China’s Threats Will Not Harm Stocks

Nancy Pelosi lands in Taiwan, China goes ballistic, but none of this means anything to stock-market investors.

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Nancy Pelosi Lands in Taiwan

On Tuesday night, US House Speaker Nancy Pelosi arrived in Taiwan, defying warnings from China to stay away.

It was the highest-level visit by a US official in 25 years.

Pelosi is second in the presidential order of succession, just after the vice president of the United States, currently Kamala Harris.

China claims Taiwan as part of its territory, but Taiwan says it’s independent. Because of this dispute, Beijing says that visits by foreign government officials show recognition of the island’s sovereignty.

It warned of “resolute and strong measures” if Pelosi went ahead with the trip.

She went anyway—and good for her!

She stayed at the Grand Hyatt Hotel in Taipei. Two buildings in the capital lit up LED displays with words of welcome, including the iconic Taipei 101 building, which read “Welcome to Taiwan, Speaker Pelosi.”

Another read “TW ♡ US”

In a statement released after her arrival, Pelosi called the visit a sign of America’s “unwavering commitment” to supporting Taiwan’s democracy:

“America’s solidarity with the 23 million people of Taiwan is more important today than ever, as the world faces a choice between autocracy and democracy.”

Chinese Foreign Minister Wang Yi said in a statement: “Some American politicians are playing with fire on the issue of Taiwan. This will definitely not have a good outcome … the exposure of America’s bullying face again shows it as the world’s biggest saboteur of peace.”

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China Looks Petulant and Weak

Statements like Wang’s are overwrought to the point of destroying China’s tough-guy street cred.

Lots of overblown warnings from China:

[Examples from an Associated Press report]

Another member of China’s Foreign Ministry, spokesperson Hua Chunying told reporters in Beijing on Tuesday: “The US and Taiwan have colluded to make provocations first, and China has only been compelled to act out of self-defense.”

Provocations?

No US policy changed. Congressional leaders have every right to visit allies.

The Speaker of the House has visited Taiwan before, without incident. Members of Congress have visited Taiwan earlier this year.

President Biden made it clear that it’s not in his purview to tell the Speaker of the House where she can and can’t go—unlike the case in strongman-ruled China.

Yes, China disputes that Taiwan is independent, but the practical treatment from the world shows that it is. Semiconductor trade, for one, makes it clear that most of the world sees Taipei as distinct from Beijing.

The main thing is this military showboat-ism. Only weaklings do this. Think of Baghdad Bob boasting of non-existent Iraqi success in the 2003 invasion of Iraq, King Jong Un constantly vowing to annihilate the world, and so on.

China brags about its DF-21 medium-range ballistic missile being able to sink US aircraft carriers, and other supposed military advantages, but does so with empty rhetoric. When push comes to shove, China folds.

This is how it has operated for years now. It complains, threatens, and folds.

So, while it’s doing so again and some people say we need to fear that WWIII is starting, we seem to hear this message a lot. Think of initial reactions to Russia’s invasion of Ukraine. Somehow, we’re always on the brink of nuclear annihilation.

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Wars Don’t Directly Hurt Stocks

The stock market’s long-term track record exhibits rising two thirds of the time. Once you know that, just ask which parts of the news cycle are on repeat. All of those can be dismissed out of hand as non-factors to the stock market.

Among them: threats of war, actual war, natural catastrophes, financial scandals, and so on.

Have they always happened? Yes. Will they ever stop happening? No.

Therefore: They are non-factors to the stock market.

With Nancy Pelosi’s visit to Taiwan and China’s bellicose threats, Russia’s ongoing invasion of Ukraine, the current worry is war.

Threat of it. Engagement in it.

But it usually fades away, no matter how scary it looks at the time. For instance, live fire drills from North Korea.

On April 26, 2017 CNN reported: “US warships and submarines are on the move. North Korea has carried out its largest ever live-fire drill. … Analysts fear the situation is a tinderbox that could be set off by a small spark.”

Nothing happened. The S&P 500 rose 13% from there to year-end, and not one strategist mentioned North Korea war risk in their year-end summaries.

Geopolitics is a coincidental factor, not a causal one.

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Some Market Pressures Come from War

For example, Russia’s invasion of Ukraine caused sanctions on Moscow that contributed to higher oil prices, which contributed to inflation, which central banks are now fighting with higher interest rates, and those impact stocks.

However, inflation was baked in before the Ukraine invasion.

The war contributed a pressure, but didn’t directly impact the stock market.

Ahead of Nancy Pelosi’s visit, Taiwan’s stock market fell almost 2%, which some analysts blamed on geopolitical tensions, but it’s hard to say and even if that tension was the reason for the slide…

Remember that stocks tend to shrug off geopolitics fairly quickly. I covered this earlier in the year at the beginning of the Ukraine invasion.

Basic idea: Stocks usually rise after a big geopolitical event. This is not shocking considering that stocks usually rise no matter what.

In February, Reuters reported that Glenview Trust Co’s Chief Investment officer Bill Stone examined market moves around past geopolitical crises for clues as to what investors might expect.

Stone looked at 29 different geopolitical crises starting with WWII and found that on average, stocks were higher three months after a geopolitical shock, and following 66% of events, they were higher after only one month.

“The odds that stocks will be higher increases as time passes after the event. In addition, stocks sometimes jump sharply after a crisis, so getting out of the market could have significant opportunity costs,” Stone cautioned.

So, don’t change your stock-market strategy because China is doing what China always does: threaten, threaten, threaten.

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I’m Glad the US Criticizes Autocratic Communist China

In my view, it’s worth the geopolitical fallout to call China out for what it is: a bullying autocrat that lies, cheats, and steals its way ahead in the world.

I like what Huang Chao-yuan, a 53-year-old business owner who watched Nancy Pelosi’s plane land, told The New York Times:

“I am quite excited about her visit today, because it’s an example that shows the United States does not need to discuss with the CCP [Chinese Communist Party], she can come here if she wants, and whoever Taiwan invites can come here. This incident demonstrates Taiwan’s independence.”

And of course that’s China’s entire beef, with its authoritarian leader, Xi Jinping, making it clear that unifying Taiwan with China is one of his primary goals—but tough luck.

At some point, the world needs to say, “China, you’re wrong, you’re misbehaving, and we’re not going to keep letting it slide until you’re a rampaging giant ruining the world order.”

The West should have never helped China grow so big and threatening without setting up controls along the way. Long ago, short-term economic interests took precedent over instilling democratic values in China.

Now the world has a monster on its hands, of course buddied up with another monster, Russia, currently committing atrocities in Ukraine, the same co-monster that brought us the Korean War of 1950.

The Soviets backed the North Korean Army in an invasion of South Korea. The UN and US rushed to help South Korea, and pushed north toward China. China amassed troops on its border, and re-invaded South Korea.

Result of this three-year war: more than 3 million dead, Korea evidently permanently divided, and Kim Jong Pineapple Head firing off missiles whenever he gets bored as dictator baby.

All of that should sound familiar: Russia and China teamed up to help bad-guy North Korea attack good-guy South Korea, who was helped by the West led by America.

Well, earlier this year, who did Russia ask for help with its Ukraine invasion? China, of course. Who’s helping Ukraine? The West, led by America, of course.

And the China monster is now so big that an American victory in a war for Taiwan is no longer guaranteed. China military expert Oriana Skylar Mastro made this plain in a May 27 op-ed in The New York Times. She wrote:

“Simply put, the United States is outgunned. At the very least, a confrontation with China would be an enormous drain on the US military without any assured outcome that America could repel all of China’s forces.”

One example: The United States has access to just two US air bases within unrefueled combat radius of the Taiwan Strait, both in Japan, compared with China’s 39 air bases within 500 miles of Taipei.

Nonetheless, she advised the US “to stand firm against Chinese intimidation of Taiwan, while working to ease Beijing’s anxieties by demonstrating a stronger US commitment to a peaceful resolution of the Taiwan issue.”

At least Nancy Pelosi did her part.

Nowhere in China is there an ounce of gratitude for all the help the world gave it on its rise to power. Its new exalted position in the global pecking order is directed toward mischief.

Chief leg-up: President Clinton normalizing trade relations with China in October 2000, paving the way for China to join the World Trade Organization in 2001. Trade with the US rose from $5B in 1980 to $615B in 2022.

Why Clinton thought this was a good idea is beyond me. Was he unaware that China calls its Korean War campaign “Resist America and Assist Korea”? China’s enmity toward America is blatant.

Anyway, what did America get in return for helping China? Theft, threats, and currency manipulation.

It could have been different.

In a September 2005 speech, US Deputy Secretary of State Robert B. Zoellick called on China to serve as a “responsible stakeholder” in world affairs, and use its influence to draw nations such as Sudan, North Korea, and Iran into the international system.

So much for that.

Now, threats of war and possibly eventual actual war are what China brings to the world stage.

On May 26, Secretary of State Antony Blinken called China the “most serious long-term challenge to the international order” and contrasted the country’s authoritarianism with America’s commitments to advancing democracy and human rights.

Luckily, while China’s schemes are terrible for global harmony they’re not of primary concern to stock-market investors.

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Links to Resources Mentioned

 

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4 Comments

  1. Posted August 4, 2022 at 12:33 am | Permalink

    Hey Jason, we’ve talked about this already, but don’t forget the NASDAQ. Pretty sure that the consequences for that index in the medium term would be catastrophic.

    • Posted August 4, 2022 at 10:23 pm | Permalink

      Hi Mohan,

      Did you listen to the episode?

      I mentioned this issue in the episode, and agree that the biggest risk would be a Chinese takeover of Taiwan that removes Taiwanese semiconductors from the world market. I hope the tech industry is working overtime to mitigate this dependency, with backup sources. At least TSM itself is opening a plant in Arizona, which will come online in 2024.

      Also, the “silicon shield” could forestall a Chinese invasion. China is dependent on TSM as well. An invasion could damage production capabilities, motivate TSM to destroy its own Taiwan-based assets, and otherwise hinder China’s access to critical semiconductors.

      Jason

      • Posted August 8, 2022 at 9:07 am | Permalink

        Hey Jason – I erroneously assumed that the notes under the podcast were the complete transcript. Oops 😕.

        I see that you touched on this subject in this week’s newsletter so will catch up there. Thanks!

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