Dalio Doubles Down – Risk Of Shooting War With China

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Dalio Doubles Down – Risk Of Shooting War With China
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Dalio reiterates yet again the possibility of a war with China echoing what George Soros said a few years ago and what the owner of this site has mentioned for several years now – Dalio points to some of Trump’s adivsors like Bolton who is generally hawkish and Navarro who wrote a book titled “Death By china”, among other reasons for his fears –  see below for the latest from the hedge fund CEO via Linkedin

[dali]

Summary: Nowadays, we can’t avoid considering geopolitical developments because they are playing a greater than normal role in affecting economies and markets.  Recent geopolitical developments have led me to raise my probabilities of trade and other types of wars, such as capital wars, cyber wars (and possibly even shooting wars). To be clear, I’m not saying they’re probable, and I’m not sure that my assessment is right.  I’m just saying that it seems to me that the odds have increased relative to where they were, and I am just sharing the thinking that leads me to that conclusion.

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What Happened?

Most recently, Donald Trump threatening to raise the stakes by $100 billion and the Chinese promptly indicating that they will match the moves dollar for dollar and step by step took me and people closer than me to the negotiations by surprise.  These developments broke my scenario that trade tensions would subside and increased the odds that a different and scarier agenda might be in play that raises the odds of trade, capital, cyber, and/or shooting wars on the horizon.

Before the last few days’ events, I thought trade tensions would subside because the Chinese are very amenable to a trade deal, because there are lots of ways to make a good deal happen, and because aggressive posturing ahead of midterm elections is understandable. Because I’m confident that those three things are true, I had expected the saber rattling to go quiet as the negotiations happened behind the scenes.  That was the picture I painted for you.  When I painted it, I said that if there was a step-up in the conflict, my scenario would be broken and I’d seriously worry. Then Trump raised the stakes by another $100 billion, which led the Chinese to promptly shift their mode from quiet negotiation to publicly stating that they will match the Trump administration’s moves dollar for dollar and minute for minute. Now we have a very public game of chicken going on. Maybe Trump’s statement was just an impulsive slip-up that he will backtrack on, or maybe he was serious.

In any case, I’m worried and forced to look harder at the question of where Donald Trump is leading us. What is his real agenda? Are these statements just negotiating maneuvers that will eventually lead us to having peace with better terms for the US, or are they steps on a path toward trade and other types of wars (and what might those other types of wars look like)?

Right now, I don’t think it’s clear to anyone, including some of the people closest to Donald Trump, what exactly his strategic objectives are. However, it is possible that he and his appointees Robert Lighthizer (US Trade Representative), Peter Navarro (head of the National Trade Council), and now John Bolton (National Security Council head) really mean what they have said.  As for what they have said, here are a few notable ones.

Robert Lighthizer said:

  • “Given the current financial crisis and the widespread belief that the 21st century will belong to China, is free trade really making global markets more efficient?  Is it promoting our values and making America stronger?  Or is it simply strengthening our adversaries and creating a world where countries who abuse the system—such as China—are on the road to economic and military dominance?”

Peter Navarro wrote a book called “Death by China: Confronting the Dragon—A Global Call to Action.” When asked about the title, he said: “It’s an economic death because of China’s unfair trade practices and the loss of the US manufacturing base.  Also, literal death because of the loss of consumer safety: toothpaste, baby formula, a dizzying array of products.  There are also human rights abuses—China’s forced labor camps…Also, the military buildup of China.  It’s an evocative title, yes, and it has multiple meanings.”

John Bolton said:

  • “Our goal should be regime change in Iran.”
  • (On bombing Iran): “The inconvenient truth is that only military action like Israel’s 1981 attack on Saddam Hussein’s Osirak reactor in Iraq or its 2007 destruction of a Syrian reactor, designed and built by North Korea, can accomplish what is required.  Time is terribly short, but a strike can still succeed.”
  • On North Korea: “I think the only diplomatic option left is to end the regime in North Korea by effectively having the South take it over.”

They and the president sound like populist fighters (for good or for bad, which is for you to assess).  Besides seemingly willing to be much more confrontational with China, this administration appears ready to step out of the Iranian deal when it comes up for assessment in May, which will likely lead to some forms of conflict with Iran and with other countries that signed on to this deal.

Having said this, I ordinarily wouldn’t read too much into these statements alone.

However, stepping back from these developments and statements, as explained before, it seems to me that the most analogous period to now is the mid/late 1930s, which was similar because of the a) big deleveragings, b) monetizations of debt that helped the deleveragings by pushing the markets and the economies higher, c) large wealth gaps that were increased by the monetizations as well as new technologies and open trade, d) rising protectionism, e) the emergence of strong populist leaders arising because of the wealth and opportunity gaps and large numbers of people believing that the system did not work for them, f) the emergence of new world powers to challenge the old, g) growing militarism and nationalism, h) tightenings of monetary policies, and i) more conflicts internal and external, with the external conflicts helping to support the populist leaders.

You know from my study of populism that I learned that the most important thing to watch when a populist leader comes to power is conflict. If it increases between the left and the right to produce operational inefficiencies and if it increases between countries to produce international tensions, the odds of one or another or a few types of war developing increase.

If you haven’t read about Thucydides’s Trap, and if you’re interested in how it might apply to US relations with China, I suggest Graham Allison’s “Destined for War: Can America and China Escape Thucydides’s Trap?” In it, he explains that in the last 500 years there were 16 times when emerging powers became as strong or stronger than existing dominant powers, and war resulted in 12 of them.  In the other four, extraordinary steps were taken to prevent war.  The war occurs because the rising power naturally wants to have increasing power, which the declining power naturally doesn’t want to give up, and there is plenty to argue about so there is typically a testing of each other’s powers.  That testing typically starts with small confrontations, which escalate into big ones. Like most things, this dynamic has a logical cyclicality to it—wars leading to peace periods that lead to wars, and so on. In a nutshell, it is that from each war the new dominant power emerges because there is a clear winner so there is not much sense in fighting against a clear dominant power, so there is peace until a new rival emerges and the previously explained conflict dynamic occurs, and so on. For good reasons, now and in the 1930-45 period, this cycle corresponds with the long-term debt cycle. Because both are long enough to typically come along only once in each person’s lifetime, they’re difficult to recognize while they are taking shape and they seem implausible.

I’m also told that it’s wise to watch the populist leader’s rhetoric about the rival country because it is meant to influence the population’s psychology—i.e., to paint the picture of that country as a friend and good or an enemy and bad—in support of its actions.  The Trump administration’s recent descriptions of Chinese actions, using works like “economic attacks” and “enemy,” are concerning.

From studying history, I believe that another thing to watch out for as a straw in the wind is a shift to “state capitalism.” By state capitalism, I mean the government redirecting “business” activity toward the service of the country and away from the service of the shareholder.  This tends to happen when there is a growing risk of war because war puts increasing pressure on the national leaders to bring all the resources of the country, including companies, into the service of the country.

Naturally, leaders who consider the odds of war significant also want to make sure that the country’s productive means are capable and self-sufficient, which is a reason for protectionism.  For instance, a country might decide that it needs a stronger steel industry in the event of war, even if that is not the most economical use of resources, because it fears potentially being cut off from key supply lines and strategic assets.

At the risk of reading too much into them, Donald Trump’s recent interventions in the economy—e.g., his executive order preventing Broadcom from buying Qualcomm—are notable in that regard.

The turn to state capitalism, protectionism, nationalism, and militarism arises when the probabilities of war rise, and reinforces the rival country’s fears and tensions between the rivals.

What Types of Wars?

As for what types of wars are possible, we should think beyond trade wars to consider the possibility of other types of wars.  Because the opposite side of a trade/current account deficit is a capital account surplus (i.e., our borrowing/selling of bonds to the Chinese to finance the deficits, which has led to the Chinese having a large inventory of bonds), one should consider the possibility that this trade war could also become a capital war. I won’t now digress into what such a war would look like because that’s a subject that warrants more words than can fit into here now. However, I will say that it will be even uglier than a trade war, and that to whatever extent anyone believes that the US has the advantage in a trade war because it has a big deficit (so it has more to gain) one could say the same for China in a capital war because it has the bigger deficit.

Managing Money through Major Political Shifts

While we are not political experts, we have studied and experienced political effects on economies and markets for over 40 years. While we typically avoid betting on political shifts happening, and we will sometimes take risks off the table when political risks are very high, we understand pretty well political changes such as in fiscal policies, monetary policies, regulatory policies, currency regimes, etc.—and we believe we have an edge in being able to anticipate the knock-on effects they will have on assets and the economy relative to what is priced.  It is for this reason that when we stress-test our systems and processes across the last 120 years, through all the major wars and depressions and political crises, our systems do well.  Our philosophy for managing money through such geopolitical shifts is to know where our edge is, and to neutralize those exposures on which we do not have an edge, while ensuring our portfolios are liquid (to be flexible) and diversified (to not have concentrated risks).  Our advice for others is to do the same.

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9 COMMENTS

  1. Jim : I would have kept my word and stayed out of further replies & retorts, but this “global warming” thingy drew me in again. Have you read “Dark Winter: How The Sun Is Causing a 30 year old Cold Spell” by John L Casey ?? Its worth a read, imho. And, just because 97% of so -called “scientists” have given the thumbs-up to global warming, does not mean that the majority is right ? Correct ? Remember, Galileo insisting that the earth moved round the sun and not the other way as commonly believed by almost everyone then ?
    I certainly disagree with you that the majority of legal American citizens do not support Trump anymore. In my view, he has more than 60% support of ALL legal American citizens. But, for sure, we can agree to disagree on that. I appreciate you being civil about this, unlike others who dislike or hate Trump. Take care, Jim, nice chatting with you even though we seem to disagree on almost everything. At least we agree that civil conversation is possible despite disagreements. Cheers, Jim !!!

  2. Well, as I pointed out, the majority does not support him anymore. When Trump came into office, I admit I knew nothing about him. It is his actions that have turned me against him, primarily the people he appointed to high level government positions, like NASA, the EPA, and the Attorney General. I’m a scientist, among other things, Carlos, and Trump’s theory that global warming is “fake” and some kind of “Chinese conspiracy” made it evident that this was not a man I wish to trust our nation and our children’s future with. I’m sorry that anyone thinks he’s doing a good job, but the future will come and vindicate one of us. Until then we shall agree to disagree. Take care.

  3. Jim : There is no point whatsoever for me to concede. I have never ever said that what the “majority” thinks is right, is necessarily right. I am only saying that despite what the biased press/media is putting out (you seem to believe them), there is clearly a majority support for Trump in America among legal US citizens. And, a democracy, for better or worse, functions by “majority”.
    My main point, however, is that (from what you have written) you seem to know nothing about Trump. You don’t seem to be following him objectively, just emotionally with a lot of hatred and bias. In my last post I also suggested what you could read, but apart from jumping on the “majority” angle as a sort of lifebuoy, you showed little interest.
    I believe that I have replied to you in full. I am not going to waste my time further on this post as I have far more important things to get done. Cheers !!

  4. Majority support does not offer tangible proof of anything except the prevailing opinion. What you’re saying now is that you believe whatever the majority supports is the truth, and everyone that disagrees must be false or a liar. So, if Trump’s approval rating drops to say 40%, would you change your mind? In three polls taken this month his approval rating was 39%, only in Trump’s favorite poll did he score a 50%, and even in that poll he has never scored higher than 59%. Your “majority is right” argument seems to be losing ground. And by the way, you were the one who wanted to make it “very clear” that the majority opinion was a salient point, so it was hardly tangential. Since the majority of polls place him at 39% and only one poll places him at 50%, that implies 50-61% of the people now disapprove of Trump, which means (by your logic) that Trump must be a liar and all the hostile media is true. Otherwise, will you concede the point that what the majority thinks doesn’t mean squat?

  5. Not only I continue to believe that your analytical skills are non-existent, you have jumped off at a tangent on the “majority” issue. I was merely making a point that though news coverage continues to be extremely negative regarding Trump (probably 80-90% negative), he actually has majority support among the rank and file. Which to my mind proves that the press and media are fake and lying. I stand by what I said about you not knowing ANYTHING about Trump. Read his books for a start. Read Scott Adams, WIN BIGLY. Or don’t. The choice is yours…..to educate yourself or believe the biased press/media.

  6. What’s your point? Are you trying to imply a modest majority is bound to always be correct? In 1930 Hitler was supported by a majority of Germans, he was good for their economy, turned them into a world power. I guess that made him the right man for the job. After all, he had the support of the majority. I’ll tell you something about the majority, the majority only care about themselves, what is good for them in their personal situation right now. They don’t care about the suffering of others if it means they might have to sacrifice something of their own comfort to diminish it. The majority of people don’t think about the future, and take nothing from the lessons of the past. The majority of people are self-centered, self-serving, self-righteous sheep that believe what they’re told to regardless of any and all evidence to the contrary. That is a major reason they like Trump, he doesn’t challenge them to face the truth, and spins a comfortable yarn that relieves them of the need to think for themselves. Go ahead and support Trump, may you and the rest of your majority share in his ultimate rewards. What do you think of my analytical skills now?

  7. You really have absolutely no understanding of Trump at all. But, that will not stop you from going public with your views. The upside to this is that you show everyone what kind of analysis you are capable of. Get just one thing very clear : Trump has the backing of the majority of legal American citizens even if you consider the huge liberal states of the West and the East. I would say close to 60% of legal American citizens are with Trump.

  8. “Right now, I don’t think it’s clear to anyone, including some of the people closest to Donald Trump, what exactly his strategic objectives are.”
    Donald Trump entered the presidency as a shyster and a confidence man, his only agenda was to grease the wheels of his business interests, reduce his overhead, reduce the regulation of his business interests, and increase his personal wealth and profitability by undermining all the governmental controls on big business. Those are his “strategic objectives.” Everything else he is just playing by ear, trying to say whatever he thinks will make him more popular with the people so he can continue to move forward with those personal objectives. That is why he conducts his presidency on Twitter. Donald Trump does not care about the world, the nation, or the future of the human race, he cares about his personal empire and maintaining it for the du