Signal: Faith in China, Hope in Germany, and Crappy North Korean Beer

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THE CONFIDENCE GAME

If you own stocks, anywhere in the world, there’s a good chance that the markets’ wild ride this week upset your stomach. But, worried as you were, you probably felt some confidence that the US and European economies are relatively stable, that governments in those places know what they’re doing and are relatively transparent about it, and that markets would recover.

Now consider a day in the (not-so-distant) future when a market meltdown begins not on Wall Street but in China. Imagine further that when that day comes, China is the largest economy on earth (by some measures, it already is). Will you be as confident in China’s leadership and markets are you are in the US and Europe’s?

A few thoughts:

1. In China, all the big political and economic decisions are made behind closed doors by seven men — the Politburo Standing Committee. No one alive today has ever lived in a world where the largest economy on earth was governed in such secrecy.

2. Last week’s stock market rollercoaster started in part because of expectations that the US Federal Reserve will soon raise interest rates to keep the economy from overheating. Investors don’t like higher interest rates, but they know how the Fed works and what it wants to achieve. The Fed has a responsibility to explain its decisions. Imagine the uncertainty when investors are instead hanging on the words of China’s central bank, where decisions must be approved by politicians who feel no need to explain their actions.

3. Starting this year, Chinese stocks are included in the MSCI EM index, one of the largest indices of stocks from “emerging market” economies. Because many American pension funds hold the MSCI EM Index, they — and maybe you — now have direct exposure to China’s domestic stock market for the first time, even if you’re not aware of it.

4. Today, China’s economy appears strong, but many analysts say economic statistics produced in that country are more vulnerable to political manipulation, particularly at the local level, than stats from countries like the US, Germany, or Japan. In fact, several Chinese provincial governments admitted recently that they faked their GDP data for 2016. Investors shrugged off this news because they’re confident in smooth sailing for China’s economy. But what happens when the waters get choppy and investors get queasy?

5. Investors know that, in a crisis, China’s leaders will worry about political stability first and the credibility of state-generated information a distant second. So even if China produces accurate info, will panicky investors believe it? How long will it take for confidence to be restored?

Confidence is the fuel that powers economies forward — at the local, national, and global levels. Today, China and its economic engine inspire confidence. That may no longer be true on the day when real trouble shakes an economy governed by secretive leaders who care more about political survival than the credibility of the information they share with the world.

That day is coming.

THE COMING DIGITAL DIVIDE

Sometime around 2020, if you live in a big city, you’ll access a 5G network for the first time. You’ll immediately notice a difference: 5G will be up to 1000 times faster than your existing mobile connection. “Download times” will cease to exist, as everything runs instantly in the cloud, but that’s just the beginning.

Potentially world-changing technologies that depend on continual access to ridiculous amounts of data — think driverless cars, smart factories and cities, and next-generation military technologies — will move from the drawing board to reality. It’ll be an amazing time to be alive, if you’re lucky enough to access a 5G network. In the developing world and in farther-flung parts of wealthy countries, millions of people may still be stuck with slower connections, if they’re connected at all. The “digital divide” is an old problem, but 5G is such a quantum leap forward that the gulf between the haves and have-nots will be profound.

Here’s where the geopolitics get interesting: if you’re one of those people or countries in danger of being left behind, you’re likely to view anyone who can help you access the 5G network as a valuable potential friend. If your new friend built and ran the network, you might even come to depend on them.

China gets this — 5G is an integral part of Beijing’s Belt and Road initiative aimed at outfitting old Silk Road and maritime trading routes across Eurasia and Africa with modern-day infrastructure. For China, leadership in next-generation wireless technology isn’t just about securing new economic opportunities, it’s about gaining geopolitical leverage. And the US is unlikely to take that challenge lying down. Welcome to the new “space race,” one with higher stakes.

GZERO WORLD WITH IAN BREMMER: LET THE GAMES BEGIN

Airing this morning at 10am ET, a special Olympics-themed GZERO World episode complete with mushroom cloud shadows and death by anti-aircraft missile.

A NEW GRAND COALITION FOR GERMANY

There are many observations worth making about news that Angela Merkel’s center-right CDU/CSU and the center-left SPD agreed this week to form another “Grand Coalition” government. But for now, let’s just leave it at this: Merkel’s decision to offer the SPD control of the Finance and Foreign Ministries suggests that Merkel means to use her fourth and final term as Germany’s chancellor to work with France’s President Emmanuel Macron on significant reform of the Eurozone. No guarantee it’ll work, of course, and SPD members have yet to approve the coalition agreement, but Merkel’s apparent willingness to try is worthy of note.

WHAT WE’RE WATCHING

Corsica — Spain is not the only country with a potential separatist problem. French President Emmanuel Macron paid his first visit to Corsica this week to respond to demands for greater autonomy from increasingly ambitious nationalists on the island. 

Korean Women’s Ice Hockey Team — The Winter Olympics are officially open, and one of the great stories of these games will be a women’s hockey team that brings together South and North Korean athletes for the first time. Forget politics. Forget medals. Forget your national team, at least in women’s hockey. They may not win a single contest, but these women are THE team to watch in Pyeongchang. 

Other Animals That Can’t Fly — Last week, we told you about United Airlines’ refusal to allow a woman to board her flight with a large peacock she claimed she needed for “emotional support.” Now United is preparing a list of other animals that will not be allowed. The preliminary list includes hedgehogs, ferrets, insects, rodents, snakes, spiders, reptiles and “non-household birds.” Your Friday author will be watching to ensure his Support Llama is not included.

WHAT WE’RE IGNORING

Lembert Mende — In 2016, Democratic Republic of the Congo’s President Joseph Kabila refused to step aside when his term of office ended. Violent street protests followed. This week, Kabila’s Minister of Communications, Lambert Mende, said that Kabila, in office since 2001, would not stand for re-election or try to select a successor who would protect his interests in a vote now scheduled for December. No offense, Mr. Mende, but we’ll need to hear this news directly from Joseph Kabila. 

Pence in Pyeongchang — US Vice President says he plans to attend the Games to ensure that North Korea is unable to “hijack the messaging of the Olympics.” Is there anyone alive today on this planet who is capable of being charmed by Kim Jong-un but then guided by Mike Pence? No, there isn’t. 

North Korean opinions about beer — North Korea’s state-run Taedonggang brewery has introduced a new beer which North Korea’s state-run newspaper Rodong Sinmun says tastes and smells “better than existing beers” and has “already gained positive reviews from North Korean citizens.” Dear North Korea, we’ll cheer for your hockey players, but we aren’t going near your beer.

HARD NUMBERS

69/78: 69 percent of Americans polled say Russia tries to influence the domestic affairs of the United States. 78 percent of Russians polled say the United States tries to influence domestic affairs in Russia.

200,000: The Grand Review of the Armies, the largest military parade in US history commemorating the end of the Civil War, included over 200,000 soldiers. That’s going to be tough to top.

Zero: Despite a recent surge in violence, the Syrian government has not authorized a single aid delivery to besieged areas or a single evacuation for medical treatment in two months, according to the UN.

107,000: Do Saudi women want to work? The Saudi General Directorate of Passports has begun to recruit women for the first time. In one week, they received 107,000 applications for 140 job listings.

2: Following appearances in eight Winter Olympics, North Koreans have won just two medals, one silver and one bronze.

WORDS OF WISDOM

“I want a parade like the one in France.”

— A US military official recounts an order from President Trump, whose passion for parades was inspired by a trip to France last year.

This edition of Signal was written by Willis Sparks, and prepared with editorial support from Kevin Allison (@KevinAllison), Leon Levy (@leonmlevy), and Gabe Lipton (@Gflipton). Spiritual counsel from Alex Kliment (@saosasha). Give a friend the Signal here.

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