1-Jan-13 WV-2013 Forecast: Financial Crisis and China Threat

[John]

1-Jan-13 World View -- 2013 Forecast: Financial Crisis and China Threat

The Most Dangerous Regions of the World


** 1-Jan-13 World View -- 2013 Forecast: Financial Crisis and China Threat
** http://www.generationaldynamics.com/cgi ... 01#e130101



Contents:
Updating Global Conflict Risk Assessment for China threat
The Most Dangerous Regions of the World
Forecast for 2013: Financial crisis and China Threat


Keys:
Generational Dynamics, Global Conflict Risk,
Europe, Arab-Israeli, Russia Caucasus, Kashmir,
North Korea, China, Financial Crisis, Swine/Bird flu

[Reality Check]

China is a very hard case to make for 2013.

Obama is in the process of massively, but only partially, disarming the United States strategic capability. That process is in progress but will take 2 or 3 more years to complete. No one in America is even talking about stopping this strategic downsizing. Six hundred ( 600 ) strategic nuclear warheads that can not be launched against you, and that you do not need to waste 1,200 to 1,800 of your nuclear warheads to destroy is a very big deal.

Even if the Chinese do not want to wait for future potential military cuts ( which are highly likely under Obama ), those strategic cuts that are in progress, fully funded by the U.S. Congress, and no one is even talking about stopping them, are very hard to not allow to complete. When your enemy is destroying himself, do not interrupt him. China very well may be that smart and that rational, even during a crisis period.

China is winning these regional battles on the economic and the demographic front without going to war with the U.S. why push it in the next 12 months ?

China could avoid direct confrontation by only boarding civilian ships not allied with the U.S. If China provokes other countries, not allied with the U.S., to Attack them in the South China Sea and then plays the victim card and only respond proportionately within the South China Sea. Obama would do everything in his power not to get involved. China could advance it's economic and political goals in the South China Sea without going to war.

China could continue to provoke Japan to cease civilian Chinese ships and press their case non-militarily while justifying a future war when they are ready. China could carry out limited economic war with Japan short of a military attack on Japan or Japan's Navy. China is now the superior economic and demographic power, versus Japan. Japan is unlikely to attack China without U.S. support and Obama would never give the OK for a Japanese instigated war against China.

Obama will seek "peace in our time" at every opportunity. China very well may adjust their aggression to levels that will avoid war with the U.S. and U.S. allies for a few more years.

Vietnam and India for example are not formal U.S. allies and civilian and economic interests aligned with Vietnam and India in the South China sea could be made an example of without risking a direct military conflict with the U.S.

Miss-calculations could occur, but the case for China to rush to war while the U.S. is still in the process of rapid, massive demobilization his hard to make.

[John]

It's like buying a new computer. You know that it's always true that
in six more months, computers will be cheaper and faster, so logically
you should never buy a computer. But at some point you bite the
bullet anyway.

[Guest]

If you are correct, I'm glad that red zones do not now appear in the huge swath of the Earth from the North Pole to the South Pole marked by the Americas and Antarctica. Peaceful in Australia too. Let's hope red-zone troublemakers keep it that way.

Also glad that North Korea went down a notch to yellow.

BTW: Using black text on a yellow background would make North Korea's new ranking easier to read than white on yellow.

[Younger Brother]

With interest rates at near zero, I don't see how stocks could fall that far. Wouldn't interest rates have to rise first?

[jwfid]

Hi John,

I haven't posted in at least a year, but I check your blog daily. I am truly very thankful for all of your analysis. I hope that more influential people become aware of your site in the future.

I have to disagree with any chart or data that uses P/E anymore ever since 2009, when the FASB GAAP requirements were suspended and companies, especially financial companies, could mark their assets to pretty much pure fantasy. Also, who knows how many companies out there cooking their books just like Enron and Worldcom.

I wouldn't be surprised if the true P/E is right now higher than the peak of 120.

I couldn't resist.

Thanks again,

Joe

[Reality Check]

With interest rates at near zero, I don't see how stocks could fall that far. Wouldn't interest rates have to rise first?

Younger Brother makes a very good point regarding your Price divided by Earnings Chart.

Clearly something weird went on with that chart during the peaks between the mid 1990s and today, but there could be a number of explanations that do not include makings sweeping conclusions.

When large corporations are audited something strange happens when either profits, or losses are very close to non-existent.

Things that were not even worth mentioning before, suddenly become a very big deal.

If the auditor finds 10s of thousands of expense account claims were not properly backed up by receipts, that becomes a huge deal reported to the board of directors by the auditors in person.

Why, because when any number is divided by a number near zero, it becomes a very large number, even if the number being divided is not all that large.

If my recollection is correct, Price and Earnings ignore companies where there is a loss.

20 Years ago corporations use to work very hard to shift earnings around to have a significant loss in one quarter and significant profits in other quarters. This avoided ratio distortions caused by the absolute value of the profit, or loss, being very close to zero. Such distortions were viewed as irrelevant distractions executives simply did not want to waste their time explaining.

If for some reason the accounting environment after Enron or other things changed so that executives found it in there interest to have very small profits for an extended period, rather than small but significant profits some quarters and small but significant losses in one quarter, this could explain the very P / E rations for an extended number of quarters.

Those results around 2010 just look weird.

Little Brother makes another great point, during recessions like the one in the early 1980s interest rates sky rocketed sucking money out of the stock market in to various triple AAA rated bonds and other investments that were favorable during high interest rate periods. That does not describe the recension and extremely weak expansion period after 2007.

[Reality Check]

Joe points out something else which is very useful and supports your point, if I understand your point John.

That is that companies stock price can be justified on both asset value and/or and the perceived rise in future earnings.

The rise in future earnings expectation after the deep V downside recession after 2007 could explain part of it.

The more concerning issue is that the asset values are totally fraudulent and the those fraudulent asset values are what is holding stock prices up.

The "correction" when those the true asset values were exposed would be brutal.

[solomani]

Barring hubris or accidental engagement (for example a Japanese jet accidentally hitting a Chinese spy-plane) I think it would be silly for China to go to war as its not ready and I believe the Chinese leadership knows this. Of course this doesn't mean it wont but on paper its still weak.

China is still a poor country - most of the country doesn't even have indoor plumbing.
Its economy is very dependent on outside input - in particular from countries like Australia who is a US ally. A war with the USA means no raw-supplies for China anymore.
It could manage a conflict with a single minor country - like Vietnam or Philippines but it could not manage a regional/global conflict and I assume the leadership knows this.
It can not manage a multi-front war. For example, say China starts a war with Japan which sucks the USA, Philippines, ANZUS and Singapore in (and any other USA allies that care to join which could potentially involve forces from Europe). Invariably the war would not go well for China. Do you believe that Vietnam and India wouldn't join in? Even Russia?
Lets look at the navies. China has no feasible aircraft carrier and a few subs. It has 300 ships which matches the USN but in terms of tonnage its 1/3 that of the USN. Regionally it cant even dominate as it only has 2 to 1 vs Japan (at 150 ships) but Japan's navy is also the most technically advanced navy outside of the USN. I don't think a battle would go well here for China. This is not to mention India's navy sitting at 150 ships as well including an aircraft carrier. China would be overwhelemed.

As an Australian living in Hong Kong I fervently hope for peace in the region and in particular within China. I also hope that the Chiniese leadership is wise enough (or at least conservative enough) to weigh the odds as I have and decide its not the best time for war. Hopefully its just all bluster. A war may still occur but I doubt (hope?) it will not be this year.

[Trevor]

The same thing could have been said about Japan seventy years ago. We outnumbered them about 2 to 1, could outproduce them ten to one and even if everything went perfectly, there was no chance in hell that they could possibly win against us. However, they attacked us anyway because they deluded themselves into thinking that they were stronger than they really were. I'm seeing the same thing happening in China. They've become a major military power over the past several years, but at the same time, they're overestimating their capabilities.

At this point, all it would take is one miscalculation.