Identifying the Real Fronts in the U.S.-China Conflict

China has developed a nuclear-capable hypersonic missile. 

The country is pushing back on the original report, but there’s no way this still-unfolding mini-drama won’t be woven into the “New Cold War” narrative.

That’s just the way it is when a major media outlet like the Financial Times (FT) reports that the Middle Kingdom “tested a nuclear-capable hypersonic missile in August that circled the globe before speeding towards its target.”

Here’s more from the FT:

Five people familiar with the test said the Chinese military launched a rocket that carried a hypersonic glide vehicle which flew through low-orbit space before cruising down towards its target.

The missile missed its target by about two-dozen miles, according to three people briefed on the intelligence. But two said the test showed that China had made astounding progress on hypersonic weapons and was far more advanced than U.S. officials realized.

The test has raised new questions about why the U.S. often underestimated China’s military modernization.

“We have no idea how they did this,” said a fourth person.

Of course, hyperbolic hot-takes are proliferating from all sorts of former government officials and foreign policy experts … as well as straight-up warmongers, armchair geostrategists and keyboard-commando demagogues.

“Strategic stability is slipping away” is how a former U.S Department of Defense official tweeted it.

Meanwhile, conservative radio talk show host Hugh Hewitt wanted to know why more U.S.-based mainstream media outlets aren’t running with the story. 

Mike Mazarr of the Rand Corporation has the answer:

It would be useful if folks making hyperventilating claims about the end of strategic stability would define the term. Secure U.S. second-strike capability isn't going anywhere. History suggests exaggerated threat perceptions equal at least as dangerous to stability as new military systems.

China says “the report was inaccurate, and the exercise was a test of reusable technology that could reduce the cost of launching spacecraft.”

According to Zhao Lijian, Chinese foreign ministry spokesman:

[T]o my understanding, this test is a routine spacecraft test, used to test a reusable spacecraft technology. This could provide a convenient and cheap way for humans to use space for peaceful purposes.

It sounds awesome — what China did … or didn’t do — depending on who/what you’re buying these days. But, while some folks would have you lose your head for another 20th century-style clash of civilizations, let’s keep ours and make some money in the process.

Weiss Ratings’ Jon Markman has a useful take on the very real but still very easy to exaggerate U.S.-China conflict:

Forget fancy F-35 fighter jets … because in today’s day and age, the real war could be digital.

China is waging a devasting digital war against the United States, and the Asian superpower is winning, according to former Pentagon software chief Nicolas Chaillan in a Financial Times exposé.

Chaillan spent the past three years at the Department of Defense (DOD) working on cybersecurity and artificial intelligence (AI). He retired in September, arguing China is already so far ahead that the battle is lost.

The exposé is full of details about incompetence and the sorry state of unpreparedness at the DOD.

•  Chaillan says China is winning the global cyber war because of its dominance in AI and machine learning. The state of cybersecurity at the Pentagon — in his opinion — is at the kindergarten level.

There’s also some Congressional concern.

A mandated national security commission review in March found that China is making serious inroads in AI. The 756-page report warns that the U.S. is unprepared to defend or compete against a hostile China that is determined to weaponize cutting-edge technologies.

The commission called for the U.S. government to more than double its $32 billion AI research and development budget.

Normally, this would be good news for private sector firms like Alphabet (Nasdaq: GOOGL), which is considered the global leader in AI development. However, Alphabet has faced considerable employee backlash to DOD contractual work.

The Chinese Communist Party (CCP) faces no such corporate opposition. All Chinese companies are bound by law to help the CCP with technology initiatives.

•  Although U.S. companies don’t have nearly this same kind of alliance to their government, there’s still a way for savvy investors to consider playing this trend. 

And it’s with Lockheed Martin (NYSE: LMT) … for reasons that might not be obvious.

Lockheed Martin is best known for those expensive F-35 fighter jets, yet the Bethesda, Maryland.-based company is also a major Pentagon provider for cybersecurity.

For decades, the company has been building platforms and tradecraft for military customers. Almost 99% of its $65.4 billion in 2020 sales came from public sector clients.

•  The comments from Chaillan will change the narrative about cyber security. His assessment is as important as it is scary … and Washington politicians have made China a deserving bogeyman.

Since leaving the Pentagon in September, Chaillan has met with leaders at both the Air Force and the Marine Corps to discuss what can be done right now. Both leaders publicly acknowledged, according to the Financial Times, that a more disciplined approach was necessary.

It would be nice if that approach involved cutting-edge software from companies like Google, but that is probably not realistic. The DOD is stuck with Lockheed Martin.

Shares trade at 13.9 times forward earnings and only 1.5 times sales. The company also has a $147 billion backlog of orders.

Although the stock has been mired in a trading range between $350—$390 since February 2020, it looks like better times could be ahead, especially as politicians feel the pressure to increase spending on cybersecurity.

This head-to-head between the U.S. and China is probably the major subplot of what Jon calls the “great digital transformation.” It’s huge, and it’s happening fast. 
 
Click here to keep up with it.

And, if you’d like to dive even deeper into the digital transformation, I highly recommend you check out Jon’s Weiss Technology Service.

He’s currently helping subscribers reach open gains of 417%, 362% and 344% on some of the best tech stocks on the market. Click here to learn more.

Best,

David Dittman