March 16, 2007

PAPER TIGER:

US, Japan in security overdrive (Alan Boyd, 3/17/07, Asia Times)

A rat that gnaws at a cat's tail invites destruction, says the classic Chinese proverb on the importance of knowing one's physical limits. Yet the United States and its regional allies appear blissfully content that China, Asia's economic and political tiger, will not swat back as they pursue their crude security containment strategy.

This week's defense pact between Japan and Australia bolsters the third axis of the Trilateral Security Dialogue that those two countries share with the US. Washington wants to make it a neat quadrilateral by also bringing in India.

What then? Some diplomats envisage a happy family of democracies stretching through South Korea, Taiwan, Singapore and possibly Thailand that would channel their collective fear of a resurgent China into a pooling of resources - and possibly even retaliatory measures.

The US already has defense arrangements with each of these countries. Canberra and Tokyo signed a memorandum in 2003 that initiated a strategic dialogue, including regular ship and aircraft visits and other exchanges. But the latest pact, the Japan-Australia Joint Declaration on Security Cooperation, takes these relationships a step further by providing for the sharing of intelligence and high-level exchanges of military personnel, as well as extensive cooperation in training.


Mr. Boyd, like most, seems to have forgotten that George F. Kennan proposed containment because he understood that the USSR was doomed and need only be kept in check long enough to implode. Containment of China proceeds from a similar recognition of its weakness. This "tiger" can't spit the bit.

Posted by Orrin Judd at March 16, 2007 8:15 AM
Comments

Crude?

Who cares if it's crude?

Posted by: Sandy P at March 16, 2007 8:49 AM

China sneezed two weeks ago, and the markets here in the U.S. dropped by 7%. What do you think will happen if it actually "implodes"?

Posted by: HT at March 16, 2007 10:01 AM

We'll hire different Third Worlders to assemble stuff we design.

Posted by: oj at March 16, 2007 10:28 AM

7%, are you sure? I think it was 5% in Shanghai, 2% in the US.

China implodes not because of anything we do. As a matter of fact, we have delayed her implosion by investing there. We are afraid of her imploding, that is why we contain her. China implodes because of her domestic policies. Once a dictator cannot kill his citizens with impunity, the dictator is doomed. When a dictator is doomed, he lashes out against external enemies to divert attentions from his people, and galvanize their supports. The most obvious target is Taiwan. That is what we are trying to contain, the aftermath of China's implosion.

Posted by: ic at March 16, 2007 11:04 AM

HT: As measured by the 30 issues tracked in the DJIA, the "US market" retreated to where it was on December 1, 2006. Yawn.

Posted by: JR at March 16, 2007 11:32 AM

It's just the business cycle and the speculative real estate implosion. The Shanghai market was only a catalyst setting off the inevitable correction.

Posted by: at March 16, 2007 12:09 PM

First, you are collectively missing the point, which is: if a minor dislocation in China can cause a significant drop, what will OJ's projected "implosion" do?

Second, a drop from 12700 in the Dow to slightly below 12000 (where we were mid-session recently) is 6% on the face, not 2%. When you add in the larger drop in the Nasdaq composite, you probably get close to 7% overall.

Third, the return from the market, taken over the last seven years, has been anemic. A few nice runs have had the life sucked out of them by some exogenously-inspired drops, leading to a 2% return or less (using the Dow as a proxy), averaged over the entire period. We can't all be traders, and we can't all beat the market. And a major correction at this point could actually take us back into negative return territory for the last 8 or so years; you can't build a privatized retirement system on that kind of ROI.

So be careful what you wish for, is what I'm saying.

Posted by: HT at March 16, 2007 12:25 PM

We may get a cold but China will be dead. In less than a year(at the outside) we will get over the cold but China will still be dead.

Posted by: Bob at March 16, 2007 12:45 PM

You can't seriously be suggesting that ditching the PRC isn't worth a dip in the market? It'd be our cheapest military victory since Grenada.

Posted by: oj at March 16, 2007 1:23 PM

HT: If you need money for retirement in 8 years, it shouldn't be in the stock market, now should it? And if you need it in 40 years, where else would you put it?

Posted by: b at March 16, 2007 1:50 PM

HT: Just to clarify the point we're apparently missing. DJIA closed at 12,632 on 2/26. China, et al "sneezed." On 2/27 the close was 12,216. It took another five days of panicked headlines to reach 12,050 on 3/5/07, it's lowest point since 11/3/06.

The DJIA isn't the best proxy but, since it's the one we're talking about: DJIA returns for the last 10 years ended 12/30/2006 [annualized, price] = 6.81% [source: FactSet] S&P 500 was about 160 basis points better.

No competent institutional money manager would suggest 30 US equities be the sole foundation of a giant pension. Setting aside the obvious underdiversification in the DJIA [one asset category=US LG], risk/return premiums in equities abound elsewhere [i.e. International, Small, Value]. Not to mention other asset categories: commodities, managed futures, real estate, etc.

[Self ref alert] Skating on thin ice in terms of what can be said here but . . .we manage about $200MM in portfolios with a strict adherence to static weightings of 10-14 entire asset categories [meaning, we don't trade, time or sector rotate]. Our most aggressive equity platform [95% stocks] holds 9,400+ individual issues from 40+ countries.

Since 1995, its worst 1yr return was -8.7% [gross, 2002]. The 10yr annualized number is about 550 basis points better than the DJIA number above. [Usual caveats: YRMV, not an offer to buy or sell securities, read and carefully consider the prospectus, blah blah blah, etc.]

China isn't small, but it's a BIG BIG world out there.

Posted by: JR at March 16, 2007 2:15 PM
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