The disruption of the North Atlantic Alliance and the Liberal World Order are being acted upon by Beijing. Beijing beleives that these events reinforce its conviction that democracy is too decadent to defend itself and that the US will not defend Taiwan. It is therefore time to start heating the water to boil the Taiwanese frog. Since the US election, cable cutting and loitering around Taiwan and aggressive live fire exercises off Australia and New Zealand have upped the ante.
Now this: The PRC launched a sudden live-fire exercise 40 miles south of Taiwan on February 26, likely as a coercive display of force. This exercise follows similarly provocative exercises near Vietnam, Australia, and New Zealand. The PRC broadcasted radio warnings that it would conduct live-fire military exercises in an approximately 1,850 square-mile area near Kaohsiung and Pingtung off Taiwan’s southern coast, overlapping with busy international shipping lanes. The PRC gave no advanced warning of the drills through usual channels, such as notices to airmen or mariners, which endangers nearby air and sea traffic. Taiwan's Ministry of National Defense (MND) reported at least 32 PRC military aircraft around Taiwan on February 26, 22 of which crossed the median line in the Taiwan Strait into Taiwan's Air Defense Identification Zone (ADIZ). The aircraft included fighter jets, surveillance planes, and drones. Seven People’s Liberation Army Navy (PLAN) ships operated within the designated drill zone, which was far outside of Taiwan’s territorial waters. Source ISW, RoC Min Defense, Osint.
It is likely that Beijing will undertake kinetic action against Taiwan in the time window of 2025 and 2026 before the US military assets withdrawn from Europe (inevitable) are bedded down in the Indo-Pacific basin. The escalation will be progressive so as to test the US's response. But Beijing's hypothesis is that President Trump can be bought off and that the destruction of alliances, which the US Administration is now contemptuous of, means that Taiwan's (already ambivalent) US defense pact will not honoured in the breach.
We do not have to wait for that hypothesis to be proven right or wrong. The escalation just has to happen.
The portfolio is adding short Taiwan equities and short TWD as well. The portfolio is in geo-economic escalation mode and has been preaching a 2025 bear market for a long time. That entails high 20-40% cash holdings; gold as a core holding; long oil and LNG. US Exceptionalism has been progressively eliminated and we are now underweight/short US stocks and underwirght/short USD. We are long Yen and Japanese stocks. We are also long German equities since Nov 2025 (Germany - A Casket Case). And within equities EU and Korean defense stocks, China AI and Civilian Nuclear are favoured themes. In bonds we still hold 2yr USTs (as cash). We are short French 10yrs sovereign (OATS) bonds and Japanese 10yr JGB's (though this is under review).
The portfolio will be published on Monday next at the same time as a report looking at fact and fiction in Europe's rush to re-arm (called "A Hello to Arms").
Have a good weekend.
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