There are some systemic risks out there with the ability to blow up, and they’re interesting if you’re like me, a context person.
The first is Europe, or, more specifically the European Union.
Christine Lagarde will replace Mario Draghi as the head of the European Central Bank later this year. It is clear that the Super Mario was unsuccessful in resolving banking issues stemming from the 2008 financial crisis (just look at the stock performance of European banks since then). He just “papered over” the problems by pumping huge amount of liquidity into the markets.
The Americans call it: “kicking the can down the road.”
I am not sure if Mrs. Lagarde fully realizes what is she walking into, but the European elites seem to think that there is still some road available to kick the can further down, hence her appointment. She is a lawyer without any real world banking experience (give it to Draghi, he is an ex Goldman Sachs banker).
The problem with lawyers is that they think that to solve a problem all you need to do is enact a new law, which then the people have to follow.
The thing with bankers is – they know that this is not how the real life works.
So, Europe is in a holding mode for now, brewing persistently, but the one region that is definitely not is South-East Asia – political events there are clearly accelerating.
Just last week, not only did president Trump meet with the North Korean leader Kim Jong Un (whom he refers to casually as the Rocket Boy) for the second time, but the meeting took place in the DMZ, making Trump the first sitting American leader to cross into North Korean territory proper. Their nuclear program is nothing less than a quest for survival for the country – its neighbors have it (Russia, China) or are capable to have it within short time (Japan, South Korea). It appears that what is being negotiated is letting the program continue, but without intercontinental missile carrying capacity. Notice that with this swift move, president Trump drop-kicked the North Korean nuclear problem on the laps of its neighbors, taking the US of A out of the fight.
Now have a look at China – it’s history shows that it never unites for long. Some countries unite well, like Germany, some not so well, like Italy, but to keep China united usually requires some ammunition.
There are three major problems that China is facing at the moment – first, their economy was built for a world that is going away, never to come back. Second, there is no way to replace the foreign markets with domestic consumption due to terrible demographics and the fact that China (except for coastal cities in the east) really is a poor country.
The third issue is this – the Chinese government has been pumping money into their economy with the goal to guarantee employment, so that people don’t protest, and the hell with profit margins. These are loans that are not repayable, the amounts are staggering, and they know full well that they’re entering the end of the road.
Now enter Hong Kong, the real flashpoint.
A step back in time: the British seized the city, located in the delta of Pearl River, to exploit local labor and to control the trade.
When China itself started exploiting cheap labor, the reason for existence for HK changed to financial and logistic hub. It was then, when the Chinese government negotiated with Margaret Thatcher the return of the city to China. She gave in, however, it was agreed that over the next 50 years (until 2047) Hong Kong would be an independent democracy.
Give it to her: she was good.
What followed is what the Chinese call One Country – Two Systems.
They tolerated the situation as long as the economy was booming.
With the output now in the plateau mode at best, trade wars, supply lines security disruptions, internal tensions; we’re into a new reality.
In short – China will not allow Hong Kong to be independent anymore, the protests will be crushed, and the city will be folded into China.
This is the end of Hong Kong as we know it, and hopefully it will go down with a just whisper, but I wouldn’t put my money on it.
Tom Kubiak is the author of The Traveler