Welcome anon to another week of paid content.
Please refer to the Backdrop Post and trade with mindfulness.
If you’re new and have a question, please read the FAQ post first.
Please refer to Definitions page for any terms or abbreviations that I use that you don’t understand. If a term is missing, please let me know.
This post will be too long for the email, please come to the substack website.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
All times given in this update are in US Central time (UTC-6 clock).
Please note - next week I will be taking a break from the weekly forecast and review posts. There may or may not be content coming out next week, depending on how my drafts develop, but I am taking a week to myself. Regularly scheduled content will return the following week.
Song of the Week - Sizzla Kalonji - Solid as a Rock
I hope Pelosi take’s some advice from Sizzla
Table of Contents
China, Taiwan, and Pelosi
Economic Calendar
Australian Interest Rates
UK Interest Rates
US Employment
Crypto Macro
Conclusion
1. China, Taiwan, and Pelosi
Some things are just inevitable. Unfortunately, I see war with China as one of those things, but I don’t think it’s coming now, I’ll explain why below. We’ve touched on China quite a bit here and I’ll be linking back to several old posts for more context when necessary.
To note, right now it’s Saturday morning, and US Senator (D-CA) Nancy Pelosi is on her way for a scheduled visit in Taiwan, among several other countries with a few other US lawmakers. Officially, it’s not confirmed that Pelosi will be for sure visiting Taiwan on this trip, but the US armed forces and pentagon are preparing as if she will.
It’s an unfortunate lose-lose situation here for her and for the US. Either they go ahead with the visit and they further stretch US foreign relations with China at a point in time when we simply can’t afford to risk disrupting trade even further; or they skip out on the visit and show China that they can intimidate the west into changing it’s plans by simply making threats. Both outcomes are terrible, and I’m glad that the decision whether or not to do this is not mine to make.
Leading into Pelosi’s visit, China has turned the bluster up to 11, running a live-fire drill on Friday night in Fujian along the coast at the closest point from China to Taiwan.
Chinese media has been pulling out all of the stops of course with Chinese news media discussing shooting down Pelosi’s plane, etc.
This all may sound rather scary on it’s face, but as we’ve covered before, China has some significant internal problems in regards to the shadow banking collapse, and the junk bond collapse spurred by the construction of ghost cities to artificially juice their GDP growth. Meanwhile internal protests in China have been escalating as the local population rails against the health lockdowns as well as against consequences from corruption within the banking system. China has been using the CovID app they created for contact tracing to falsify infections and force protesters to enter lockdown and be banned from public spaces, but it’s still not an enviable position for China to be in.
Internally, rival political parties will wait until election time if they want to depose you, but what happens in a country where you rule and you’ve eliminated all future elections as Xi Jinping did in China? You might think China is a One-Party Government through the CCP. It is… but also it isn’t. Just like how the Republican Party in the US has multiple factions within it, so does the CCP. And the thing to understand about the CCP, is that only about 1% of the population of China are allowed to be members, it is very competitive, and positions within the CCP are awarded by what is called the Organizational Department. Having your people in charge of the Organizational Department means two things, one, all of the new members of the CCP are loyal to you, and two, you can send these people to be in control of facets of the country that are valuable for you to control.
There are currently 3 factions within the CCP, the Shanghai Gang, The Chinese Communist Youth League, and the newest faction, the Xi Gang. Currently, as you can probably guess, the Xi Gang is in control of the Organizational Department, and this faction is loyal to Xi Jinping. Prior to the rise of Xi and the Xi Gang, the two factions essentially cooperated in rule after Deng Xiaping stepped down, and in the period from the 90’s to the 2010’s this was a period of relative cooperation between the two factions. Xi came up in the Shanghai Gang, but as soon as he became Party General Secretary and then Chairman/President in 2012 he made significant changes to the positions of power within the party and gave them to people he personally had been close with. This group of people are the ones called the Xi Gang, and when he made the move to end the traditional 2 terms for President and made it a lifetime appointment, everyone was already in place to support him.
But now that puts him in a precarious position, as the other 2 factions are not content to have him essentially upend what was the previous power sharing agreement, and Xi has been using “anti-corruption investigations” as a means to clean house of those who were inconvenient to his rule.
There is a lot more to it than what I’ve described, but Xi’s term as presidency would normally have ended in 2023 and those within both factions are looking for an excuse to claim that the Mandate of Heaven no longer resides with Xi Jinping. China recently may or may not have unraveled a coup attempt against Xi in 2021, and Xi needs the approval of the party in 2023 if he is to maintain power. Just because he says there are no more elections is not enough, he needs to also be seen as competent, otherwise excuses will be made to remove him, or to simply not stop the next plot to remove him.
So can Xi afford to wage a war against the West and Japan? Probably not. Can Xi afford to have China’s $1T of US Treasury Bonds be turned into worthless paper like we did with Russia? Probably not. Can Xi afford to have China’s shadow banking system collapse and bring down the entire junk bond sector right now? Probably not. I think Xi is bluffing and projecting as much strength as he can to make the US rethink having Nancy Pelosi visit Taiwan, which China still claims is their sovereign territory and not an independent nation. For Xi, it would be a big win if the US cancelled their visit to Taiwan, while I imagine that if Nancy Pelosi does go through with it, China will saber rattle while making excuses internally about why this visit didn’t actually mean anything. Xi, just simply isn’t in a position right now to retaliate or legitimately block Pelosi’s visit, much less to shoot down her plane.
Xi wants an easy and quick win in Taiwan, if it looks like they won’t be able to invade and consolidate power before the West and Japan can respond, he’s going to wait.
As usual, nothing happened just yet, and my expectation for China’s move on Taiwan is that they would prefer not to move until we get further entangled with Ukraine and Russia. China does not want to be the first country to engage with us, they would prefer that we are distracted.
Personally, I think Xi is using the wrong threats against the US. The Chinese government, in general, lacks a lot of sophistication; consider the below IG post from 2020 when Chinese treasury rates went negative.
Previously the PBOC has refused to entertain negative rates because they didn’t understand them (to be fair, most people don't). They believed they would have had to hire people to collect the interest from their lenders (this already sounds so retarded doesn’t it). But of course that’s not how it works. The lenders prepay the negative part of the interest.
They lacked the creativity to consider that the bonds could be sold at the primary auction for more than their par value at maturity.
Similarly when threatening the US, they don’t seem to understand where our real weakness is. Instead of threatening a military confrontation, why not threaten us with sanctions? Seriously. Our inflation is through the roof, we’re struggling with energy and food supply, they should hit us where it hurts. Tell us they will no longer be sending any metals or heavy machinery to US purchasers if we visit Taiwan. Now there’s a bluff that might scare us. We’re in no position to handle that considering how far behind we are already in manufacturing. Or they could hit us in pharmaceuticals or another sector we are totally dependent on China for.
But I think they lack this creativity to try and put the shoe on the other foot and to actually fight us in the arena that we have gone unchallenged within. How would we even diplomatically respond? Our current diplomatic policy towards Taiwan does not recognize Taiwan as an independent nation, so if China sanctioned us for breaking our own stated diplomatic policy, how could we even retaliate or cry foul when this is our stated diplomatic policy? It’s obvious what China should be doing, but as usual, the Chinese lack the creativity to try it. They should be calling us out on our hypocrisy, instead they’re going to challenge us in an area within which they are woefully unprepared for.
Pelosi should go to Taiwan.
Keep reading with a 7-day free trial
Subscribe to Flirtcheap’s Asymmetric Economics to keep reading this post and get 7 days of free access to the full post archives.