so the failure of the JCPOA has caused China to import record amounts of Iranian oil: China now imports more Iranian oil than it did before the imposition of sanctions on Iran in 2017. President Biden has just fist bumped in to contact with two pieces of political reality: Over the last year, President Biden’s approval rating has fallen from 52% to 38%, and the annualized rate of inflation has nearly doubled to 9.1%: gasoline prices were one of the most significant components of that, having risen 59.9%. The President’s visit to the Middle East is unlikely to have turned either of those around. Further Reading
Duncan Wales
Jul 18, 2022 · 6 min read
A Significant Week - Virtual BRICS, topless G7, and NATO expansion
BRICS - Adjusted Heights On 23 June the leaders of Brazil, South Africa, China, India and Russia met (virtually) in Beijing to foster “ solidarity and cooperation based on our common interests and key priorities ”. Not only did the BRICS leaders met virtually, they issued a virtual group photo, in which the heights of the leaders had been diplomatically adjusted to avoid embarrassment and foster a sense of unity (President Xi is nearly a foot taller than Presidents Modi and Putin). In a long and platitude-filled “Beijing Declaration” invoking multilateralism and the rule of international law, the group admitted - briefly - they had discussed both Ukraine and Afghanistan, making it clear that they aren’t going to judge and aren’t going to interfere (emphasis added): Reading the Western media one would not have known about the BRICS meeting, nor of its non-judgmental approach to Russian over Ukraine: all focus was on the G7 and NATO. Immediately after the leaders of the BRICS had their virtual meeting, the G7 was meeting physically in picturesque Bavaria in southern Germany, its leaders cheerfully making jokes amongst themselves about President Putin’s fondness for posing for photographs shirtless. The only virtual attendee was President Zelensky of Ukraine, who was invited to speak. The G7 - Adjusted Morals The G7 has made Russia and President Putin pariahs, and its leaders - and majority of their electorates - obviously believe that it is politically appropriate to make personal jibes at Putin’s expense. However, just before Trudeau, Johnson and Von der Leyen laughed a their own jokes with the delighted media looking on, the Russian President himself was being greeted by the BRICS - which include the world’s largest democracy and world’s second largest economy - with all the diplomatic courtesy afforded to the leader of an independent democracy (which technically he is). On the day the G7 meeting started a Russian air-launched cruise missile - a guided not arbitrary weapon - hit a shopping center in the Ukrainian town of Kremenchuk. That feels like a very deliberate message. Beyond the G7’s childish quips, the official rhetoric against Russia and President Putin could not have been harder. In a joint statement the G7 described President Putin as a war criminal; “ Arbitrary attacks on innocent civilians are war crimes. Russian President Putin and others responsible will be held accountable,” they said in a joint statement. With profound irony - or perhaps political pragmatism over moral consistency - the G7 had no qualms about inviting two of President Putin’s BRICS friends to join them. President’s Modi and Ramaphosa attended the G7 meetings as India and South Africa are “ partner countries ” of the G7 and “ strong democracies that are aware of their global responsibilities ”, in the words of German Federal Chancellor Olaf Scholz. Strong democracies that hang out and have shared priorities with war criminals, that is. Human Freedom Metrics The BRICS nations have a decidedly patchy record on matters of personal and political freedoms. Despite 4 of the 5 BRICS countries being democracies, their collective tendencies are decidedly illiberal: based on the 2021 Human Freedom Index published by the Washington DC based Cato Institute, South Africa and Brazil rank poorly at number 77 and 78 in the world (some way below post-traumatic Bosnia and El Salvador), with India at 119th (below Sierra Leone and Cambodia), Russia at 126th (below Nicaragua and Nigeria) and China at 150th (below the Democratic Republic of Congo and Zimbabwe). The G7 all rank in the top 35: it would be higher but France lets the side down with its 34th place ranking: Canada ranks 6th, the UK 14th, the US, Japan and Germany joint 15th, and Italy 26th. NATO’s Renewed Sense of Purpose A day after the G7 summit nearly all the G7 leaders and their entourages migrated from Germany to Madrid for the NATO meeting: Japan and the EU were allowed to go home. And Finland and Sweden are joining, now that Turkey has lifted its objection to their NATO membership. The Nordic countries apparently agreed to stop supporting armed Kurdish groups in south eastern Turkey - which had enraged Ankara - in exchange for their membership of NATO. In sharp contrast to the BRICS Beijing Declaration of the week before, which hardly mentioned Ukraine, the rhetoric of the Madrid Declaration of NATO was predominantly about Russia. The original raison d’etre of NATO - fighting Bolshevik Russia (see https://the-perspective-pool.scriber.to/article/russia-is-a-bolshevik-state-once-again ) - has reignited its purpose, and expanded its membership further (emphasis added): However, in another signal that the world is now changed, NATO is also explicit about China and its disruptive influences on the Western-led world order: As I noted in my last Scriber piece https://the-perspective-pool.scriber.to/article/the-eu-aspires-to-be-the-new-rome Ukraine - for all its corruption, dysfunctional politics and long running civil war - has done enough to illustrate it has “European values and standards”, by resisting Russia. Turkey - a NATO member with an on/off relationship with Russia - still hasn’t made the cut. China vs The West The new lines are now being drawn between those who aspire to “ Western standards and values ” - led by the G7 - and those who want to make “ global governance more inclusive, representative and participatory to facilitate greater and more meaningful participation of developing and least developed countries ” (the Beijing Declaration) - led by China. The natural beneficiary of the consequences of the conflict in Ukraine is China: it remains friends with Russia, will buy more of its gas and use it to win more friends in Central Asia, Africa and Latin America, many countries of which have longstanding arms and energy deals with Russia. It also remains the second largest investor in US public debt (Japan owns a little more), and intimately connected to the economies of the West, which depend on it. The next years and decades are going to be defined by the complex wrestling match between China and the West and their friends who may have to pick sides. Further Reading:
Duncan Wales
Jul 2, 2022 · 6 min read