War between the US and China — an unpleasant thought, for sure…unless you happen to be a defense contractor. The threat of war could be sufficient to power the defense industry’s profit growth for many years.
We would not be tackling this grim topic — nor engaging in the financial market version of grave-dancing — if the suits and uniforms in Washington understood that China is merely implementing its own version of the Monroe Doctrine.
If you don’t remember the Monroe Doctrine from history class, it goes like this: President James Monroe in 1823 put the European powers on notice that if they meddled anywhere in Latin America, the United States would step in to put a stop to it. It was a big “keep out of our backyard” sign.
OK, it was more subtle than that; an aging Thomas Jefferson congratulated Monroe on achieving a “cordial friendship with England.” The doctrine was, indeed, a tacit agreement between the United States and Great Britain. The US took a free ride on the Royal Navy. Its ships patrolled the waters surrounding Latin America, keeping the continental powers far from America’s doorstep.
The original Monroe Doctrine aimed to keep Europeans away. China’s Monroe Doctrine aims to keep the United States from getting closer than it is already.
“The Pacific basin has long been home to the United States’ largest trading partners, and Washington deploys more than 320,000 military personnel in the region, including 60% of its navy,” writes Conn Hallinan of the think tank Foreign Policy in Focus. “The American flag flies over bases in Japan, the Philippines, South Korea, Malaysia, Thailand, the Marshall Islands, Guam and Wake.” The US Seventh Fleet routinely sails near the Chinese coast, to the edge of the “12-mile limit” where international waters end.
No wonder Chinese leaders sense — rightly or wrongly — that they’re being encircled.
“China has made it clear that it will not tolerate the threat to its security represented by a foreign military presence at its gates when these foreign forces are engaged in activities designed to probe Chinese defenses and choreograph a way to penetrate them,” writes our acquaintance Chas Freeman, the veteran US diplomat who was President Nixon’s interpreter on his groundbreaking visit to “Red” China in 1972.
“There’s no reason to assume that China is any less serious about this than we would be if faced with similarly provocative naval and air operations along our frontiers.”
Thus are the Chinese asserting their dominion over the disputed Senkakus Islands. “China sees the islands as part of its defensive parameter,” Hallinan explains, “an understandable point of view considering the country’s history. China has been the victim of invasion and exploitation by colonial powers, including Japan, dating back to the first Opium War in 1839.”
China also insists it rightly controls a host of islands in the South China Sea — rich fishing grounds and a potential source of oil and gas. These islands, such as the Spratlys and Paracels, are also claimed by… oh, let’s run down the list: Vietnam, Malaysia, Taiwan, Brunei and the Philippines. Maybe the Kardashians too, for all we know.
In addition, China has…
A sensible US response would go something like this: “Hey, China’s implementing its own Monroe Doctrine. They want to be in charge in their own backyard. Meanwhile, we’re $16.4 trillion in debt. Heck, we owe $1.1 trillion of that to China. Why are we going deeper in debt to keep 60% of the Navy stationed in the Pacific basin? Maybe we should reconsider this whole ‘American lake’ thing.”
Instead, the US government is doubling down.
“As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point,” Secretary of State Hillary Clinton wrote in Foreign Policy’s November 2011 issue. “One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment — diplomatic, economic, strategic and otherwise — in the Asia-Pacific region.”
In DC wonk circles, this statement of intentions has come to be known as “the pivot.”
The same month Clinton published that article — with the presumptuous title “America’s Pacific Century” — the Obama administration stationed 2,500 US troops on Australia’s northern coast for the first time. More encirclement.
This “pivot” opens up an intriguing investment angle. Think of it as channeling some of your tax dollars back into your own pocket. The US defense industry is positively salivating over the pivot.
As 2012 wound down, the Aerospace Industries Association — whose membership roster reads like a list of ITA’s top holdings — issued its annual industry forecast. Reuters summed it up like this: “US sales of warplanes, anti-missile systems and other costly weapons to China’s and North Korea’s neighbors appear set for significant growth amid regional security jitters.”
Not to put too fine a point on it, the pivot “will result in growing opportunities for our industry to help equip our friends,” enthused AIA vice president Fred Downey. Orders from Asia will more than make up for a slowdown in buying by those parsimonious and peacenik Europeans.
And even if the automatic cuts in the US take effect, “contractors such as Lockheed, Boeing, Northrop and Raytheon Co. expect regional demand for their products and services to help them offset Pentagon belt-tightening,” says Reuters.
The AIA didn’t put numbers on its forecast, but pressed by Reuters, the industry group disclosed that sales agreements with countries under the US Pacific Command’s umbrella grew 5.4% in fiscal 2012 — to $13.7 billion.
Nevertheless, J.P. Morgan recently downgraded several of the big defense-sector names: “We believe,” said its report, “that Republicans as a group put a higher priority on spending cuts than they do on preserving the defense budget.”
We have our doubts… but even if that turns out to be true, there’s still money to be made from the pivot. Back in November, we urged the subscribers of Addison Wiggin’s Apogee Advisory to buy shares of The iShares Dow Jones US Aerospace and Defense ETF (ITA). The stock is up about 15% since then. But as the pivot proceeds, we would expect this stock to continue trending higher.
Addison Wigginfor The Daily Reckoning
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
I think your analysis of a Chinese Monroe Doctrine is insightful. However, I would use this insight to warn our politicians, not to pour on the military investment. War is not fun. We should be withdrawing.
America will lose its position in Asia. sooner or later. there is no preventing it. whether we reach that reality the easy way or the hard way is up to America.
I feel that Monroe can only thrive with uncle Sam and he is still alive since 1800s. Fabulous
economic gifts and packages such as the most favoured nations term is part and parcel
of his generosity(?). Apart from this he offers his magical umbrella that is nuclear-tipped and possesses economic functionalities as well, foc, to anyone he assesses could be instrumental to his global grip. Generosity in general sense will never be overreacted or egregiously done.
But, debacle of the core problem is zombies thriving ubiquitously, far outstripping genuine
human popping souls, hampering healthy demography progress. Succinct enough, the
concurrent ecological imbalance is posing high risk of tearing the globe into pieces.
Normally I stay out of these discussions but the blatant ignorance of the author needs to be highlighted.
Your list of contenders for the Spratlys is missing the two largest (after China), South Korea and Japan. Your also glossing over the fact that China is not a Democratic country, every other nation in that region is rightly afraid of a Chinese Hegemony being established. The US has for the most part been clandestine in it’s operations in the North, Central and South American region. China will not be so nice, their method of solving problems is much harsher and more direct.
Also your numbers for forces in the Asian Pacific region is HORRIBLY wrong. There aren’t even 200,000 active duty deployed / stationed over seas, much less 300,000 in one region. The two main concentrations of US military are South Korea (ground) and Japan (Air and Surface). The USFK has approx 28,500 service members, USFJ has approximately 50,900 service members. 7th Fleet is part of USFJ and is permanently forward deployed to Yokosuka, Japan and compromises approximately 40,000 personal. Some of those are counted as part of USFJ the others counted as part of the base at Guam. There are less then 100,000 active duty personal stationed in the East Asian theater. Middle east is part of CENTCOM and an entirely different combatant command.
Finally the entire reason the US is in that region is to prevent China, and to a lessor degree Russia, from becoming a military superpower. Its the result of US policy set after WWII which intends to prevent another major war from happening and the economic consequences of such a war. Essentially it’s cheaper in the long run to ensure nobody else starts a World War then for the USA to clean up after one’s already begun. And contrary to what people like yourself would have others believe, it’s worked. There hasn’t been a single World Wide conflict since the end of WWII even though nuclear weapons have advanced and proliferated to the point that relatively unstable nations like Pakistan have them.
The US will not give up its presence in Asia period. Even if it means a war.
Chris, in complete agreement. I am in Asia and have lived here for some years and former military. Your numbers are correct.
They cannot do that!!! The beast has to get the results written from day dot.
Its all clear to see that is is BULLSHIT….Of course….China blah Russia blahh And USA BOOM.
Whats so stupid is they war but the drainblood bWatch n find out.guess what? These little people know that their time has run out and now its the end of their game so they gotta see who has got the biggest army with the best toys coz they all know that their toys are gonna get burned up weather they want them to or not. LOL!rains only have one enemy and the fools all know that. NATURE…. He,he….. THEY ALL GOT MORE THAN TORNADOES COMING TO THEM NOW.Watch n find out.guess what? These little people know that their time has run out and now its the end of their game so they gotta see who has got the biggest army with the best toys coz they all know that their toys are gonna get burned up weather they want them to or not. LOL!
you actually meant hellerica
They actually dont have a place nor a pin.
Given a choice, Bernanke will likely strangle the currency (your money)... in favor of “strengthening” the economy.
Eventually, economic reality and markets will collide -- unfortunately, the higher the market, the harder the fall.
How certain business practices wind up jacking up costs before sticking you with the bill.
The Japanese Nikkei fell flat on its face overnight.
While Bernanke Runs Wild, Let’s Talk Ponies