Rising tension in the South China Sea

Rising tension in the South China Sea

Just yesterday, Jim wrote, ‘trade wars can lead to shooting wars’.

The trade wars start out innocently enough.

President Donald Trump was a little fed up with China’s cheap labour and tightly managed currency values.

A few tariffs and some name calling later, Trump found himself starting a trade war with Australia’s biggest trading partner.

Yet the persistent lens on the US-China trade war meant most of us were missing a growing development: China building military bases through the South China Sea.

Those waters are pretty close to us.

They are also vital passages for international trade.

The militarisation of the islands in the South China Sea is putting an increasingly assertive China one step closer to Australia.

More so with the US Decatur incident that occurred in October this year. This was when the US naval ship Decatur and Chinese military ship Lanzhou came within 41 metres of each other while trying to navigate waters.

There was no damage or injuries for either ship. And by the US navy’s account, the situation was never upgraded to an ‘in extremis’ event.

It was more a case of one ship failing to give way, according to The Interpreter. With the site writing that the Chinese warship was supposed to alter course as the US ship had right of way, saying:

‘Lanzhou came upon the American ship from astern, making it the “burdened” vessel under the International Regulations for the Prevention of Collision at Sea (COLREGS), passed up Decatur’s port side and moved ahead on a slowly converging course that would have eventually crossed ahead of the Decatur’s track.’

International media outlets – as well as Australia’s – did play up the incident.

While it was nowhere as dramatic as we were first led to believe, it does go to show that China isn’t afraid to flex their military muscle as a show of strength.

As Jim points out today, the growing naval presence from US, China and Australian ships is being largely ignored by the press overall. It’s only the odd story here or there that makes the headlines.

The US and China ships passing each other was a non-event, in spite of some hyperbolic media claims, but it leaves an aggressive tone in supposedly open waters.

And aggression can be contagious.

Now, I’ll have you over to Jim.

Until then,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

How Trump Invaded the South China Sea

Jim Rickards, Strategist

Jim Rickards

I’ve been warning for months about a disturbing possibility: that currency wars and trade wars can easily spill over into shooting wars.

This happened in the 1930s, and it seems to be happening again.

One of the most dangerous hot spots in the world today is the South China Sea.

There are six countries with recognised claims to parts of the South China Sea.

Yet China itself claims the entire sea except for small coastal strips and claims all of the oil, natural gas and fish that can be taken from the sea.

China has ignored international tribunal rulings against it.

Global hotspots remain hot

The US is backing up the other national claims including those of the Philippines, which is a treaty ally of the US.

China has built small reefs into large artificial islands with airstrips and sea bases to support its claims.

The US has increased naval vessels in the area to enforce rites of passage and the equitable sharing of resources.

Both sides are escalating and the risk of a shooting war or even an accident at sea is increasing.

The South China Sea is mostly out of the headlines at the moment, but it bears watching as a possible catalyst for the next international crisis with global financial implications.

This warning is timely for Australians.

The South China Sea is a major shipping channel for freight.

If the US-China tensions rise, we should look for slower growth and possibly a recession as the trade and currency wars play out.

Let’s hope that history does not repeat and that we don’t end up in a Third World War, as the currency/trade wars of the 1930s helped lead to WWII.

No longer just the ‘cranks’ predicting a crash

Warnings of economic collapse are no longer confined to the fringes of economic analysis, but are now coming from major financial institutions and prominent economists, academics and wealth managers.

Leading financial elites have been warning of coming collapses and dangers.

These warnings come from the IMF’s Christine Lagarde, Bridgewater’s Ray Dalio, the Bank for International Settlements (known as the ‘central banker’s central bank’) and a range of other highly regarded sources.

Just when we think we’ve seen enough of these, another one arrives.

This time, it’s the legendary Paul Tudor Jones, who manages Tudor Investment.

I’ve met Jones; he’s a cerebral yet polite and mild-mannered manager from Tennessee who has not lost his Southern accent despite decades in Connecticut and an estate on Maryland’s Eastern Shore.

What gives Jones’ voice added authority is his longevity in the fund investment world.

He’s managed through the 1987 stock crash, the 1994 Mexican crisis, the 1998 Long Term Capital meltdown, the 2000 dot-com crash and, of course, the 2008 financial panic.

Jones knows that panics happen, but he also knows they don’t happen all the time. Panics take years to build and usually have specific triggers (even though endpoints can spin wildly out of control).

Jones does not treat the possibility of a financial crisis lightly, so his warning deserves close consideration.

Jones warns that the next crisis is likely to be triggered by excessive debt, specifically corporate debt, which can be more difficult to manage or bail out than sovereign debt.

At the same time, other gurus are warning that the next panic will emerge from the foreign exchange market, overvalued equities or commercial real estate.

Preparing for the next crisis

Perhaps the real message is that all of these areas are vulnerable and the next crisis will seem to come from everywhere at once.

That’s the danger. We’re looking at another debt crisis and global financial panic. Only this time, it won’t come from mortgages alone but from all directions at once.

So let me repeat what I said earlier: The time to prepare by increasing allocations to cash and gold is now.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia