Dow Descending Wedge

Dow Jones Industrial Average displays a descending broadening wedge on the daily chart. Thomas Bulkowski describes this as a “mid list performer ….found most often with upward breakouts in a bull market. Downward breakouts are quite rare.”

Dow Jones Industrial Average

The correction seems mild and lacks urgency from sellers. It is very likely to end with an upward breakout, above the wedge at 20800, signaling another advance. Watch for a failed down-swing within the wedge pattern. According to empirical testing done by Bulkowski, a partial decline has a high probability (87%) of resolving in an upward breakout.

Latest GDP numbers confirm that low growth of the past decade continues.

GDP & Forecast

The quick rule-of-thumb forecast — Private sector employee payroll x Average Hours Worked x Average Hourly Rate — has proved remarkably accurate and has become one of my favorite indicators.

Gold bullish as Dollar finds support

10-year Treasury Yields are consolidating around the 2.5% level. Upward breakout is likely and would signal an advance to 3.0%.

10-year Treasury Yields

The Dollar Index has found support, with a large engulfing candle at 100. Recovery above the descending trendline would suggest a fresh advance, with a target of 108*. Reversal below 99 is unlikely but would warn of a test of primary support at 93.

Dollar Index

* Target calculation: 104 + ( 104 – 100 ) = 108

China’s Yuan continues to weaken, with USDCNY in a strong up-trend. Shallow corrections flag buying pressure. 13-week Twiggs Momentum oscillating above zero indicates a strong up-trend.

USDCNY

Spot Gold is testing support at $1240/$1250 an ounce. Recovery above $1260 is likely and would signal an advance to $1300.

Spot Gold

2 Great Bollinger Band Trading Strategies

I recently updated Incredible Charts’ Bollinger Bands page to highlight two great trading strategies:

First, if you are not familiar with Bollinger Bands here is a quick summary of basic Bollinger Band trading signals.

Bollinger Band Squeezes

The traditional way of trading the Bollinger Band squeeze is on breakout above (or below) the bands after a squeeze. Now Microsoft had been trending upward since 2012 and another advance was likely. It is important to guard against fake signals in the opposite direction, like the one highlighted in mid-September 2016.

Microsoft Bollinger Band Squeeze with Twiggs Money Flow

  • Green arrow = Long entry
  • Red arrow = Exit
  • The red candle on Friday, September 9th closed below the lower band after a narrow Bollinger squeeze, signaling a downward break, before a large engulfing candle on Monday warned of reversal to an up-trend. The primary trend would alert traders to treat shorter-term bear signals with caution but it is also advisable to use Twiggs Money Flow to confirm buying or selling pressure. Here 21-day Twiggs Money Flow is oscillating above zero, indicating buying pressure despite the downward breakout. So the trade would be ignored.
  • Subsequent rising troughs on Twiggs Money Flow would give me sufficient confidence to enter the trade [green arrow] before the next breakout, with a stop below the recent low at $56. More cautious traders would wait for breakout above the upper Bollinger Band but this often gives a wider risk margin because the stop should still be set below $56. The subsequent pull-back to test support in November 2016 underlines the need not to set stops at the breakout level.
  • Exit [red arrow] on bearish divergence on Twiggs Money Flow, when the second dip crosses below zero, or if price closes below the lower Bollinger Band.

Bollinger Band Trends

The second strategy is a trend-following strategy I picked up from Nick Radge’s book Unholy Grails, where he uses 100-day Bollinger Bands to capture trend momentum. The rules are simple:

  • Enter when price closes above the upper Bollinger Band
  • Exit when price closes below the lower Bollinger Band

Nick proposes setting the upper band at 3 standard deviations and the lower band at 1 standard deviation but I am wary of this (too much like curve-fitting) and would stick to bands at 2 standard deviations.

Here I have plotted Microsoft with 100-day Bollinger Bands at 2 standard deviations and 13-week Twiggs Money Flow to highlight long-term buying and selling pressure.

Microsoft Bollinger Band Trends

For a detailed discussion of trading signals for this chart, go to Bollinger Band Trends.

What drives Russian active measures & influence campaigns?

Testimony before U.S. Senate Select Committee on Intelligence
By Eugene B. Rumer, Senior Fellow and Director, Russia and Eurasia Program, Carnegie Endowment for International Peace
March 30, 2017

….To understand why the Russian government is engaged in this large-scale and diversified
influence operation, which blends overt and covert activities, one needs to step back and put it in
the context of events of the quarter century since the end of the Cold War.

Every country’s foreign policy is a product of its history, its geography, and its politics. Russia is
no exception to this rule, and to understand the pattern of Russian behavior at home and abroad,
we need to look at Russian history, Russian geography, and Russian domestic politics.

War in Europe is integral to the formative experience of every Russian. The country’s national
narrative is impossible without the record of two wars—the Patriotic War of 1812, which Russians
view as a war of liberation from Napoleon’s invasion of Russia, and the Great Patriotic War of
1941-1945. Both wars were fought to liberate Patria, the Fatherland, from foreign occupiers. In
1812, Napoleon entered Moscow and the city was burned. In 1941, Hitler’s armies were stopped
just outside the city limits of Moscow. Americans, too, had their war of 1812, and Washington too
was burned, but few Russians know or remember it, just as they think little of the fighting in the
Pacific theater against Japan in the second world war. Stalin’s armies didn’t enter it until nearly
the very end, three months after the war in Europe ended. The end of the Great Patriotic War is
celebrated in Russia every year as a great national holiday on May 9. The greatest Russian novel
of all times is Leo Tolstoy’s War and Peace, all Russians read it in high school. They are also
taught in history classes that their country’s greatest accomplishment of the 20th century was the
defeat of fascism in the Great Patriotic War.

The war of 1812 ended for Russia when the armies of Tsar Alexander I entered Paris in 1814. The
Great Patriotic War ended in 1945 when Stalin’s armies entered Berlin. From 1945 to 1989, when
the Berlin Wall came down, Russia was at its most secure, or so successive generations of Russian
leaders have been taught to believe. The history and the strategy taught in Russian military
academies for decades after it ended were the history and the strategy of the Great Patriotic War.
The map for tabletop exercises at the Military Academy of the General Staff in 2001 was a giant
map of the European theater. U.S. strategists were by that time “done” with Europe and shifting
their focus from the Balkan edge of the continent to South Asia and the Middle East. Russia was
not “done” with Europe.

Little appreciated in the West at the time was the trauma suffered by the Russian national security
establishment when it lost its outer and inner security buffers—the Warsaw Pact and the Soviet
empire. The sense of physical security afforded by this dual buffer between NATO’s armies and
the Russian heartland was gone. Russian declaratory policy may have been to sign on to the 1990
Charter of Paris as the Cold War ended, but the historical legacy and the geography of Russian
national security could not be altered with the stroke of a pen. Even as the Communist system was
dismantled and the Soviet Union disbanded, Russia’s national security establishment, which had
been brought up for generations to think in terms of hard power, could not and did not embrace the
new vision of European security based on shared values.

In 1991, with their society in turmoil, their economy in tatters, their military in retreat from the
outer and inner empires, and their country literally falling apart, Russian leaders had no choice but
to go along with that vision. They also accepted as given that history is written by the victors, and
that the victors would also make the rules for the new era. Russia would have to go along with it
for as long as it remained weak.

The 1990s were a terrible decade for Russia. Its domestic politics remained in turmoil, its
economy limped from one crisis to the next, and its international standing—only recently that of a
superpower—collapsed. Western students of Russia were entertaining the prospect of a world
without Russia. It was not lost on Russian political elites that the 1990s were also a time of great
prosperity and global influence for the West. For them, brought up on the idea of importance of
hard power, the dominance of the West was inextricably tied to its victory in the Cold War, the
defeat of Russia, its retreat from the world stage, and the expansion of the West in its wake.

Russia Is Back

But Russia would not remain weak indefinitely. Its economic recovery after the turn of the
century, buoyed by soaring global prices for commodities and hydrocarbons, and its domestic
political consolidation around Vladimir Putin and his brand of increasingly authoritarian
leadership, so different from the leadership of Boris Yeltsin, have laid the groundwork for a return
to Russia’s more assertive posture on the world stage.

That increasingly assertive posture has manifested itself on multiple occasions and in different
forms over the past decade and a half—in Vladimir Putin’s speech at the Munich Security
Conference in 2007; in the war with Georgia in 2008 and the statement in its aftermath by then-
president Dmitry Medvedev about Russia’s claim to a sphere of “privileged interests” around its
periphery; and finally in the annexation of Crimea in 2014 and the undeclared war in eastern
Ukraine to keep Ukraine from slipping from Russia’s orbit.

For the West, Russia’s return to the world stage has been nothing more than pure revanchism. It
violates the basic, core principles of the post-Cold War European security architecture—which
Russia pledged to observe over a quarter-century ago.

For Russia, it is restoring a balance—not the old balance, but some semblance of it. Currently,
NATO troops are deployed to deter Russian aggression against Estonia. (Curiously, former
speaker of the House Newt Gingrich has described it as the “suburbs of St. Petersburg.”) Russia’s
security establishment views this commitment by NATO countries to its vulnerable ally as a threat
to the heartland.

The narrative of restoring the balance, correcting the injustice and the distortions of the 1990s,
when the West took advantage of Russia’s weakness, has been the essential element of Russian
state-sponsored propaganda since the beginning of the Putin era. Whether or not we choose to
accept this narrative, these beliefs undergird Russia’s comeback on the world stage and political
consolidation at home. In public and private, top Russian officials proclaim that the wars in
Georgia and Ukraine were fought to prevent Western encroachment on territories vital to Russian
security. The military deployment in Syria merely restores Russia’s traditional foothold in the
Middle East, from which Russia withdrew when it was weak, and where it was replaced by the
West with consequences that have been tragic for the entire region.

In domestic politics, Putin’s authoritarian restoration is treated by the majority of average and elite
members of Russian society as the return to the country’s traditional political health, free from
foreign interference in its political and economic life. The more pluralistic system and dramatic
decline of the 1990s are linked in this narrative to the influence of the United States and other
foreign interests in Russia’s economy and politics, to their desire to introduce alien values in
Russia’s political culture and take Russia’s oil. U.S. support for Russian civil society is an effort to
undermine the Russian state, to bring Russia back to its knees, and take advantage of it, both at
home and abroad. Western economic sanctions imposed on Russia in the wake of its annexation of
Crimea and the undeclared war in eastern Ukraine are a form of warfare designed to weaken
Russia and gain unfair advantage over it. Western support for democracy in countries around
Russia’s periphery is an effort to encircle it and weaken it too.

This narrative has dominated the airwaves inside Russia, where the Kremlin controls the
television, which is the principal medium that delivers news to most Russians. With independent
media in retreat and alternative sources of information marginalized, this narrative has struck a
responsive chord with many Russians. The narrative has been effective because it contains an
element of truth—Russia did implode in the 1990s, and the West prospered; Russia did recover
from its troubles and regained a measure of its global standing on Putin’s watch; the West did
promote democracy in Russia, which coincided with its time of troubles; and the West has been
critical of the Russian government’s retreat from democracy as Russia regained strength.

Moreover, foreign policy traditionally was and is the preserve of the country’s political elite and
its small national security establishment. Whereas there are some voices inside Russia who, like
the leading anti-corruption activist Alexei Navalny, have challenged the many domestic failings
and authoritarian leanings of the Putin government, there are hardly any who have challenged its
foreign policy record. Worse yet, the Kremlin propaganda has been apparently so effective, and
the legal constraints imposed by it so severe, that few Russian opposition voices dare to challenge
the government’s foreign policy course for fear of being branded as foreign agents, enemies of the
people, and fifth columnists.

Warfare by Other Means

For all the talk about Russian recovery and resurgence on the world stage, its capabilities should
not be overestimated. Its GDP is about $1.3 trillion vs. U.S. GDP of over $18 trillion. The Russian
economy is not “in shambles,” but in the words of a leading Russian government economist it is
doomed to “eternal stagnation” unless the government undertakes major new reforms.

Russian defense expenditures are estimated at about $65 billion, or little more than President
Trump’s proposed increase in U.S. defense spending for FY 2018. The Russian military is
estimated at just over 750,000—well short of its authorized strength of one million—vs. U.S. 1.4
million active duty military personnel.

By all accounts, the Russian military has made huge strides in the past decade, benefiting from far-
reaching reforms and generous defense spending. It is undeniably far superior militarily to its
smaller, weaker neighbors and enjoys considerable geographic advantages in theaters around its
periphery.

Yet, the overall military balance does not favor Russia when it is compared to the United States
and its NATO allies. They have bigger economies, spend more on defense, have bigger, better
equipped militaries, and are more technologically sophisticated. A NATO-Russia war would be an
act of mutual suicide, and the Kremlin is not ready for it. Its campaign against the West has to be
prosecuted by other means.

That is the backdrop for the subject of today’s hearings. Since Russia cannot compete toe-to-toe
with the West, its leaders have embraced a wide range of tools—information warfare in all its
forms, including subversion, deception, dis- and mis-information, intimidation, espionage,
economic tools, including sanctions, bribery, selective favorable trading regimes, influence
campaigns, etc. This toolkit has deep historical roots in the Soviet era and performs the function of
the equalizer that in the eyes of the Kremlin is intended to make up for Russia’s weakness vis-à-
vis the West.

In employing this toolkit, the Kremlin has a number of important advantages. There is no domestic
audience before which it has to account for its actions abroad. The Kremlin has few, if any
external restraints in employing it, and its decisionmaking mechanism is streamlined. There is no
legislature to report to, for the Duma is a rubber stamp body eager to sign off on any Kremlin
foreign policy initiative.

The circle of deciders is far smaller than the Soviet-era Politburo, and it is limited to a handful of
Putin associates with similar worldviews and backgrounds. They are determined to carry on an
adversarial relationship with the West. They can make decisions quickly and have considerable
resources at their disposal, especially given the relatively inexpensive nature of most of the tools
they rely on. A handful of cyber criminals cost a lot less than an armored brigade and can cause a
great deal more damage with much smaller risks.

Shame and reputational risks do not appear to be a factor in Russian decision-making. In early-
2016, Russian Foreign Minister Sergei Lavrov did not shy away from repeating a patently false
fake media story about the rape of a Russian-German girl by a Syrian asylum-seeker in Germany.

Moreover, a version of selective naming and shaming—or targeting of political adversaries with
false allegations of misconduct—has been used by Russian propaganda to discredit political
adversaries in the West. Russian propaganda, and Putin personally, have sought to deflect the
attention from the fact of the intrusion into the DNC server and the top leadership of Hillary
Clinton’s presidential campaign to the information released as a result of it that has presented
various political operatives in an unfavorable light.

This not only deflects the attention from Russia’s role in this episode, it helps the Kremlin convey
an important message to its domestic audience about the corrupt nature of U.S. politics. Russia
therefore is no worse than the United States, which has no right to complain about corruption and
democracy deficit in Russia.

Russian meddling in the 2016 U.S. presidential election is likely to be seen by the Kremlin as a
major success regardless of whether its initial goal was to help advance the Trump candidacy. The
payoff includes, but is not limited to a major political disruption in the United States, which has
been distracted from many strategic pursuits; the standing of the United States and its leadership in
the world have been damaged; it has become a common theme in the narrative of many leading
commentators that from the pillar of stability of the international liberal order the United States
has been transformed into its biggest source of instability; U.S. commitments to key allies in
Europe and Asia have been questioned on both sides of the Atlantic and the Pacific. And last, but
not least, the Kremlin has demonstrated what it can do to the world’s sole remaining global
superpower.

It Is Not a Crisis, It Is the New Normal

Events of the past three years, since the annexation of Crimea by Russia, have been referred to as a
crisis in relations between Russia and the West. However, this is no longer a crisis. The
differences between Russia and the West are profound and are highly unlikely to be resolved in
the foreseeable future without one or the other side capitulating. The U.S.-Russian relationship is
fundamentally broken, and this situation should be treated as the new normal rather than an
exceptional period in our relations. For the foreseeable future our relationship is likely to remain
competitive and, at times, adversarial.

The full extent of Russian meddling in the 2016 presidential election is not yet publicly known.
But the melding of various tools (e.g, the use of cyber operations to collect certain information
covertly) and the provision of this information to outlets such as Wikileaks and the news media
was certainly a first. Unfortunately, it is not a first for U.S. allies and partners in Europe and
Eurasia. It is not the last either. Just a few days ago, Vladimir Putin received France’s right-wing
presidential candidate Marine Le Pen in the Kremlin. Previously, her National Front had received
a loan from a Moscow-based bank, and Russian media outlets have tried to injure the reputation of
her chief opponent Emmanuel Macron by spreading rumors about his sexuality and ties to
financial institutions. The chiefs of British and German intelligence services have warned publicly
about the threat from Russia to their countries’ democratic processes. The Netherlands recently
chose to forego reliance on certain computer vote tabulation systems due to elevated fears of
Russian interference and hacking.

The experience of Russian meddling in the 2016 U.S. election should be judged an unqualified
success for the Kremlin. It has cost it little and paid off in more ways than can be easily counted.
To be sure, U.S. officials should expect it to be repeated again and again in the future. 2016 was a
crisis, but it was not an aberration and should be treated as the new normal. Cyber is merely a new
domain. Deception and active measures in all their incarnations have long been and will remain a
staple of Russia’s dealings with the outside world for the foreseeable future.

Source: Carnegie Russia: Testimony of Eugene B Rumer before Intelligence Committee.

APRA fiddles while housing risks grow

From Westpac today (emphasis added):

….With the Reserve Bank sharing our caution around 2018, along with ample capacity in the labour market (unemployment rate is 5.9% compared to full employment rate of 5.0%) and stubbornly low wages growth, there is only scope to cut rates. But as we have argued consistently, a resurgent housing market disallows such a policy option. Indeed, the minutes refer to “a build- up of risks associated with the housing market”. A tighter macro prudential stance seems appropriate.

Indeed, as we go to press, APRA has announced new controls, restricting the “flow of new interest-only lending to 30 per cent of total new residential mortgage lending” with a particular focus on limiting interest only loans with a loan-to-value ratio [LVR] above 80%. Currently, “interest-only terms represent nearly 40 per cent of the stock of residential mortgage lending by ADIs”, so this policy will restrict the terms at which a marginal borrower can access credit (investors and owner-occupiers). APRA also noted that they want banks to manage growth in investor credit to “comfortably remain below the previously advised benchmark of 10 per cent growth”. This is not a hard change to the target as had been mooted recently in the press (some suggesting the 10% limit could be as much as halved), but it does suggest lending to investors will continue to grow at a pace meaningfully below 10%. Looking ahead, the next RBA Stability Review (April 13) may provide more clarity on the macro prudential policy outlook and potential triggers for further action. For the time being though, the 2015 experience offers an understanding of the potential impact of this further tightening.

To head off a potential bubble burst, the RBA and APRA need to drastically slow house price growth. I am sure the big four banks are urging caution but they would be the worst hit by a meltdown. What APRA is doing is fiddling around the margins. To make housing investors think twice about further borrowing, APRA needs to cut the maximum LVR to 70%. And half that for foreign borrowers.

What makes a good life?

What keeps us happy and healthy as we go through life? If you think it’s fame and money, you’re not alone – but, according to psychiatrist Robert Waldinger, you’re mistaken. As the director of a 75-year-old study on adult development, Waldinger has unprecedented access to data on true happiness and satisfaction. In this talk, he shares three important lessons learned from the study as well as some practical, old-as-the-hills wisdom on how to build a fulfilling, long life.

Hat tip to Barry Ritholz

Is the Coalition prepared to die defending the housing bubble?

I don’t always agree with David Llewellyn-Smith but love his pithy style. Here he takes the Turnbull government to task over their housing and immigration policies.

Cross-posted with kind permission from Macrobusiness:

….Because that’s what it looks like.

We all know that the Coalition hearts the housing bubble. Everything it does spells undying infatuation:

  • protecting property tax rorts;
  • focusing only on supply-side reform and even then doing pretty much nothing;
  • shelving any and all policy reform that might disrupt its smooth and burgeoning progeny, plus
  • running a staggeringly huge immigration program despite widespread economic damage.

It’s the last point that I want to focus on today because that’s the one where Coalition bubble-love rubber hits the road for its electoral prospects.

Since the WA election, Coalition polling has been devastated. A little bounce in Newspoll has been wiped out by landslides against the government in Ipsos and Essential polls. Moreover, the carnage has been just as apparent in the Coalition’s primary vote which has hemorrhaged voters to One Nation. The latter has been unaffected by the WA election despite doing less well than expected.

The major change in politics since the state result has been a commitment by One Nation to never ally with the Coalition again. The fringe party has realised that such pragmatism is lethal to its prospects.

This simple truth seems yet to have filtered through to the federal Coalition. As One Nation takes a material portion of its vote, and that vote refuses point blank to ally with it, there is ZERO chance of the Coalition winning a federal election ever again, and probably not at the state level either. While One Nation exists in this form, the Coalition has effectively ceased to exist as a political force.

One might have thought that the prospect of NEVER WINNING ANOTHER ELECTION might be enough to trigger some soul-searching in the party. And it has done a little. Do-nothing Malcolm has switched from toying with random ideas to deploying random ideas but it’s still all at the margins and is meaningless:

  • 18c reform won’t move the needle;
  • contradictory coal and hydro investment won’t move the needle;
  • a retrograde company tax cut won’t move the needle;
  • a supply-side housing affordability Budget won’t move the needle.

All together they might nudge it a little but it won’t be enough. Nothing like it.

Indeed, I’ll go so far as to say that the Coalition could do the following immensely popular policies and it would still get clubbed from office:

  • abolish negative gearing;
  • install gas reservation;
  • offer tax cuts.

The problem is that these are all cyclical fixes for what is a structural shift to One Nation driven by one very simple truth: Australians are done with high immigration.

That’s Pauline Hanson’s primary appeal. She makes little sense on other issues and is bat shit crazy on many. But her one great power, the one that vibrates deep in the bowels of every Australian that is marginalised by house prices, falling wages, can’t get a job, is fearful of Islam or just a bigot, or is just plain pissed off at the direction of the country, is the deep and legitimate truth that running a mass immigration program during a period of high unemployment is treasonous economics.

Thus there is only one policy shift that can change the Coalition’s fate and it is as plain as the nose on Pauline Hanson’s face: cut immigration and cut it hard.

Cutting immigration back to 70k per year or less would completely shift every electoral parameter as the Coalition:

  • finally had a housing affordability policy to put up against Labor’s negative gearing reforms;
  • finally had an environmental policy to put up against the immigration-hypocritical Greens;
  • could gut One Nation overnight and go to work on wiping it out by exposing the loons as weakening polls divide them.

This one policy shift would put the Coalition instantly in the running for the next election even if it were Do-nothing Malcolm that did it.

So, why does the Coalition suffer from such suicidal bubble-love that it can’t or won’t grab this lifeline?

  • many Coalition MPs are personally leveraged to the bubble so they’ve their own financial interests in mind;
  • as yesterday’s revelations about the MPs that prevented negative gearing reform showed, they are political hacks with terrible policy judgement;
  • they are bereft of the intellectual depth and corporate memory to contemplate alternative economic models. Cutting immigration to 70k would take pressure off eastern capital house prices enabling further rate cuts and a lower currency;
  • the Howard and Costello myths make this even worse,
  • and, the Coalition is closely wedded to the business interests in banking, retail and construction that benefit from high immigration even as the net result is negative for the wider economy.

I’ll add one more factor which appears increasingly important. Career politicians don’t care for their own political party or its nominal values as they used to. The dominant ideology of unglued self-interest comes with the wonderful fringe benefit of not having to take responsibility for anything. Contemporary Coalition MPs see party membership as a gravy train to private sector riches in board positions, lobbying roles and other forms of ‘control fraud’ in the very sectors that thrive on the bubble. So, for them, arbitraging the fate of the party for personal gain is all just a part of being a good liberal.

Backing self-interest used to work in political forecasting but does this rabble even have that in them?

The Chip on China’s Shoulder | WSJ

…..Fully 70% of Chinese television dramas have plots related to war with Japan, he tells us, and in 2012 alone 700 million imaginary Japanese were killed in Chinese movies. Mr. French’s findings on this count are ominous: “Up until the present day,” he writes, “East Asia has never proven large enough for two great powers to coexist peacefully.”

….he points to the enormous demographic shift under way in China as the population ages and birthrates fall far short of replacement. China is on course to have more than 329 million people over the age of 65 by 2050, while the younger, working-age population is set to plummet. The inexorable aging of the population will, Mr. French predicts, restrain the country’s ability to project power in the future. It will halve the size of the military-age population while saddling workers and the government with enormous expenses to care for the elderly. He suggests that the incredible pace with which China is currently trying to assert control over the South China Sea is driven by President Xi Jinping’s awareness that the country has a window of at most 20 or 30 years before demographics catch up to it and such an expansion becomes impossible.

China’s attempt to dominate East Asia (if not Asia) brings it into direct conflict with Japan. Expect increased militarization of Japan as China attempts to expand its sphere of influence. The Korean peninsula and Vietnam are simply sideshows.

Source: The Chip on China’s Shoulder – WSJ