The Gray Swan Volume 5: Could The Demise Of China Be The Next Gray Swan?

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Gray swan is a term used to describe a potentially very significant event that is considered unlikely to happen but still possible. Because there is a slight chance the event will occur it should be anticipated, particularly as it could shake up the world, economy, and stock market.

It has been argued that the coronavirus was a gray swan event. Why? Over the years there have been several global viruses that did not rise to pandemic levels but certainly made people aware that such an event like Covid-19 could happen at any time. An event in plain sight waiting to happen – a gray swan.

So, are we starring at a huge gray swan event playing out like the demise of China? The very Covid 19 pandemic may accelerate the demise of China and its leadership. The democracy demonstrators in Hong Kong have brought forth attention on how China chooses to deal with unrest. But the handling of how Covid-19 developed and spread exposed to the world how China actually considers its global neighbors. Exposing the globe to economic chaos and medical emergencies created a bitter backlash toward China with Germany, the UK and the U.S re-thinking trade relations. I think that others will follow. Indeed, two states in the U.S. are taking legal action against China for damages. The world’s view of doing business with China has changed dramatically.

Now, what if there is one more ignored part of this gray swan that investors have not considered? It seems the leader of North Korea, Kim Jong Un, has not been seen as much publically lately. What if Kim Jong Un has or had Covid 19? A Chinese medical team had been summoned— not a good sign –to assist while Kim Jong Un took some time off several weeks ago. But what if Kim Jong Un actually dies from a Chinese inflicted virus? What would North Korea do if it turned out China “killed” its beloved leader? Would his younger sister, Kim Yo Jong, take over? It seems that she has indeed exerted her power recently. 

Would she and the North Koreans blame China and turn friendly to a reunification with South Korea? Would she make her mark and turn to the West to open up her country to the world? Might she even give up nuclear weapons? She could go down in history as the woman who opened up North Korea for the benefit of its people, not to mention win a Nobel Prize.

Or, has Kim Jong Un lost favor after meeting with Trump and exploring denuclearization and warmer relations? Has his sister Kim Jo Jong decided to assert herself and push her brother aside? Will China use North Korea via “little sister” to saber rattle and threaten its neighbors, to flex its muscles in an effort to forestall its demise?  Have China/North Korean relations soured with the North no longer doing China’s bidding?

What if all of the above are signs that the demise of China has begun? What should an investor do, just in case? Dump Chinese stocks? Maybe reduce some South Korean market exposure? Maybe look for better relations longer term as “sis” cements her power and goes for the big (Nobel) prize? Hmmmmm! Gray Swans love potential overlooked opportunities.


Bill Taylor is Managing Director/CIO at Entoro Wealth & is widely published in financial industry media throughout the world