We recently published two geopolitical discussions, on Ukraine (https://www.cumber.com/market-commentary/ukraine) and China (https://www.cumber.com/market-commentary/china-0). We thank readers for their replies. We will share a few below. But first we want to remind readers that our portfolio positions may change at any time and without any notice. That includes the International ETF portfolio.
Please note that nasty and trollish responses will not appear here – such rudeness is not tolerated. We block despicable trolls and never freely give them the benefit of any of our economic work or financial market research.
Civil discourse with views other than our own are always welcome. At Cumberland, our policy is to receive and review diverse points of view. In fact, we value opposing views because they invite more diligence and allow for proofing and fact-checking.
We will start this list of replies with an opposing view sent by A.L. While I disagree with A.L., this responder and writer we will identify as A.L. was articulate and civil. So the response below is unedited, in the sequence that occurred and as follows:
Dear David, I have been following your writings for a long time. I feel compelled to say that this is the most biased and uninformed piece I've read from you. Perhaps your objectivity in this area is lost forever, but I hope you can do better.
I responded:
Maybe so. And I hope you are right and I am wrong. But fact check. Were there 39 intrusions of Taiwan airspace by PLA or not? Is a journalist who told truth imprisoned or not? Did China officially blame Covid on US on Al Jazeera or not? I don’t make up the evidence.
I’m open and will offer readers diverse views.
A.L. replied:
Thank you for your reply David. For every point you make, we can argue the same from another perspective. All I'm saying is there are better and more objective ways to present "facts."
On Taiwan: this picture says it all – I would imagine these "intrusions" would occur a lot less if US dialed back its presence in the region.
"Is a journalist who told truth imprisoned or not?": Are you referring to Julian Assange? You will find this Youtube video both informative and entertaining – how about this as a diverse view:
https://www.youtube.com/watch?v=CfVGludKPWM
[Kotok clarification: I was actually referring to the imprisonment of the Chinese citizen journalist Zhang Zhan, which we covered in our China commentary. Here again is the link we offered to her story: “China: Release jailed Wuhan activist ‘close to death’ after hunger strike,” https://www.amnesty.org/en/latest/news/2021/11/china-release-jailed-wuhan-activist-close-to-death-after-hunger-strike/.]
On China "blaming" the US – did US not do the same?? US dialed down the rhetoric here because it had turned out the Wuhan lab was being funded by US funds!
As for Hong Kong – you are right, the Hong Kong you knew is gone forever and that is a great thing for the majority of people of Hong Kong. It seems like in the name of Democracy any other view is just the evil propaganda from the CCP – give me a break. The real problem of HK is the lame duck government, and only China can fix that – not more freedom or democracy.
Anyway, everything we have discussed is just simply about reality on the ground vs perception. Unfortunately, you have already ruled out doing any work on the ground going forward. So it will be very hard to correct this perception gap.
Thank you again for your views and writings.
Marc wrote:
If you haven’t already read it, I suggest you instantly jump on a book titled “Prisoners of Geography” by Tim Marshall. A very easy read with maps. His chapter on Russia makes plain what is going on now in Ukraine. There are chapters on China and other places that I haven’t read yet. But his remarks show that he concurs in my following conclusion:
Russia and China will eventually be at loggerheads, but for now the possibility of an alliance of convenience between them to control both Ukraine and Taiwan seems very real and dangerous.
Paul O. wrote:
This is a really tough investment call. Growth is in short supply in the world, and China is a major growth pole. China also makes its own economic weather and is a great diversifier.
What are you trying to accomplish? Beat ACWX, or take a principled stand about not investing in a repressive regime that also could be an existential threat to the United States? Either is acceptable, but a fiduciary must be clear about their goals.
Finally, as you well know, economic exposure to China is not as simple as the physical location of portfolio companies. Do you offset the China underweight with overweights to commodities, energy, related east-Asian economies? If so, is that really “underweighting” China?
Fred wrote:
After living in China for more than 20 years, our son (a Ben Franklin scholar, etc., from Penn and Wharton) says "nobody understands China," David. By that he includes the leaders of China and himself.
By my own observations: Of the 12 most deadly wars in history, 6 or 7 are domestic wars in China. Like the old Yugoslavia, left on its own, each area of China hates most of the other areas. After the Vietnam war, SE Asian nations had China doing border disputes and beat the hell out of them until they retreated. The place is only 10% arable and needs US Ag more than we need Chinese production, long term. They spend so much time bickering over the meaning of kanji characters (that regularly change meaning depending on debates among scholars) that they forget why they argue. There are many brilliant people there, but they have to devote so much time to figuring out intra-China relationships that they have too little time to figure out the world. I brought them MBS [mortgage-backed securities] and they immediately declared they'd copy us. When my brother's law firm (with offices there) congratulated me on that I laughed out loud. When asked why I was laughing, I listed about 20 things we found necessary to making our national mortgage markets "work" and explained that China had NONE of them – they decided what they had was "good enough" (in China that's like the old US line "good enough for government work”), and now I laugh each day at the news on how they have developers going broke.
They really do not have any idea what "absolute priority" (debt must beat equity – or there's no reason for debt to be able to leverage equity returns up if they do not have priority going down) means and they resort to demands that the world "kow-tow" for its past imperialism whenever someone questions what they do. Don't get me wrong, there are MANY really outstanding Chinese people who want it to be otherwise, David, but the place really is an insoluble calamity. NOTE: In Hong Kong and Shanghai, despite decades of being taught they cannot speak local dialects, the locals still do – BECAUSE THEY DO NOT TRUST MANDARINS. Every time it snows in Shanghai, our daughter in law reminds us that an old emperor declared buildings south of the Yangtze River did not need central heat, so Shanghai freezes.
As for Russia, read "Secondhand Time." The people have been downtrodden for so many centuries that they have no idea how to be responsible for their own freedom. Gorbachev called it "servile patience”; it was considered better to wait for a handout than to volunteer to lift yourself up. Again, of course, there are exceptions, but the Russian people have no worthy examples to follow.
In response to my comments about the weakness of using sanctions, D.B. wrote in favor of using them and also about war games:
Economic sanctions are far better an option than military intervention in support of Ukraine or giving in to Putin and removing Nato troops from Eastern Europe. What is curious to me, however, is that my daughter, who is a Russian and Eurasian studies graduate of Georgetown who spent a few years on and off in Russia, heard a few months ago when this first came up after Biden’s call with Putin, from one of her ex-boyfriends in St. Petersburg, asking if there was going to be a nuclear war with America over this. Apparently that was the news in Russia at the time, even as the Biden-Putin call barely made it through one 24 hour news cycle here. In the seven years I was in the Pentagon in the Office of the Secretary of Defense in the 1970’s and early 1980’s, aside from discussing alternative ways to hide our ballistic missiles from the Russians, we never even imagined nuclear war in any form what so ever. It was not a discussion topic among the staff, for it was considered to be a useless alternative. We did imagine that ground zero for an attack on DC was the hot dog stand in the middle of the 10-acre park inside the building.
The only time that it did come up was as a way to end a very boring two weeks spent in a room playing a war game where Russian troops attack in Europe. I had to sit there discussing our defense mobilization base (non-existent except in the minds of the Russians, who remembered World War II and Lend-lease). Every few hours the people in the room would get a briefing on where the Russians were now, if they’d breached the Fulda Gap, and so on. We seemed never to be able to repel them in the game; or if we did, they had a breakthrough elsewhere. After about two boring weeks of this, a stern-faced military man would come to the podium and say that the Secretary was sending over a memo to the White House asking that the tactical nukes be released. This was a good sign. It meant that now the game could end. Once they released the nukes, then the war game ended, Russia defeated, Germany a nuclear zone, and everyone could go back to their real jobs.
Still, it is apparently the topic in Russia, and that must have us all worried.
I suspect that Putin is looking for a way out. It is like the Bush build-up in Iraq in some ways. I’m sure the Russian people just want the war to happen, or for some small gain to allow it to not to happen. Keeping those troops on the borders is costly, too. Economic sanctions against Russia will be more effective than before, and the Russian economy is not some superpower economy. China would fare better against Taiwan from sanctions, and they would hurt us more than Russia, but Russia will wilt under the loss of access to the world monetary system that the Treasury can unleash.
P.S. I don’t think invading Taiwan, 100 miles across the water, is a slam dunk for China, nor would it be beneficial. I think they like the idea of having Taiwan there to threaten more than undertaking something that would be harder than the invasion of Europe during World War II.
P.P.S. This is the best analysis I have read about what could happen in the Ukraine. Just in case you have not seen it: Russia’s Possible Invasion of Ukraine | Center for Strategic and International Studies (csis.org)
Another reader sent this story, which is self-explanatory: “European Chamber of Commerce concerned that Hong Kong may reopen only in 2024,” https://www.businesslive.co.za/bd/world/asia/2022-01-26-european-chamber-of-commerce-concerned-that-hong-kong-may-reopen-only-in-2024/.
We thank all readers for their notes and responses.
We offer three final and diverse quotes to close this missive:
- “In war there is no substitute for victory.” Douglas MacArthur addressing a joint meeting of Congress on April 19, 1951.
- “Our policy is directed not against any country or doctrine but against hunger, poverty, desperation and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist.” George Catlett Marshall addressing Harvard University on June 5, 1947, and discussing the European Recovery Plan (Marshall Plan).
- “I cease not to advocate peace; even though unjust, it is better than the most just war.” Cicero [106-43 B.C.], Epistolae ad Atticum, bk. VII. epistle 14.
David R. Kotok
Chairman & Chief Investment Officer
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