Why I Invest Overseas

Fifteen Centuries of Trade

Few places are more fascinating than the vast stretch of country which make up the Silk Road. From the streets of Istanbul, watching ships transit the Bosporus while smoking double apple in the apple shisha, through Iraq and Iran, to swimming in Lake Issyk Kul, which according to Kyrgyz lore formed from tears Alexander the Great cried over the death of a beloved general, and even further east, through the Gobi desert, into China itself.

You can feel the longevity of history in this part of the world, ancient and fascinating, like anything in life is still possible, and new adventures still wait. By comparison, Europe feels newer and tame, and America like just assembled IKEA furniture.

For nearly two thirds of human history the Silk Road connected the west to the east, with trade and ideas flowing between civilizations.

I recently read Silk Roads: A New History of the World by Peter Frankopan, the narrator on the audio version is outstanding, to better understand why China seeks to revive this trade corridor with the One Belt One Road Initiative by knowing more of its history.

As early as the first century AD, Roman senators bemoaned the fact over half the coin minted in the empire flowed east, beyond their borders to China for silk. Made me chuckle to realize the west had a trade deficit with China two thousand years ago.

Also realized for the vast majority of human history, the focus of wealth and power for the world has been to the east and decidedly different than how we look at a world map today and think of western Europe, then the US having world spanning influence.

It wasn’t until the end of the 15th century that the center of world geopolitics, wealth, and globe spanning empires lurched abruptly to the west.

For example, the map below is from 1452 by Venetian cartographer, Giovanni Leardo.

Jerusalem is at the center, and the direction of East is originally orientated North. I have rotated it to match the orientation of present day world maps, to show Europe, Asia, and northern Africa. All of this was thought to be surrounded by water.

Europe, Asia, and northern Africa was the known world for over 1,500 years of trade, mostly by overland or ships that would stay close to shore.

Then, in just seven years, from 1492-1499, the world went from what had been known for the last 1,500 years to discovering a new world and finding the sailing route around the Cape of Good Hope eastward to India.

Lost in school classrooms around the world is why expeditions like those lead by Christopher Columbus and Vasco de Gama were funded, outfitted, and launched in the first place in this new Age of Discovery.

The reason was global trade had been cut off.

In 1453 after the fall of Constantinople and defeat of the Byzantine Empire, the Ottomans closed the Silk Road as part of a total warfare strategy against Europe.

In response, the Age of Discovery was born to establish direct trading links between Europe and the Far East in an effort to bypass the Ottoman Empire.

Vasco de Gama brought back spices from India in 1499 after a two year journey spent trailblazing the maritime trade route to the Far East, the importance of the Silk Road for the next 500 years was annihilated.

Before that, people had no idea the Atlantic Ocean connected with the Indian Ocean, or that there were people in fancy headdresses sacrificing slaves on top of pyramids in the jungle in an entirely New World.

With these discoveries the balance of world power shifted decidedly west for the next five centuries, away from the historical center as new lands, trade, and wealth were opened up directly to Europe.

After all, if you had to make a choice to open trade back up with the Far East, would you rather sail east and fight the Ottomans who fielded advanced infantry tactics, fortified cities, cannons, and sailing ships in what would be a risky, long, and costly war?

Or would you rather sail west to the New World and fight on easy mode, stone age edition, with muskets and toledo steel against bows and arrows, sail ships to India around Africa, and forget about the Silk Road?

We’d all vote for easy mode, then go give the Aztecs the gift of Toledo steel.

And not a single one of us would feel bad about it because they were eating people and playing soccer with the heads of their enemy like ISIS in the Levant.

So the most important military might that mattered with the world oceans being mapped and a new world discovered shifted to naval power as the need to control oceans and protect trade in a different hemisphere now plotted the course of empires.

By 1507, the world looked different with the first map naming America and showing the full continent of Africa made by the German scholar, Martin Waldenseemuller (below).

The age of maritime might has lasted from the 16th century till now, with the Spanish Armada, the sun never setting on the British Empire, the rise of the aircraft carrier and projecting power from the sea, to America becoming the sole superpower after World War II, now sailing aircraft carrier battle groups unmatched on every ocean backed by seven decades of warfighting doctrine and a worldwide network of military bases. All focused to one goal.

Protecting the free flow of global trade for the US and allies.

Matched with the greatest military in the world is the soft power of the world reserve currency, used in 79% of all global trade.

This combination, the world’s sole superpower which for the most part doesn’t care if the dollar is strong or weak, allows the free flow of dollars around the world, and protects the private property rights of any foreigners as stringently as it does its own citizens in the markets, all backed with the military might of 10 aircraft carrier groups which ensures the free flow of goods across every ocean in the world is unique.

History Does Not Repeat, But It Rhymes

Newton says in his 1st Law of Motion, an object at rest will stay at rest, and an object in motion will stay in motion until an outside force acts on it.

Similarly, geopolitical and world trade will stay the same until an outside force acts.

The Age of Discovery and powerful navies was launched by the change in global trade when Europe was cut off from the overland route to the Far East by the Ottomans.

Today, the US sails the oceans uncontested with the ability to wield the dollar as a weapon through sanctions and SWIFT, a decidedly strategic advantage in world trade which other countries resent.

The US does not have to physically cut off global trade routes like the Ottomans in the 15th century. In the electronic age, the ability to cut off access to the world reserve currency and banking system has just as drastic and immediate consequences to regimes around the world.

The old world powers in Europe and Asia are very much aware of this strategic disadvantage and are constantly looking for ways to lessen the US’s dominance on world trade. This is why the euro was launched in the beginning by France, to lessen dependence on the dollar (very ungrateful from the American perspective after saving them in two world wars), but in the end the euro was used as a weapon by Germany against their European rival to cement its economic dominance of the continent.

This is why China started to build the One Belt One Road Initiative and why China is moving full speed ahead with the Digital Currency Electronic Payment (DCEP) program. China dreams of a day when they have a digital centralized currency which any company that does business in China must use as an end run around the US dollar.

The One Belt One Road Initiative is being built for the same reason Europe launched ships off the map in the Age of Discovery.

China needs to find a way to circumvent and neutralize the maritime power of the US Navy and the soft power of a weaponized US Dollar which threatens to cut it off from global trade.

China not trusting the West in trade goes back to the Opium Wars.

For a brief overview of the Opium Wars, the west was unhappy with the free trade agreement with China, and did not like giving gold to China for goods.

Much like the Romans 2,000 years before, they did not like trade deficits with China either.

So the British East India Company started pushing opium into China, addicting an entire civilization to drugs in order to not give China gold for goods, but instead now have a “product” the Chinese wanted to trade for goods (silk, porcelain, etc.).

When China seized the illegal drugs trying to halt the fracturing of their society after the Emperor pleaded with the Queen of England to make British merchants stop smuggling opium into China, the British marched armies into China to protect their illegal drug trade and completely crushed China in not one, but two, Opium Wars.

That is how Britain got Hong Kong, favored trade status, and China was humiliated for over a century. They have never forgotten or forgiven the West.

This is the root of the reason why China does not believe in free trade with the West today, honor intellectual property, and never will.

To them, they are getting justice against the West for the injustice and humiliation inflicted on them over 100 years ago that no one in the West even remembers.

If the roles were reversed, and we had to choose between trying to build up a Navy to match the United States in global maritime trade, or go back to the ancient overland route which we could control by giving loans to poor countries and combine with a new digital currency to tie them to China, which would we choose?

Easy mode, always, lets rebuild the Silk Road and beat the US to the digital currency frontier.

It is a good plan, especially for a country that has horrible geography for being a naval power, decided it was smart to only have one child and heavily preference boys under communism resulting in near terminal demographics for their society, and still wants to overtake the current world superpower which is the ONLY naval power on the planet capable of projecting global power, has half the world’s wealth in their stock market, and the largest millennial population of the developed nations of the world.

When you look at the countries China is trying to connect with the OBOR and DCEP, makes sense why they would pursue this strategy.

It plays to their historical strengths as a land based power in Asia, and they are targeting countries which are exactly the opposite of themselves and most western countries in terms of demographics and debt.

The countries along the OBOR all have relatively low national debt and young populations in the region of the world with the highest population density.

When taken in aggregate, it forms the largest group of millennials in the world, an area which is primed for economic growth in the 21st century as people hit their prime earning years, get married, have children, buy phones, diapers, cars, houses, plates and wine glasses at the Asia equivalent of Pottery Barn…all at the intersection of US maritime power and new silk road of China.

Population density is important.

When the OBOR is completed, over 4 billion people will be connected, with a combined GDP of US $21 trillion, slightly larger than the US$20 trillion GDP of the United States.

China is betting they can connect these people then tie them into DCEP, putting China on an economic footing equal to the world superpower without having to win a world war, protect global trade, let their currency devalue and run a trade deficit with countries that use their currency, or have nations trust them in order to gain control over their economic future.

Just One Small Problem

And when I say small, I mean fatal flaw. But it doesn’t lie in the OBOR or DCEP, it lies in energy and geopolitics.

The problem with most investors and economists is they aren’t geopolitical or military strategists, and vice versa. I think this is where I add the most value, since have years of experience overseas in military, private sector, and security and also like investing and macro economics.

China currently has the longest supply route in the world from their source of energy. This trade route is run by oil tankers from the Persian Gulf, through the Strait of Hormuz, across the Indian Ocean, through the Strait of Malacca in Indonesia, then up the South China Sea and finally to China.

China desperately wants to sit at the big kids table on the world stage with the United States, but by pursuing a strategy which did not require an expeditionary Navy capable of projecting worldwide power, they have left their energy supply vulnerable to any Navy which decides to cut it off, and for a developed economy, no oil mean no economy, and no economy means unrest, revolt, and the CCP politburo nightmare of possibly no more communist party in power.

I honestly have no idea what China is going to do about this problem. You don’t just build and launch an expeditionary navy. It takes decades, if not centuries to build the knowledge, skills, and doctrine. Even the United States, the world superpower, had a head start by being a British colony. Naval power was in the United States DNA from the start. To this day, one of the white lines on US Navy uniforms is for the British naval victory at Trafalgar.

The US is a two century old global naval power which was born from the first global navy dating back to 1546. I don’t think most investors realize the centuries of naval power the current global economy is built on.

China can want to be the global superpower all they want, but until they have an expeditionary global navy or go one strategic level higher and rule outer space, they never will be.

They may hate it, but whether China likes it or not they are completely dependent on the benevolence of the US Navy protecting their oil shipments from the Middle East across the oceans.

China is actually surrounded by neighbors who have more blue water naval experience and a lot of bad blood for China going back hundreds of years.

Namely Japan to the east, which has a proud five hundred year history of raiding the Chinese mainland whenever they felt like it and are a true blue water expeditionary navy…it is not a coincidence their naval ports are on the east coast of Japan facing open ocean.

Then India to the west, who in ten years will have land based fighters and missiles built on a barren island chain that controls the western entrance to the Strait of Malacca.

Have you ever wondered why China and India keep doing hand to hand combat in the Himalayans? As long as China can keep India distracted in the mountains, that prevents India from funneling funds and resources to their Navy which is the real concern to China.

80% of China’s oil supply transits the Strait of Malacca and it would be embarrassing to have an Indian missile man able to sink oil tankers while eating naan bread.

But it doesn’t even matter, Japan is building destroyers instead of shore based missile systems, and they absolutely have the ability to be outside China air and missile range and sink oil tankers while all China could do is send a strongly worded fax to the UN Security Council.

So China can not like the situation all they want, but no one depends on the US Navy more for the continued free flow of world trade more than China.

Which is why I think China’s strategy of the One Belt One Road and their digital yuan will have limited success.

Do I think they will succeed in being a regional power? Absolutely. Do I think companies and countries which want to use the OBOR infrastructure or do business in China will have to use the new digital yuan? Yes.

But do I think this new digital yuan will replace or even threaten the dollar for global trade and China is going to be the next world superpower as fund managers like to breathlessly talk about from heated seats in Davos? No way.

I’ve actually sailed through the Strait of Malacca on anti-piracy operations. It is no joke, and controls the fate of China, not only from an energy market prospective but for their ability to project naval power.

The world at large is never going to use the digital yuan because the only reason they use the dollar is because it comes with a three-fold silent promise.

There are 10 aircraft carrier battle groups sailing the world’s oceans protecting trade, the US does not care if the dollar weakens against other currencies, and the US protects the property rights of foreigners in their markets as much as their own citizens.

The Chinese cannot offer any of those three things to the world. So think OBOR and DCEP will be of limited success, and if anything the world becomes more bifurcated because the honest truth is the United States does not really need China any longer.

Robots now work cheaper and faster than Chinese workers in factories. That can be onshored for limited cost and higher corporate profit, or if needed offshored to other Asian markets, or even Africa (looking at you Ethiopia), but much more likely is Mexico gaining from China’s loss as labor stays offshore but is now safely snuggled under the Eagle’s economic protective wings in North America (NAFTA).

With the global pandemic fresh in everyone’s mind, no longer is the keyword synergy having everything concentrated in one place across an ocean, but instead the safe word is antifragile as companies look for ways to move manufacturing out of China, and preferably within NAFTA as the political winds change direction in both houses of US Congress and it is popular to take a hard stance against China while Mexico is seen as the valuable trading partner that they are to the US.

When you add in America has the largest agriculture production land with the cheapest inputs and transport costs in the world (midwest and Mississippi river) while also able to rival the middle east in low cost oil production on a per barrel basis thanks to the advancements in horizontal drilling, the geopolitical hard reality is now the world needs America to keep maintaining world stability a whole lot more than America needs the world anymore.

Why Invest Overseas Then?

So after saying all that, why even bother with investing overseas?

Because most Americans don’t invest overseas and I consider geopolitical diversification an important part of my overall investment diversification.

Add in the current societal issues in the United States which I think are just starting to trend (after all, can’t keep people out of work for a year, set them back financially, and not expect them to want change) on top of the hard to ignore long-term growth potential in the Indian Ocean region, and I think it is compelling.

While I think the world would be a dark place if the CCP was in control and everyone was forced to use DCEP, I do think it has the potential to unlock value and growth where the maritime power meets the land power in the world.

Will go into more details on specifics and thought process of how and why I chose the investments I did in the Fortress.

See you out there, Radigan