Taiwan's +25% YTD: War & Punishment
Taiwan's +25% YTD: War & Punishment
I tend to prefer multi-month/year core positions in conjunction with trades to manage the complexities of our world. 🍾
To recap, the actions of the current administration are designed to escalate geopolitical tensions. These tensions will be a major focus in the next presidential cycle, as America consolidates into a centralized wartime economy, leading to many problematic ramifications in the subsequent years. As many of you are aware, there have already been suggestions that PM Netanyahu might be convicted of war crimes, so it would come as no surprise if similar ramifications affect anyone who occupies the Oval Office in the next cycle.
As we inch closer to what could be classified as a world war.
It’s important to understand all the dynamics and implications to better manage your portfolio.
One China - One Trade
The assertive stance on implementing trade war tariffs has always been an agitation for China, as was the case in the spring and summer of 2020. Specifically, as Taiwan undergoes its presidential transition amid Chinese military exercises, the next administration faces quite a conundrum—what a handover.
The Biden administration has announced new tariffs on $18 billion worth of Chinese imports, including a 100% tariff on electric vehicles, 50% on solar cells, and 25% on lithium-ion batteries, steel, aluminum products, and medical supplies. These tariffs are part of a broader strategy to counter what the administration describes as unfair trade practices by China, such as government subsidies and dumping excess products at low prices. The tariffs will be phased in, with some taking effect on August 1, 2024, and others in 2025 and 2026 - also the next term.
China has vowed to retaliate, likely through tit-for-tat tariffs on American goods, reducing purchases of U.S. agricultural products, or restricting sales of critical minerals. The timing of these tariffs coincides with the upcoming U.S. presidential election and aims to protect strategic sectors and bolster domestic manufacturing.
Scorned Love
Additionally, it’s being reported that China is conducting "punishment" military drills near Taiwan. China has initiated extensive military exercises around Taiwan, labeling them as "punishment" for "separatist acts."
The drills feature simulated attacks by fighter jets and warships.
These drills indicate to me the linkages.
Trade wars, Cold Wars, and hot wars are interconnected in various ways, often influencing each other through economic, political, and military dynamics.
Trade wars can exacerbate economic and political tensions between countries, which may contribute to the conditions of a Cold War.
For instance, during the Cold War between the United States and the Soviet Union, economic sanctions and trade restrictions were common tools used to exert pressure without direct military conflict. These economic measures were part of the broader strategy to weaken the opponent’s economy and political stability.
In this case, Taiwan is the Proxy.
The escalation of trade wars has accelerated the proxy conflict in the region. China's ineffective attempts to decouple from the US Dollar regime have exacerbated the situation.
Yuan Love
China has been significantly reducing its holdings of U.S. Treasury securities, selling a record $53.3 billion in the first quarter of 2024 alone. This trend, which has seen China offload approximately $300 billion of U.S. Treasuries between 2021 and mid-2023, is driven by several factors.
Primarily, China aims to support the yuan, which has weakened against the surging U.S. dollar. By selling Treasuries, China can acquire U.S. dollars to buy its own currency, thereby propping up its value.
Additionally, trade tensions with the U.S., including tariffs imposed by both the Trump and Biden administrations, have reduced China's dollar earnings, prompting a decrease in Treasury purchases.
There is also a strategic element to this sell-off, as China seeks to diversify its reserves and reduce reliance on dollar-denominated assets, partly due to fears of potential U.S. sanctions similar to those imposed on Russia.
Till next time!