Change Is Coming: China Is Accelerating Its Plan For A Military Base In Pakistan

Authored by Lawrence Sellin, op-ed via The Daily Caller,

On January 1, 2018, The Daily Caller published information – later confirmed in two separate reports, here and here – about a plan for a Chinese military base on the Jiwani peninsula in Pakistan, near Gwadar, a sea port critical to the success of the China-Pakistan Economic Corridor (CPEC).

According to noted national security correspondent Bill Gertz:

“Plans for the base were advanced during a visit to Jiwani on Dec. 18 by a group of 16 Chinese People’s Liberation Army officers who met with about 10 Pakistani military officers.”

“The Chinese also asked the Pakistanis to undertake a major upgrade of Jiwani airport so the facility will be able to handle large Chinese military aircraft. Work on the airport improvements is expected to begin in July.”

Sources now say the plan has been accelerated. Upgrade of the Jiwani airport is already underway. In addition, procedures are being formulated for the relocation of the local population to make way for Chinese military and other support personnel. The sensitivity and importance of this issue to China and Pakistan cannot be overstated. After the disclosures and the expected denials from both Islamabad and Beijing, Pakistani officials, as early as January 5, 2018, launched a leak investigation and it was jointly decided to advance the schedule for the Jiwani base.

Strategically, China’s Belt and Road Initiative (BRI) is their roadmap to geopolitical dominance. It is soft power with an underlying hard power, military component, the so-called “String of Pearls” bases and facilities.

A Chinese military base on the Jiwani peninsula will complement the Chinese base in Djibouti, which became operational in 2017. Both are located at strategic choke points. The Djibouti base is near the entrance to the Red Sea and the Suez Canal, while the Jiwani base will be within easy reach of the Strait of Hormuz, a combination, not only capable of dominating vital sea lanes in the Arabian Sea, but boxing-in U.S bases in the Persian Gulf and outflanking the U.S. naval facility on Diego Garcia.

There is concern that the Chinese will transform its 99-year lease of the Sri Lankan port of Hambantota into another naval base, the exact “debt-trap” method the Chinese used in Djibouti and after its acquisition of a 40-year lease of the Pakistani port of Gwadar. There are also continuing Chinese diplomatic efforts to gain access to the Maldives.

All of the above represent elements of China’s “String of Pearls” bases to secure military dominance of the maritime component of BRI.

In addition to explicit economic and military moves, China is planning a fiber optic network to control the flow of information and is mapping the northern Indian Ocean seabed, potentially for a SOSUS-like system to monitor maritime traffic and control a fleet of subsurface drones.

While the United States is tinkering with counterinsurgency policy and nation building in Afghanistan, there are seismic strategic changes taking place in South Asia and the Indian Ocean region.

It is senseless to continue an unsuccessful, costly and exhaustive approach in Afghanistan, which not only places our forces at an equivalent tactical level to the Taliban, but allows Pakistan to regulate the operational tempo and the supply of our troops.

Instead, the U.S. should be moving toward a policy that shifts the burden of Afghanistan stability to the regional players who have thwarted our efforts there and adopt a strategy that exploits our technological advantages to counter growing Chinese sophistication and ambition through augmented U.S. naval and air power projection and the selective use of covert, special operations and cyber warfare operations.

The foremost regional problem is to have a workable plan to secure Pakistan’s nuclear arsenal, which is growing more dangerous because of its expanding tactical nuclear weapons program.

The United States is not without strategic options to disrupt Chinese hegemony. The linchpin of BRI is CPEC. Pakistan’s main vulnerability remains ethnic separatism, which was largely the reason Pakistan adopted a program of Islamization in the late 1970s. Pakistan is the Yugoslavia of South Asia with the Pakistani province of Punjab as the equivalent of Serbia, when that country pursued an expansionist policy in the 1990s.

For example, BRI cannot succeed without CPEC and CPEC cannot succeed without a subservient Balochistan, a province with a festering insurgency that was once independent and secular before it was forcibly incorporated into Pakistan. Balochistan is also where Pakistan maintains a significant Taliban infrastructure and provides safe haven to its Quetta Shura leaders.

There clearly needs to be a sense of urgency applied to this challenge because current U.S. policy in Afghanistan is about to be overtaken by events.

An American withdrawal from Afghanistan will only be a humiliating defeat if the United States is forced into strategic retreat because we do not have a plan in place to address the changing regional conditions.

A Tiny Island Nation You’ve Never Heard Of Has Become A Global Battleground

Authored by Darius Shahtahmasebi via,

Last week, Saudi Arabia and the United Arab Emirates announced a grant of $160 million for “development projects” in the Maldives, a country located in the Indian ocean that is currently battling an economic and political crisis.

“As part of the support of the Kingdom of Saudi Arabia and the United Arab Emirates, the Saudi Fund for Development and the Abu Dhabi Fund for Development has pledged $160 million in support of the Maldives and its brotherly people for the development projects including the airport development and fisheries sector of the Maldives,” a statement on the Maldives presidency website said on February 18.

Foreign debt is viewed with great enthusiasm by the current governments in the Asia-Pacific region, but not so much by the rest of the population. Former Maldivian President Mohamed Nasheed recently warned that its monumental debt to China has put the country at risk of a “land grab.”

“We can’t pay the $1.5-2 billion debt to China,” Nasheed told the Nikkei Asian Review in an interview.

If the Maldives falls behind on its payments, China will “ask for equity” from the owners of various islands and infrastructure operators, and Beijing will then “get free hold of that land,” he also reportedly said.

Just days ago, the current President, Abdulla Yameen, extended the state of emergency that was implemented in early February. Fortunately for China, the focus has quickly shifted from China’s influence in the country to the Gulf’s growing involvement, particularly Saudi Arabia’s.

“It is unfortunate that certain countries are assisting the deep state,” Mohamed Aslam, Maldivian Democratic Party (MDP) legislator and member of the House Economic Committee, told Al Jazeera. He also said:

The Maldives, at present, is in a state of flux politically and socially. It is also under siege by an organised and systematic strategy developed and implemented by radical Islamists with the intention of infiltration and subsequent total control of key departments of the state.”

In 2015, the Maldives approved a law to allow foreigners who invest more than $1 billion to own land in perpetuity. While this may not seem like that big of a deal, having a five-minute conversation with anyone in the Asia-Pacific region will immediately tell you otherwise because land is everything to local inhabitants of the Asia-Pacific. As the New York Times articulated last year:

“But Mr. Ahmed [a local resident] and others here are bracing for a life change they fear could be catastrophic, after the Maldivian president’s announcement in January that leaders of Saudi Arabia were planning a $10 billion investment in the group of islands where Mr. Ahmed lives, known as Faafu Atoll.

“Most alarming to the residents were reports that the government was breaking with a longstanding policy of leasing the islands that are home to some of the world’s premier resorts and selling the atoll outright to the Saudis. The inhabitants fear they might be moved off the islands.”

However, despite the potential loss of land ownership, Saudi funding for any country comes with some more disturbing strings attached. As Fareed Zakaria has explained:

“In Southeast Asia, almost all observers whom I have spoken with believe that there is another crucial cause [behind the ‘cancer’ of Islamic extremism] – exported money and ideology from the Middle East, chiefly Saudi Arabia. A Singaporean official told me, ‘Travel around Asia and you will see so many new mosques and madrassas built in the last 30 years that have had funding from the Gulf. They are modern, clean, air-conditioned, well-equipped – and Wahhabi [Saudi Arabia’s puritanical version of Islam].’ Recently, it was reported that Saudi Arabia plans to contribute almost $1 billion to build 560 mosques in Bangladesh. The Saudi government has denied this, but sources in Bangladesh tell me there’s some truth to the report.”

As The Week also explained in 2015, Saudi Arabia has spent billions of dollars “investing heavily in building mosques, madrasas, schools, and Sunni cultural centers across the Muslim world. Indian intelligence says that in India alone, from 2011 to 2013, some 25,000 Saudi clerics arrived bearing more than $250 million to build mosques and universities and hold seminars.”

According to the New York Times, Saudi Arabia has “for decades spread its conservative strand of Islam in the Maldives by sending religious leaders, building mosques and giving scholarships to students to attend universities.”

It should therefore come as no surprise to anyone that the South China Morning Post reported that Indian intelligence sources are claiming hundreds of Maldivians have joined ISIS in Syria. ISIS essentially holds the world ransom with Saudi Arabia’s strict strain of Islam, a mere coincidence one can be sure.

India, for its part, also has a deep interest in claiming the Maldives for itself, though it was noticeably left out when President Yameen sent envoys to Saudi Arabia, China, and Pakistan to request help in its current political crisis.

China sees the Maldives as a key part of its One Belt, One Road initiative, and Beijing does not necessarily view Saudi Arabia’s desire to inject itself in the region as a bad thing. In fact, the South China Morning Post lamented that Saudi Arabia is doing so in its bid to assert itself as a more viable partner in China’s rapidly expanding economic projects as opposed to its major arch-rival, Iran, with which China also has a cooperative relationship.

One Company Now Owns Over 7% Of The Entire S&P500

By now it has become common knowledge that in the ongoing war of attrition between expensive – but very much underperforming under central planning – active investing and cheap and efficient passive, ETFs, the latter are winning and the former will likely concede majority control of market AUM in just over a year.

Furthermore, as BofA notes, US trading volume (as of late summer 2016) was 24% exchange traded funds (ETFs) and 76% single stocks versus 20% ETFs and 80% single stocks three years ago. By now ETFs are likely responsible for 30% of trading volume or much more.

However, it is far less known that as “active” loses market share, “passive” has become a giant force in the overall market, and as of 2016, the percentage of S&P 500 market cap held by Vanguard alone has doubled since 2010. At this rate, ETF-giant Vanguard alone will own 10% of the entire market by the end of the decade.

Unfortunately, this unprecedented dominance by investment vehicles that merely reflect flows and not fundamentals, means that the market is becoming increasingly fragile, inefficient and broken, something which can be seen in the excess volatility (measured by both standard deviation & price declines) of stocks with a larger proportion of shares held by passive investors.

Yet while in the US ETFs are yet to dominate the market, resulting in even greater systemic fragility and irrationality, this is already the case in Japan, which like with QE and NIRP, has been the guinea pig for countless monetary and market experiments.

Just like in the US, there is a tangible reason why the flows into Japan passive investing have been massive: active managers suffered outperformance rates 12ppt lower between 2014-2016, a period in which passive inflows were accelerating vs. over the prior decade (34% of funds outperforming the TOPIX between 2014-2016 vs. 46% outperforming between 2002-2013).

As a result, in Japan passive funds are now two-thirds of total….

… with the flow differential between active and passive absolutely staggering.

It is unclear how much of this has been the result of BOJ intervention, but what we do know is that over the past 5 years the Japanese central bank has been purchasing massive amounts of equity ETFs in its attempt to control the stock market, and at last check the BOJ owned 75% of total Japanese ETFs.

If Japan is indeed the harbinger of what is coming, then over the next 3-5 years, the Fed will become the biggest investor in the ETF market as the US central bank does everything in its power to avoid a terminal stock market collapse after the next depression.

Meanwhile, the trend in the US is clear: investors increasingly are giving up on single stocks, and thus fundamentals, and embracing the collective hive mind of ETFs…

… resulting in “less stock selection, more sector selection”, and an ominous increase in “long-term market inefficiencies” according to Bank of America…


Spending On Hookers, Drugs And Booze Tumbles

When it comes to the US economy, there is overall consumer spending, and then there is spending on vices – a true leading indicator of overall consumer confidence and discretionary spending as Americans generally won’t splurge on hookers, blackjack and blow until they are absolutely positive they won’t need the cash for something else. Conveniently SouthBay Research  has a “Vice Index” that that tracks spending on gambling, alcohol, drugs, and prostitution. And as of February, the vice index just tumbled, suggesting that after a brief burst in late 2017 and 2018, the consumer-driven economy is again in trouble.

Or, as SouthBay’s Andrew Zatlin writes, the “Vice Index Points to Tax Cut Hangover: Slower Pace of Consumer Spending for 1Q

Shown below is SouthBay’s proprietary Vice Index (lagged by 6 months) which tumbled in February to -2%, its worst print since 2012.


Here is the same Vice Index shown unlagged: it shows that the impact of the Trump tax Cut was “Short but Sweet”, and ominous warning for the broader economy.

As Southbay notes, unlagged the Vice Index reflects two recent major swings:

  1. The 2016 Reflation: The US and global economies rebounded in late 2016 with a firming up of oil and materials prices, as well as the Trump election.  As a function of its leading indicator qualities, the Vice Index began surging July 2016. 
  2. Trump tax Cut: The Trump tax overhaul was approved in December 2017 but consumers began spending before then.  Meanwhile the Vice Index began to surge October.

The point being that the Vice Index is a very reliable gauge of shifts in the economy as they impact consumer spending. And, as Zatlin writes, “it is pointing to a sharp down turn in consumer spending.  As if the Tax cut never happened.” It’s very possible that the pace of spending will pick up over the year.  But first some household financial healing needs to take place.

Some further observations from SouthBay Research on the state of the US consumer:

Personal Consumption Shows Household Financial Stress

Why would the Vice Index point to a looming pullback in the pace of consumer spending? Here’s a snapshot of Household finances

Coming into January

  • Spending outpaced incomes by $133B
  • Savings had dropped (-$148B)

But January saw a $106B one-month jump in disposable income thanks to

  • a 2% jump in cost of living adjustments to Government benefits (Medicare, Medicaid, Social Security)
  • a drop in taxes (taxes fell -3.3% from December to January)

That’s a ‘permanent’ 5.3% jump in disposable income.

Financial healing first, spending next

  • Consumers pre-spent a lot of the Trump tax cut: In anticipation of the tax cut, Households went on a spending spree.  You can see that in the pace and timing of the drop in savings: a little drop in September (when the tax cut seemed likely) and a bigger drop in November when the cut was agreed.  Consumers were spending ahead of the expected savings.
  • Spending actually slowed in January: In the 2H 2017, PCE averaged $60B+ per month.  In January it was half or $31B.  In fact, of the January $106B gain, all but $5B went to savings.
  • Watch the cost of debt: Since September, more debt and higher rates has driven interest rate payments up $22B (a 7% growth)

* * *

Here’s what to expect according to Zatlin:

  • 1Q: Relatively slow pace of retail spending.  There’s a consumer hangover as savings get repaired and the big holiday bills get paid.
  • 2Q: Spending resumes.  By April, US households will be enjoying tax rebates and also factoring in the additional $100B per month from lower taxes and COLA.  Higher interest rates and inflation will nibble away at some of this will boost spending.  Spending to pick up in 2Q.  It’s a consumer hangover following the First the savings hole must be re-filled.  Then the holiday spending bills must be re-paid.

Perhaps the spending rebound will take place as expected… but first have a chat with your friendly, neighborhood drug dealer: when it comes to spending trends and inflection points in the US, he just may have the most valuable information.