Oil-aholic Agression

China’s insatiable, growing appetite for oil will direct future events in the East Asia. It’s not just commodity and stock prices that will be affected either…we maybe looking at a major military conflict in the Far East…

In the late 1980s, shortly before the first Iraq War, a client of mine, General Ho (he had been general under Chiang Kai-shek), complained that we ‘Wall Street’ people didn’t take political and military trends sufficiently into account when analyzing economic and financial trends.

Personally, I follow geopolitical trends quite closely, but I am aware that the short-term momentum players, who dominate the financial markets, pay little attention to these trends, since it is their belief that any economic, political, or social factors will be reflected in the market action of the various asset classes.

A hawkish leadership in the US, the war in Iraq, terrorism, soaring commodity prices, the economic rise of China and its thirst for resources (oil in particular), several recent articles concerning the growing tensions between Japan and China, and instability in Saudi Arabia all suggest to me that global geopolitical tensions are on the rise and could, at some point in the future, have a very negative impact on the global economy and financial markets. Today we focus on China.

Taiwan Invasion: Securing Petroleum for China

Last year, China replaced Japan as the world’s second largest importer of crude oil. Soon after taking over power, a year ago, President Hu Jiantao and Premier Wen Jiabao decided that, "securing reliable supplies of petroleum and other scarce resources was not only crucial to sustained economic development, but integral to China’s national security."

According to Willy Lam, a Hong Kong-based specialist in Chinese politics and foreign policy, China’s thirst for oil "is the real story behind Beijing’s worsening territorial dispute with Japan over the group of supposedly oil-rich islands claimed by China as the Diaoyus, and by Japan as the Senkakus. That same concern also explains the recent flare up in China’s dispute with some South East Asian nations over their claims to the resource-rich Spratly Islands in the South China Sea. It’s a thirst that threatens to pit China against its neighbors, despite Beijing’s avowed policy of ‘peaceful emergence’ in the global community"

In addition, reliable, firsthand sources in the oil industry have told me that, on numerous occasions, when Chinese oil companies have wanted to acquire oil concessions around the world, the American State Department has interfered and tried to prevent such acquisitions.

It may initially seem far-fetched, but with all these threats, it’s not hard to see why China might want to invade Taiwan.

Taiwan Invasion: The Reasons Are Obvious

To anyone who looks at a map of the region, the reasons are obvious. Taiwan’s strategic location makes it extremely valuable. The Taiwan Strait is a critical sea lane, and taking Taiwan would allow China to choke off international commercial shipping, especially oil, to Japan and South Korea, should it ever decide to do so."

Wendell Minnick, Jane’s Taiwan correspondent, published a disturbing article recently. Under the title "The year to fear for Taiwan: 2006." (Most analysts believe that China’s military strength will exceed Taiwan’s defense capabilities by 2005, hence 2006 is the year to fear.)

Minnick postulates that should China decide to take this route, it would be unlikely to be a large-scale, Normandy-type of amphibious assault, but involve something more akin to a "decapitation strategy".

Minnick explains that "decapitation strategies short circuit command and control systems, wipe out nationwide nerve centers, and leave the opponent hopelessly lost. As the old saying goes, ‘Kill the head and the body dies.’ All China needs to do is seize the center of power, the capital and its leaders."

According to Minnick, US Defense Department officials are now reexamining China’s military threat to Taiwan, and with a potential decapitation strategy now believed to be in the works, "US defense officials are beginning to think what had once been unthinkable: losing Taiwan in only seven days."

Taiwan Invasion: A Likely Scenario

The Taiwan takeover scenario would involve the initial deployment of China’s Special Forces and rapid deployment forces, combined with air power and missile strikes.

The second phase of the decapitation operation would begin after airborne forces had captured Sungshan Airport. With a secure landing strip, China could fly in elements of its troops with the air support of its 1,000 bombers and fighters.

Minnick says: "If the Chinese assaulted the capital, Regular Taiwanese army units, all based outside of Taipei, would take hours, perhaps days, to respond. It would be up to the MPC to hold the Chinese back until reinforcements arrived – which might be never…"

Pre-positioned Special Forces, smuggled into Taiwan months before, would assassinate key leaders, and attack radar and communication facilities around Taiwan, a few hours before the main attack.

Taiwan’s navy would have little to do in this war scenario, except sink like rocks.

Taiwan’s air force would be kept busy trying to repair runway damage caused by the estimated 500 short-range ballistic missiles deployed along China’s coast and targeting Taiwan.

Once Taipei was captured, a new government chosen by Beijing would be sworn into office. There would be plenty of Taiwanese politicians to choose from. It is well known there are many pro-China legislators who have investments in China and more than a few who have had private meetings with Beijing officials. There would be too many pro-China people in the US State Department – privately relieved the Taiwan issue was finally settled – to say anything in Taiwan’s defense.

With the new government inaugurated, the new president would declare an end to all hostilities with China. During a nationwide televised speech, the new president would order all military forces to stand down. With the pro-China sentiments running high in the Taiwan military, it is likely that most would grudgingly accept the new president.

Normally, I don’t take futuristic war scenarios too seriously, but very well informed sources with close connections to China’s military leadership have heard first-hand that, if Taiwan were to push for independence, China would have no alternative but to invade the "renegade province".

Taiwan is strategically important for the US and Japan, as Minnick pointed out above, but from the Chinese perspective it is vital. After all, whoever controls the Island of Taiwan also controls the shipping lines in the Strait of Taiwan. Thus, an independent Taiwan, with a hostile government, could block the supply of oil to China, which would cripple the mainland, both militarily and economically.

This vulnerability is China’s Achilles heel. Rest assured that the administration will consider every option to ensure China’s continued growth, including military operations.

Regards,

Marc Faber
for The Daily Reckoning
June 9, 2004

We know about Prince Charles’ plans to marry Camilla. We have found out about an investment banker who says she was a victim of ‘sexism in the City’…and about a lawyer accused of murdering her infant children…

But after reading this morning’s Times of London, we know nothing of what happened in the world of money. It must be in there somewhere; we just can’t find it.

Turning to other sources – notably our own correspondent in Paris, Philippe Bechade – we find that today the U.S. Treasury goes to the market to raise money. $16 billion worth of 5-year notes are to be sold today; $9 billion more 10-year obligations tomorrow…a total of $25 billion for the week.

Philippe remarks that the $1 trillion-dollar barrier should be broken this month. That’s the amount of U.S. Treasury obligations in foreign hands, with a third owned by Japan, about 15% by China and another 10% by Taiwan, South Korea, and Singapore.

"Which just shows how much America depends on the good will of its Asian creditors," says Philippe.

"Study finds boomers are not saving enough," says a headline from the Boston Globe. Last time we looked, they saved almost nothing at all, counting instead on the gains from stocks…and now houses, for their retirements.

They don’t seem to notice that these gains rest on an elaborate flimflam, perpetrated by the U.S. Federal Reserve. The Fed lends money for less than it is worth. People borrow it, using their homes as collateral. The houses become the tulip bulbs of the 21st century bubble; without one, you are out of it. So, houses go up…’equity’ is ‘extracted,’ more and more new mortgages are opened, frequently with short-term, variable rates, and the money is spent…or put back to work on another housing speculation.

Unfortunately, there is no room for real savings…or real investment in new industries that might make people richer. So, Americans turn to Asians. Without Asian lending, Americans wouldn’t be able to afford their war in Iraq or their current lifestyles. They think they are getting richer. Comforted by the illusion of rising property prices…inspired by the Fed and enabled by foreign lenders…they become more indebted and more vulnerable, daily.

Hardly anyone worries about this, beyond the readers of the Daily Reckoning. And we’re getting tired of worrying about it ourselves.

Buy gold and euros. Sell the dollar. Let’s see what happens.

Over to North America for more news:

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North America…? North America, do you copy…?

Unfortunately we have no news from Baltimore today…or New York. We rehash a timeless excuse and blame gremlins in the system for this unfortunate breakdown in communication.

Instead, we leave you in the capable hands of our unpaid correspondent from Pittsburgh, Byron King…

"People talk about inmates on Death Row as "dead men walking." That has been my perception of Saudi Arabia since my first visit there in 1993. Dead nation walking. It is the "walking" part that worries me.

Saudi Arabia is time travel. You leave 20th Century Bahrain, cross the causeway, and enter into the 12th Century. Yes, there is a Potemkin-like facade of modernity…fancy buildings and big-name architecture…gigantic airports with long runways to nowhere…petro-industrial behemoths, in the form of pipelines and storage tanks and loading pumps…people driving around in air conditioned Detroit steel…even a Disney Store to sell branded trinkets and other wampum to the youngsters…

But through it all, is this sense that the underlying Saudi society is at war with everything you see. Women walk around, dressed head-to-toe in black robes. Offices filled with Saudi men are sitting around, reading newspapers and smoking cigarettes, collecting their petro-welfare checks.

Other men just wander up and down the street, eyeballing things – they are either Saudi Intel, or hard-line clerics, or idle rich guys (you should see the Saudi ‘Gatsby-wannabes’ when they go for shore-leave in Bahrain on Wednesday and Thursday nights…), or bums, or maybe some combination of all of the above.

You wonder when some sort of "event" is going to happen. You don’t know what, or when, but it just doesn’t feel quite right.

Not quite right. Yes, that is Saudi Arabia. It is like a Star Trek episode, where Captain Piccard and crew beam down from the starship USS Enterprise to Saudi Prime. Piccard and crew are in search of additional deposits of dilithium, the key element used by the interstellar warp drive engines.

The landing party beams right into the middle of some uptight agrarian society where everybody is a simple country-bumpkin, except that there is some sort of "Watcher" overseeing everything. The Watchers are some kind of super-advanced race with the power to vaporize the starship, except that Piccard et al are too stupid to figure it out.

Eventually, some inept member of the landing party pinches one of the country-bumpkin females on the butt, who then turns on him and glares with diamond eyeballs, and lightning bolts come out of her fingers and fry the hormonally-challenged soul (not a regular member of the cast, just a walk-on actor pretending to be some crewman from the Astrometrics Division).

And a voice booms out from the Watchers…"You have offended our customs and traditions. Be gone lest we smacketh some antimatter down upon your sorry heads, you infidels…"

And the landing party tries to reason with the Watchers, but it is to no avail. So they beam up and the USS Enterprise leaves orbit pronto, with Piccard entering a note: "Captain’s Log – we had to leave Saudi Prime because these people just do not fit in with what we are used to. While they appear, at first glance, to be harmless souls, deep down they have the ability to infiltrate and wreck our entire system of civilization. I recommend that the Federation place a travel embargo on this planet and we make additional efforts to obtain our dilithium from somewhere else."

Too bad that Gene Roddenberry is deceased. He could get a job at the State Department.

Now beam me out of here…[Ed. Note: Byron isn’t the only one talking about Saudi Arabia…in fact, the Kingdom is attracting the attention of almost everyone, from the Bush administration, to Chinese industrialists to Muslim fundamentalists. John Myers has prepared a special report on the situation there; you must read it…this could impact much more than just your portfolio]

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Bill Bonner, back in London:

*** Poor Lord Hesketh. The man is forced to sell the family house – one of Britain’s finest country estates, the papers tell us.

Our old friend, Alexander Chancellor, finds the whole affair rather triste. Not the fact that Hesketh can no longer afford his magnificent property; that is just the way things go. But the gloating of the British press is sordid and unbecoming, he says. Reporters, who accepted Lord Hesketh’s generous hospitality, not once but several times, now snarl at the hand that once served them booze and celery sticks.

"Why do so many journalists hate the rich," asks our friend, also a journalist, Jon Connell. "Mainly envy," he supposes.

As near as we can tell, Lord Hesketh was rich through no fault of his own. According to press reports, he began with a family fortune and "frittered it away…on harebrained schemes, disastrous business ventures, vain grandeur and gluttonous high living…" Well, good for him. Better than wasting it in the stock market.

*** Britain’s aristocratic classes have become pathetic. Where once they swaggered all over the world, now they seem to cower in their decrepit piles, unable to pay the gardener and unwilling to stand up for themselves. They, along with everyone else, have fallen for the journalists’ line – that inherited wealth is something to be ashamed of…something to be taken away by the government and redistributed to more deserving (and more numerous!) voters. The upper classes defend their rights neither to wealth nor to power. In the House of Lords, they roll over and play dead, their traditional place in British government gradually withered up like a senator’s brain.

Democracy has been in a variety of bull market for the last 200 years. Hereditary power, on the other hand, has collapsed. Now, people seem to think the only legitimate rulers are those selected by the fraud of the ballot box, rather than the luck of birth…and that only if you have convinced enough lame-brained voters to put you in office do you have the right to tell everybody else what to do.

*** A little mist formed in our eyes this morning as we read accounts of the funeral of Louis XVII, the "lost dauphin." The boy died in prison June 8, 1795. His heart, preserved in a jar, was subjected to genetic tests to make sure it really belonged to the son of the last Bourbon king of France and Marie-Antoinette. Yesterday, it was laid to rest in the St. Denis Basilica, the resting place of the Bourbon line, next to the remains of his parents.

In his sermon marking the occasion, Cardinal Honore, honorary archbishop of Tours, said of Louis XVII, who was only 10 years old at his death, that "he was the victim of the murderous folly of the revolution."

*** Europe, of course, is wholly sold on democracy. Elections are coming up on Sunday for the European Parliament, which is seen by most citizens as a good way for a politician-on-the-make to steal a lot of money without going to jail.

Everyone is encouraged to participate. Columnist Simon Jenkins argues that not voting should be against the law.

Meanwhile, a Times investigation "uncovered widespread allegations of fraud, vote-stealing and intimidation" in the postal ballots.

One of the most attractive candidates for the European Parliament is porn-star Dolly Buster of the Czech Republic. One of her campaign videos shows her dancing around a farm, holding a rake handle between her cleavage as she criticizes agricultural policies.

"I have built an entire business from bottom up…" she says.