Shifting Balance of Power in High Finance

Just as international political economic trends point toward a shift in the global balance of power toward China and the ominous sounding "Emerging Giants," the wreckage on Wall Street is leading to a new balance of power in high finance.

As always the FT has an interesting commentary; "A New Battle Looms on Wall Street" points out that large private equity funds may start breaking in to the underwriting business. Perhaps a process of creative destruction is emerging.

Rory Stewart | Lunch with the FT

Rory Stewart, author of "The Irresistible Illusion," sat down for lunch with the FT this week.

It really is an incisive and enjoyable interview that touches on multifarious aspects of counterinsurgency, post-conflict reconstruction, development, and political influence. It goes well with Saturday/Sunday morning coffee.

My favorite part, which captures Stewart's preternatural longing for a system of politics based on philosophy and rational thought, follows:

“I’d love to do politics in Britain,” he says after a pause to taste a delicious cauldron of shellfish, tentacles and soggy bread. “But the important thing is to understand our culture and society in order to know how you do that. Being an elected member of parliament might not be the best way – it could be, it probably is, but – well – the question is whether you can actually play a useful role in changing policy in any way.”

It’s hard to know where Rory Stewart really belongs. He says he likes working with communities, but it’s difficult to imagine him enjoying the lifestyle of a British constituency politician. He wants to “change things for the better in a way that is enduring and worthwhile and not just superficially impressive ... or because it looks good on your cv”. In another age, he would have been a statesman, an explorer, a philosopher – but today?

The full interview may be read here.

Worth Reading: It’s Time for the US to Declare Victory and Go Home

This memo ("It's Time for the US to Declare Victory and Go Home") from Army Colonel Tim Reese is gathering buzz after appearing in today's New York Times.

There are some blistering critiques in here, and they expose the limited opportunities remaining for U.S. influence in Iraq. Ultimately, COL Reese argues that the United States has done what it can do, and that U.S. long term strategic interests in Iraq and the region would be better served through an accelerated withdrawal.

Cui Bono?

The Wall Street Journal reports this morning that the China Investment Corporation - China's Sovereign Wealth Fund - has selected Morgan Stanley and Blackrock (with which it has a colorful, if not depressing history) to manage a portion of its $200 billion portfolio.

Elsewhere, Bloomberg reports that Warren Buffett made two lucrative decisions last September. First was Berkshire Hathaway's investment in Chinese carmaker BYD Co., whose Hong Kong-listed stock has increased five-fold since Buffett's investment. Paper profits to Berkshire: $1 billion.

As if that wasn't sweet enough, Buffett's capital injections for Goldman Sachs - for which he received favorable warrant terms - have netted Berkshire $2 billion in paper profits.

Not bad for a week's work.

And if you're one of the countless Americans who snagged a new car through the Cash for Clunkers program, congratulations! It turns out that the $1 billion program ran out of money after six days. Assuming each participant received the maximum $4500 subsidy to purchase a new car, that means auto inventories shrunk by more than 200,000 cars. Chalk up a "W" for the American auto industry and the 200,000+ Americans who bought new SUV's with taxpayer money. The American taxpayer continues its losing streak - a trendline that looks set to continue through the next decade.

China Looks to Go on a Shopping Spree

In case you missed it, Chinese Premier Wen Jiabao announced yesterday that China is looking to spend its foreign exchange reserves. When Western politicians and economists called on China to bolster its consumption and demand, I don't think this is what they had in mind.

As part of its continued efforts to reduce exposure to the U.S. Dollar, China will use portions of its $2.132 trillion - yes, trillion - forex reserve chest to purchase tangible and corporate assets abroad. The announcement comes less than one week after China appointed Yi Gang as the new head of the State Administration of Foreign Exchange (SAFE).

Ostensibly energy and natural resources firms will be first on the acquisition list. Prepare for an uptick in xenophobia and anti-Chinese sentiment on Capitol Hill as China's state-owned companies take advantage of depressed asset prices to buy up U.S. companies and business units of multinationals with sensitive technologies.

One wonders which banks stand to gain from the underwriting and due diligence requirements coming in the months and years ahead, and whether outside consultants are advising SAFE on its investment strategy.

It will be interesting to see if/how this impacts Chinese demand for U.S. Treasuries. Without the Chinese government's continued purchases of U.S. debt, the costs of the Obama Administration's ambitious policy agenda will escalate further. On top of the declining support for his policies, an inability to acquire debt financing would leave his initiatives stillborn.

The Geopolitics of the Indian Ocean: Sino-Indian Tensions on the Rise

Yesterday, the Financial Times published an excellent piece on growing Sino-Indian geopolitical tensions.

With China's three decades of uninterrupted economic growth, the country is seeking to expand its influence throughout South Asia - from the Indian Ocean to the Persian (Arabian) Gulf. As the FT notes, often this influence takes the form of infrastructure projects - such as deep water ports, arms deals, energy investments, and diplomatic support.

The so-called "string of pearls" of Chinese influence appear to leaders in New Delhi as elements in a strategy of encirclement. No wonder the Indians are eager to begin sea trials of their first nuclear-powered, ballistic missile capable, submarine later this month.

This portending conflict is a subject that Robert Kaplan expanded upon in the March/April 2009 issue of Foreign Affairs, in an essay titled "Center Stage for the 21st Century: Power Plays in the Indian Ocean."

While it is tempting to believe that the forces of history will inevitably lead to major war between these two powers, it is worth pausing and remembering that history isn't linear. The recent unrest in Xinjiang Province points to the tenuous hold the Chinese Communist Party has over domestic stability. An increase in unrest of any kind within China likely would compel the government to focus on its domestic situation, and forego the uncertain benefits of foreign intrigue. Of course, leaders in Beijing might redirect domestic anger and unrest, by channeling the population's latent nationalism toward a foreign enemy.

Regardless, as David Lampton points out in his excellent book The Three Faces of Chinese Power: with 14 land neighbors, China faces a delicate balance between overt demonstrations of power and influence, and maintaining a peaceful regional environment conducive to its own continued economic growth. If China manifests its power obtrusively, it may find its neighbors bandwagoning against it.

For those interested in geopolitics, competition over resources, the great swath of land stretching from the Near East through South and Central Asia to China, as well as those who believe the world's future lies more with the G-20 than with the G-8, this story is one to watch.

The Irresistible Illusion

The London Review of Books just published Rory Stewart's blistering essay "The Irresistible Illusion." The essay exposes the hubris and delusion with which Westerners view their efforts in Afghanistan.

The essay is available here.

This is a must read.