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Generational Dynamics Web Log for 13-Jan-2011
13-Jan-11 News -- Test flight embarrasses China's Hu Jintao in front of Secretary Gates

Web Log - January, 2011

13-Jan-11 News -- Test flight embarrasses China's Hu Jintao in front of Secretary Gates

Baltic Dry Index seems to be crashing again

J-20 Test flight embarrasses China's Hu Jintao in front of Secretary Gates

China's President Hu Jintao was possibly hugely embarrassed on Tuesday during a meeting with US Secretary of Defense Robert Gates in Beijing.

Robert Gates and Hu Jintao on Tuesday (VOA)

Robert Gates and Hu Jintao on Tuesday (VOA)

The People's Liberation Army (PLA) conducted a major test of their J-20 stealth fighter on Tuesday. That alone would be a big signal to both Hu and Gates, given that it occurred just before their meeting.

But even worse, Hu appeared not to be even aware that the test had occurred when Gates asked him about it, according to the Wall Street Journal (Access).

Hu later acknowledged that the test flight had occurred, and assured Gates that the test was not directed at the U.S. The sequence of events indicates that hawkish elements in the PLA are taking control of military policy, overriding Hu's civilian control.

During their meeting, Gates also said that within five years, North Korea will likely have a nuclear intercontinental ballistic missile capable of reaching the United States, according to VOA. Gates asked Hu for help with this situation but, not surprisingly, no such help was offered.

According to an analysis in the Washington Post, the surprise flight test incident illustrates the weakness of Hu as a leader:

"The bizarre drama that Gates - a former U.S. intelligence chief who has dealt with China for decades - witnessed highlights a significant trend in Chinese politics as the fourth handover of power in communist China's 62-year history approaches: the increasingly assertive voice of the People's Liberation Army in the country's foreign policy.
Throughout the past year, the PLA has been a catalyst in a series of national security crises. Chinese fishing vessels have clashed with Japanese and South Korean coast guard cutters near disputed islands in the Western Pacific. PLA officers have engaged in verbal fisticuffs with senior American officials from Singapore to Beijing.
And PLA officers have appeared on Chinese state television, enunciating, much to the chagrin of China's senior diplomats, what appears to be an ever-expanding list of China's core interests. ...
To that end, the PLA has found a perfect foil in Hu - considered the weakest leader in communist China's short history, said Andrei Chang, editor of Kanwa Asian Defense magazine. Chang said Hu's apparent ignorance of the test was part of a "soap opera" that is unfolding as China changes leaders. Hu is slated to step down, and China's vice president, Xi Jinping, who met with Gates on Monday, is expected to succeed him."

Calling Hu "the weakest leader in communist China's short history" is an interesting statement, but one that I fundamentally disagree with in the form stated.

A more accurate description is that Hu is a fine leader but an anachronism, someone who would have been more successful ten years ago.

Hu, born in 1942, is a member of China's "Artist generation," having been born and raised during China's last crisis war, Mao's bloody Communist Revolution that climaxed in 1949. As such, he is like America's Silent Generation -- people who are mediators and conciliators and implementers, but not decision makers. (See "Basics of Generational Dynamics.")

Hu would never lead China's central committee to declare war on the U.S., but once such a decision were made, he would implement it ruthlessly, as I described in my 2006 report, "Eerie similarity: Chinese President Hu Jintao and Donald Rumsfeld."

Four years have passed since I wrote that report, and since that time, China's "Nomad generation," like America's Generation-X, have moved powerfully into middle management positions throughout society. And just as the West's Generation-X perpetrated the massive fraud in real estate securities that led to the global financial crisis (which is far from over and has barely begun), China's new middle managers are exhibiting similar nihilism and destructiveness in their increasingly hegemonistic military policy. Unlike Hu, they are almost oblivious to the consequences of launching a war, and they would not hesitate to do so.

Baltic Dry Index seems to be crashing again

The Baltic Dry Index (BDI) crashed in 2008, signaling a worldwide collapse of trade and transportation. It appears to be crashing again, but today it means something different.

The Baltic Dry Index is a measure of shipping costs for cargoes in "capesize" vessels -- vessels that are too large to fit through the Suez or Panama canals, and so must go around the Cape of Good Hope or Cape Horn. These vessels transport the huge cargoes of copper, iron ore and other commodities.

In 2007-8, the BDI was strongly correlated to China's commodity purchases. And after the Beijing Olympics, China cut back on construction, and there was a worldwide collapse in trade and transportation, reflected in the BDI.

But today it's not clear that the BDI is related to a fall in trade and transportation. There are two OTHER factors pushing down the BDI these days. One is the floods in Australia that have shut down the coal mines. And the other is that a number of new ships are coming online -- these are ships that were commissioned during the 2008 bubble.

In fact, there's an amazing 20 mile long line of 132 ships floating off the coast of Australia, according to Bloomberg.

As a result, shipping rates are expected to plunge an additional 32% from where they are now. This means that the BDI should continue in free fall, but it's not completely clear exactly what that will be telling us.

Popping champagne corks in Portugal

They're popping champagne corks in Portugal on Wednesday, thanks to their "very successful" bond auction, where they borrowed €1.25 billion ($1.6 billion) by selling bonds, according to Financial Times (Access).

They had feared that they would have to pay yields (interest rates) at the head-crushing rate of 7%. But instead, they will only have to pay ... wait for it! ... just 6.71%!!

That's substantially higher than the 2-4% yields that are typical of such auctions, and will push Portugal ever deeper into systemic debt.

But apparently there's a very good reason why the yields came in just a hair lower than 7%. The European Central Bank (ECB) averted disaster by buying Portuguese bonds earlier in the week, according to the Guardian.

In fact, the worst is yet to come for Portugal, according to CS Monitor. Just to meet current debt payments, Portugal will have to borrow an additional $6 billion in March, and $8 billion more in April. And this is at a time when Portugal's economy is entering a recession.

This week's danger for the eurozone isn't over yet. On Thursday, Italy and Spain will both be going to the bond market.

Additional links

The Dhaka (Bangladesh) Stock Exchange rallied a small amount on Wednesday, partially further recovering the huge loss when the market was in free fall on Sunday and Monday. The Bangladesh experience, along with similar but less severe experiences in India and smaller Asian countries, provides a warning to investors that these stock markets may have surged last year, but the risks are great. NY Times

One of the villainous practices of the credit bubble was the use of leverage, so that a small investment could yield huge profits. Once the real estate bubble started bursting, the high leverage had the reverse effect -- resulting in huge losses. Hedge funds were "deleveraging" early in the global financial crisis, but last year they started "releveraging" again, and now they're almost as highly leveraged as they were before. As I keep saying over and over, the same practices that led to the financial crisis in the first place are now being practiced more than ever. That's one of the ways that we know that the worst of the financial crisis is yet to come. CNBC

Just recently, Palestinian Authority president Mahmoud Abbas seemed exhausted, ready to resign, and ready to dissolve the Palestinian Authority. But now Abbas's popularity has been increasing, and he appears to be "invigorated" and acting "like he's a young man again." The National (UAE)

Hamas held "urgent" talks with militant groups in Gaza on Wednesday to pass on a warning from Arab leaders that firing rockets into Israel is "very dangerous," and risks triggering a big counter-attack by Israel. The militant groups agreed to stop the rocket attacks, but maintained the right to "launch resistance attacks" if Israel invades Gaza Strip. AFP and Jerusalem Post

North Korea has repeatedly followed a well-calculated path of extortion to get whatever it wants, usually a lot of money. It creates a crisis, raises tensions with threats of war, and then when everyone is anxious, proposes "peace talks" to present its demands. This may not work next time, as the South Korean population has become increasingly bellicose after last year's North Korean attacks on South Korea. Asia Times

Last week's murder of Pakistan's Punjab governor Salman Taseer reveals the depth of Pakistan's extremist drift. Time

(Comments: For reader comments, questions and discussion, see the 13-Jan-11 News -- Test flight embarrasses China's Hu Jintao in front of Secretary Gates thread of the Generational Dynamics forum. Comments may be posted anonymously.) (13-Jan-2011) Permanent Link
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Generational Dynamics Web Log for 13-Jan-2011 13-Jan-11 News -- Test flight embarrasses China's Hu Jintao in front of Secretary Gates

J-20 Test flight embarrasses China's Hu Jintao in front of Secretary Gates

Baltic Dry Index seems to be crashing again

Popping champagne corks in Portugal

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Generational Dynamics Web Log for 13-Jan-2011
13-Jan-11 News -- Test flight embarrasses China's Hu Jintao in front of Secretary Gates