The Chinese Buying Spanish Debt Represents a Shifting Power Base!

Many people will look at the falling Euro and think that the Euro zone is about to collapse. Today on Fast Money lunch Steve Cortez said that Spain is Greece 2.0 and hence sell. Yet here is China buying Spanish debt. Why on earth would China buy European debt? After all Steve Cortez is much smarter than the Chinese, right?

To fully understand why China is doing what it is you need to look at one politician.

Old Chancellor Kohl

Who is Chancellor Kohl?

Chancellor Kohl saw the end of the second world war and he saw the establishment of the EU and Euro. He was Europe (along with Mitterrand) and he made it acceptable for everybody that Germany should be reunified. His tenure was not without discussion, as he accepted into the EU countries that many would have questioned (eg Spain or Portugal), and many would say East Germany should have stayed that as East Germany.

So why do I equate Old Chancellor Kohl with China? Because they both look at the long term. I trade using behavioural economics. Many believe that economics and finance is science like gravity, but its not. Economics and finance involves humans and it involves behaviour.

Old Chancellor Kohl saw that Europe could be something bigger as a group of many voices. This concept is what people like Steve Cortez are completely missing. Europe is strong not because of its currency or politicians, but because of how intertwined the businesses and people have become.

Why is China Like Chancellor Kohl?

China understands psychology, and they understand how different voices are needed to move a country. Lets be frank, China is more effective managing 1.5 billion people than any other country on this planet. I am not saying I want to live under the Chinese system, but I respect it. Thus Chancellor Kohl and the Chinese see eye to eye in more ways than one.

What China wants to avoid is the mess that Japan made in Europe. Japan essentially dominates the North American car market. Yet on the mainland of Europe Japanese car makers never reached any meaningful goals. While you might say that European cars are better, that is not entirely true. There are crappy European cars, they just don’t get exported outside of the EU. To illustrate how badly the Japanese car makers do look at the latest car sales in Switzerland (I use Switzerland since it is not biased by any local car maker like in Germany, France or Italy)


Look at where Toyota is, back in 8th place. And Toyota was the only car maker loosing sales. The Japanese and Europeans never connected. And right now that same disconnect is happening between American and European investment bankers.

Zwischen europäischen und amerikanischen Banken besteht ein fundamentaler Unterschied. Im Berufsverständnis der Amerikaner dominiert die calvinistisch-religiöse Ausrichtung. Sie fühlen sich von Gott gesandt, um im Kapitalismus zu wirken.

What he is saying can best be summed up with something said by the CEO of Goldmans: I am doing God’s work.

China is not doing God’s work and China wants to sell more products to Europe. And the way to do this is to support the European Union! In particular the Euro. The fact that China is supporting Spain also illustrates how China is playing chess and wants access to the Latin American market. China could have bought Portuguese debt, but they didn’t. They bought Spanish debt. In turn of course the EU, and Euro zone will open trade channels with China.

If you looked closely at Chancellor Kohl and his politics he was the first to head to a foreign country (eg Spain) to loan money. And he was the first to make sure business contracts came to Germany. Of course one could argue that this policy is very similar to American policy. But I would argue there is something different. Namely Chancellor Kohl’s policy involved no military and no quid-pro-quo. It involved haggling, trading, negotiating because Kohl very clearly understood that these types of policies can only work if both parties benefit.

The EU is becoming a central power broker because of its trade ties to South American, Middle East, and Northern Africa (let’s not forget about their ties to China). China wants in and wants to hold more sway!

So SELL SELL SELL the Euro like Steve Cortez is saying because I know European stocks and corporations will do fantastic! And I have positioned my portfolio accordingly. The only thing that bothers me right now is that the Swissie is being destroyed and so is the Swiss economy. Like I previously blogged Spain is not the problem, the Swiss National Bank is! Swiss companies will just use the Euro and say bugger to the Swissie.

Posted in General Trading