It is a miracle that planes fly at all but it’s an even bigger miracle that a plane can recover from a nosedive. It is a miracle that markets can nosedive and recover as well. Recoveries from nosedives, whether planes or markets, usually end up with better performance than anyone could have imagined. Markets typically go on to exceed all previous known performance records, at least for the last 100 years or so. That’s a miracle too. Similarly, aircraft and pilots that survive nosedives ensure the creation of new aircraft and piloting methods that revolutionize the aviation world. Sometimes two nosedives happen nearly simultaneously. In 2001 we had already had the dot.com bubble burst and then 9/11 and then Enron and a crash between a Chinese fighter jet and an American spy plane as well. Today we have the Crypto/Interest rate catastrophe and the recent near-miss between a Chinese fighter jet and an American-made spy plane. These nosedives and recoveries are intimately intertwined. But, before you buckle your seatbelt, check out these five nosedive recoveries in fighter jets, especially the last one which is called “Everything All at Once”. Spoiler - The pilot lived.
I remember the Dot.com Bubble well. After achieving insane valuations, the entire tech sector blew sky high in March 2001. The disaster was prolonged. I was serving as the President’s Economic Advisor during the campaign in 2000 and then on The National Economic Council (NEC) in 2001 and 2002. We knew the reverberations from the epic tech sector losses would seriously undermine the performance of the economy and that was before two seemingly related incidents – a catastrophic crash involving a Chinese fighter jet and an American spy plane and the failure of Enron. At the time, in 2001, we didn’t connect the dots between falling planes and falling markets. The two phenomena were handled by different parts of government. The NSC (National Security Council) dealt with the plane crash. The NEC dealt with the markets and seven of the nine largest bankruptcies that all occurred in a 12-month period including Enron, Tyco, Worldcom, United Airlines, and Global Crossing. Oh, and then there was September 11th, 2001. It sure felt like “Everything All at Once”.
We forget now that in early April 2001 a Chinese F-8 fighter jet (an old MiG-21)and a US EP-3 spy plane (a precursor to the P-8’s spy plane that China is buzzing again today), crashed into each other in mid-air, forcing the US PEP-3 to crash onto Hainan Island in China. The Chinese fighter jet pilot, Lt. Cdr. Wang Wei, died in the incident. He buzzed the EP-3 and caught his tail on the US spy plane, creating a catastrophic death spiral for both aircraft. His F-8 could not disentangle itself from the EP-3. The 24 American military staff aboard the US Spy plane managed to bail out and safely land on Hainan Island. It felt like WWIII would spontaneously engulf the world as the world clocked that these superpowers were nose-to-nose in an aerial confrontation. This was a complete surprise to most at the time.
For those in the know, the reasons were obvious. EP-3s (and today’s P-8s) are submarine trackers. Hainan Island’s Yulin Submarine Base was and is the center of China’s most sophisticated submarine capabilities. China had just started to lay claim to the islands in the South China Sea, thus giving it a reason to establish an EEZ (Exclusive Economic Zone) and maritime rights which gave China the right to control the airspace above the designated area. The US perceived this as a massive push into the Pacific which would threaten America’s ability to defend Taiwan and which would threaten the freedom of navigation in the region. America’s allies, including The Philippines, Vietnam, Australia, and others soon began to find themselves in confrontations with China on or above the high seas. It took 11 stressful days to secure the return of the US crew members. The US promised to reduce weapons sales to Taiwan and to pull back from the spy missions in exchange for their return. The Chinese hollowed out the EP-3, taking all the electronics, chips and tech out of it. They returned the dismantled shell to the US on a Russian Antonov Cargo Plane, just to send a message.
This is when quiet conversations began in The White House. We were all respectful of the fact that President Bill Clinton had managed to bring China into the World Trade Organization. But, the assumption was that China would learn to play by the rules. They would stop pilfering military and industrial secrets and stop copying IP. We began military-to-military cooperation. The President and the team played nice publicly while privately asking ever harder questions about China’s true intentions. We knew that the US was increasingly dependent on China’s massive purchases of US Treasuries. They were funding the US current account deficit even as they were challenging the US militarily.
The .com crash unfolded slowly. Some of us on the team had seen it coming and saw the aftermath as a prolonged crisis that would take years to recover from. The markets, as usual, seemed to react to specific headlines, failing to anticipate the severity of the events. But, even the most pessimistic among us failed to anticipate the hit to non-dot.com firms. We were surprised by Enron’s failure in October 2001. That was in part because we were dealing with another series of plane crashes, namely the events of 9-11 which had their own knock-on effects.
Taken together, and in retrospect, it seems clear to me now that 2001 was when people started to argue that the US was too dependent on China. The “Made in China” approach might work fine for goods at Walmart but it would not do for the military or any strategic sectors. This is when the Justice Department started hunting down Chinese spies and cracking Chinese spy rings. Still, the belief was that the bulk of China’s economy was commercial in nature and competitive. It was only after Donald Trump became President that the tone shifted (rightly or wrongly) and the Chinese economy came to be seen as military in nature and not competitive but subsidized by an increasingly hostile military leadership in China.
After this “Everything All at Once” period, I realized that every time we have a catastrophe in the world economy it is always bigger than the last one and it always feels like there is almost no chance of recovery. It’s even worse when a tech wreck coincides with geopolitically-driven plane crashes, as it did at that time. And yet, we recovered. How? In part, because everyone involved gets savvier about tech. The internet accelerated after the dot.com bubble burst in large part because DARPA backed it and the US Government needed it. Google had launched Ad Words in 2000 and AdSense in 2003. The dot.com bubble hadn’t killed the internet. It had cleaned out the bad business models that allowed it to grow into what it is today. Level 3 bought Global Crossing and completed that last mile of the cables needed for the global internet (but not without some controversy over whether they had also helped the NSA tap into these cables). Only after the mess was cleaned up could the little 16 GB iPhone appear on June 29th in 2007.
We are in another “Everything All at Once” moment. On May 26th, 2022 Australia reported that a Chinese J-16 Fighter Jet dangerously cut across the nose of an Australian P-A8 and then, as the Australian Defence Secretary put it, “released a bundle of chaff, which contains small pieces of aluminium, some of which were ingested into the engine of the P-8 aircraft. Quite obviously, this is very dangerous." As far as China is concerned, the Australians and the British are proxies for the Americans now. The AUKUS announcement made that public. This is a proxy fight.
Meanwhile, the central banks are raising rates and we are in another bubble burst moment. Everything is down. Crypto, bonds, blue chips. The lot. The bad business models are being beaten to death. But the good ones have not yet become a certainty.
We can’t yet see the equivalent of the iPhone that will appear in a few years’ time. We can know that the cleanup of this mess is exactly what will allow it to come to life. Why? Because like then, the US and allied governments are redoubling their efforts to pull ahead of China (and Russia) when it comes to computing power, infrastructure, and business models. We see endless stories of US military entities announcing extraordinary breakthroughs in the generation of power and the delivery of faster computational capability. All the sectors that matter from an infrastructure perspective will get more government backing: Quantum computing to the rare earth metals needed to make planes. That’s what Mike Brown, the soon-to-leave head of the Pentagon’s Defence Innovation Unit, just said, “We’re not the same giant force in technology development that we were 50 years ago,” “So we need more emphasis, more budget, more advocacy, more programs focused on how are we bringing that technology in? The Defence Innovation Unit is a great start on that, but we really do need to expand that dramatically from here.”
The old broken business models in the financial markets are giving way to new ones just like the EP-3 improved into a P-8. This matters from a security perspective which is why the defense establishment is going to be getting even more involved in the tech sector. Why? Because strong tech and strong economies are the keys to military superiority these days. The two go together. They always have. So, every time we have an incident in the skies you can be sure there will be more direct or indirect support for the tech sector on the ground. This recovery will be like the last - a terrifying nosedive followed by a newfound understanding of what is possible.
Subscribe to stay informed on new developments as they bubble up.
As usual a helpful perspective from a jet pilot’s eye-view of markets and geopolitics. Your writing reminds me that this intertwining has always been true, but somehow thirty years ago it didn’t seem quite as prominent - possibly because after the Berlin Wall came down and history officially ended - there was really only one (US) game in town.
Perhaps the reason that markets always pull back up again is simply because the real wealth is in the stuff that markets represent, not the markets themselves and they are, how shall we put it, not quite as monomaniacal or hysterical (or manipulatable) as markets are. Great metaphor even if I couldn’t get the 5 videos you link to to work properly..
Note that these confrontations are taking place between Nato Jets and Russian Spy planes as well: https://www.bbc.co.uk/news/av/world-europe-61834997