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The Rise of the East and the Downgrade of the West

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China postures for the New World Order.

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"All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved." --Sun Tzu

Earnings season has arrived and the eyes of the world are on corporate America as they share their fare on the state of affairs.

After a tenuous second quarter stretch -- one that could have been entirely worse given the sovereign situation -- the market slapped on a brave face for reporting season, rallying 7% since the third quarter began and inching within a kitten's whisker of the flat line.

As analysts sharpen their #2's and investors wait with bated breath, the other side of the world stirred this week when China's leading credit agency stripped America, Britain, Germany, and France of their AAA ratings, accusing Anglo-Saxon competitors of ideological bias in favor of the west, according to the Telegraph UK.

So what, you say? Could this be a one-off rant? Au contraire Mon frére, Dominique Strauss-Kahn, chief of the IMF, validated the view by offering, "Asia's time has come."

This is but one ingredient in an increasingly complex global stew that's been brewing for quite some time. Old school Minyans will hearken back to the days of yore, when Professor John Succo offered the following foresight in 2004. (See: Subterfuge)

And I quote:

The Federal Reserve has assured the US public that our debt is not too high and we should not be concerned that so much of it is owned by foreigners.

These words are inherently disingenuous not because there is certainty they are not telling the truth, but because there is at least a chance that they are wrong and the consequences of this error are immense. And they know that there is at least a chance that they are wrong.

In order for us to be assured and not concerned, we would have to be certain that the Chinese will always behave in the best interests of the US. I contend that you have to at least consider that they will not. I contend that the Chinese will always act in their best interests and not necessarily ours.

Right now they are acting in our best interest by using their dollars from trade to buy our treasuries to keep our interest rates low, but that is only because right now their interests align with ours. If they ever deviate, I think we can be certain that they will go their own path.

But what if it is even worse and they actually have a plan for their benefit at the detriment of ours? This is at least a possibility, the consequences of which are significant. Our government has left us exposed to this possibility.


This isn't some Jack Bauer conspiracy where Ben Bernanke was abducted and tortured for seven months until such time he broke. No, it's entirely more sinister than that; we've been willing participants in feeding the beast of global imbalances for years on end, hoping against hope they'll magically reverse.

They haven't and they won't, although gauging the timing of the cumulative comeuppance remains the single biggest unknown for the markets at large. (See: The Eye of the Financial Storm)

The bottom line is this: as it stands, it's in nobody's economic interest to shake the foundation of our interconnected market machination. With upwards of $1 quadrillion dollars of derivatives tying the world together -- an estimate once reported by the Bank of International Settlements (nobody knows the actual number, which is scary in itself) -- we're all in this together.

Sovereign nations would have extricated themselves from this tangled web long ago if they were able to do so. Given cross-border counter-party risk and the interdependence of trade relations, this dynamic is growing increasingly tenuous as the enormity of the financial condition magnifies in size and scope.

The financial market construct has evolved into a chess match of political posturing. "Free trade" and "free markets" are quickly becoming antiquated ideologies in the newfound global balance of power. Isolationism and protectionism are the "other side" of globalization. The question remains whether we'll need to endure the former before arriving at the latter. (See: The War on Capitalism)

One thing seems to be crystallizing as an unfortunate truth unfolds. If and when true globalization arrives, it will likely manifest from the outside in. The US, once the global leader of capitalism, is simply a pawn in the much bigger race towards economic prowess.

R.P.

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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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