By Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist. 28 Jun 2020
(delayed. modified & truncated release to the public of a geopolitical round-up issued on 26 June 2020)
Content: Market brief, 1) Governments are seizing Markets, 2) Israel to seize ancient heart of Judea & Samaria (West Bank), 3) US Peak Oil? , 4) US reassesses military allies, 5) Rise of Britain, Conclusions: Impact on Monetary Outlook, Personal comments
While investors and observers are closely watching the pandemic and economic evolutions, governments and geopolitical powers are aggressively advancing their agendas. As a result geopolitical, macroeconomic and military developments are overlapping at a breathtaking pace – Thanks to Covid 19 that convergence is almost entirely overlooked by consensus. As usual I will only focus on the issues where our analysis shows the biggest “delta” or deviation from consensus.
Although every single topic I address today was worthy of a separate report, it is their interconnectivity at aggregate levels that makes the biggest difference in bringing clarity and direction to today’s massive array of confusing and contradictory data. Thus, I saw no way around addressing them but in one report. So, kindly bear with me in this longer than usual report that has been several weeks in the making. A number of smaller reports may also follow today’s comprehensive one.
Markets briefly
Before I dive into the global geopolitical scene: Some words on current events, because they are influencing the Trump campaign: Localised spikes in countries leading the recovery like China and Germany were digested by the markets quite well, not so the rise in cases across multiple Republican leaning Southern states. The latest IMF outlook confirms that the highly indebted G7 economies in the West are poised to fare worse than the rest of world. With China looking so unscathed from the pandemic, Washington will try to exact concessions from it. But the new focus of Washington for Q3 is going to be Europe.
I think the current situation will force President Trump to shift focus to the Mid West battle ground states. There the pandemic seems under control. Thus, issues like farm exports, US manufacturing and plant relocations will drift to center stage sooner than expected at the expense of the infrastructure push – opening the door for President Trump to accept a watered down bipartisan infrastructure bill. The President’s predicament is bad: even Senate Republicans are looking at saving the Senate majority by distancing themselves from the President. But Mr. Biden’s isn’t that much better either. His lead in the polls is way too early with four months to go. A very long time in the US Political Process.
Unable to risk undoing his “historic” US-China Deal, President Trump is likely to focus his pressure on Europe. So, he will remove troops from Germany and respond harshly to potential European levies on Boeing. The timing of this WTO couldn’t be worse for Europe. By the way, Mr. Biden may be the official Democratic presidential candidate, but I am not fully convinced he will be the one running for President in November. All this bodes well for a highly agitated and somewhat exciting summer.
Barring new policy mistakes, the US Covid-19 death toll – albeit lagging – should not rise as steep as the infection rate. Experts are learning more about the vulnerabilities of Covid-19 and the virus could also see its “virulence” subside as we saw in some European countries. The biggest problem is not the virus. But what it has exposed: high dependence on China and Russia, over-indebtedness and a fragile US economic-social fibre.
As leading investors downgrade and delay their outlook for the US economic recovery into late 2021, I feel it is worth reminding, that the potential momentum of the recovery and asset prices could still be powerful. Investors care solely about stock prices – whether driven by earnings or the FED .. , not about the deteriorating living conditions of average Americans. But the biggest reason not to underestimate the stock market potential lies elsewhere: it’s the state.
I finish this introduction by stressing that people should put this crisis into perspective. The current crisis is a minor-to-medium shock compared with the shocks that are likely coming our way in the course of this decade. In that sense, Covid 19 is a blessing in disguise for all those households, businesses and nations that want to put their house in order. Big risks never come without great opportunities. The unprepared soul gets to face the losses, the prudent forward-looking soul gets to seize the opportunities. At the end of this monetary experiment I foresee a massive asset destruction in stocks, bonds and real estate.
1 – Governments are seizing financial markets
It wouldn’t be a surprise to see stock prices doing better than the US economy in 2020. In fact financial prices are increasingly reflecting state intervention and not economic realities. Since 2010 a growing number of representatives on Capitol Hill are skeptical of the FED and see US financial markets as “rigged”. Reason why FED officials fear only two things: A fast rising Gold price and Congress.
It is also essential to understand the Big Picture: US corporate earnings and stock prices are in a long term de-coupling process from real economic conditions. Stock prices have been rising for over ten years despite a decline in profit quality, stagnant real incomes and the massive increase of risks around the world. Neither GDP nor EPS nor the Stock Market are reflecting the economic realities of vast sections of the economy. Those indicators are driven by inflated consumption – Not a sign of intrinsic economic health. Thus, policy makers cannot even afford to deflate the consumption and debt bubbles.
Policy makers have laid the foundations for the most formidable or destructive Perfect Storm since the 1930’s.
Looking at the facts we are on fast-track process towards Socialisation. Rather than addressing structural issues and introducing fiscal discipline, industrialised nations doubled down on their “sins”. With their deflationary monetary policies they are accelerating the trajectory to the Great Reset. In the past those resets were accompanied by wars, debt defaults and currency reforms – In one word: massive asset destruction.
But as my readers of the past 10 years will know I call it the coming Great Normalisation. What has been inflated for 40 years has to be deflated.
No innocent consumers
While many conspiracy theorists like to portray innocent citizens vs powerful elites with evil intents, I see few innocent consumers, not so powerful elites and no shortage of good intentions. The David-Goliath concept sells well of course. The truth is uncomfortable: Consumers and policy makers are in this together. It is systemic and endemic.
Constrained by this generation’s refusal to go through recessions and by their elected politicians to push unpopular reforms, policy makers created massive inflation in asset prices and increased their grip on aggregate supply & demand. This has unfortunately rendered most industrialised economies fragile over time. Real economies can now easily tip into spiraling deflation or inflation.
Almost 80% of what we are witnessing around the world can be explained by down-to-earth political calculus in the face of a powerful convergence of geopolitical and macroeconomic trends.
Never mind the debt
Unlike most economists in the consensus, I no longer worry about Debt Levels as a restrain to policy making since 2015. Having passed the point of no-return, it doesn’t matter to G7 policy makers how much debt they issue and how much money they print. The current system cannot be fixed, it can only be replaced. The question is only when and how policy makers will usher the reset and inform their citizens about their unserviceable debt and debased paper money. That is if they can manage to control the reset. I believe exogenous forces are likely to disrupt their plans.
The West converges towards the East
After predicting Brexit and Trump in 2016, some conservative circles invited me to speak. But after I told them that the conservative comeback would be only temporary, I didn’t hear from them again. I also told them: In the long run, the much better organised liberal-globalist forces are likely to succeed. Enter 2020, Covid-19 couldn’t have come at a better time for them. That working hypothesis of mine has only seen its probability rise.
The interesting thing is that policy makers are controlling and regulating markets for such a long time, most citizens still believe they are living in a free market economy, failing to realise the convergence of free Western systems towards centrally controlled Socialist systems.
Contrasting the promises of world leaders 20 years ago .. the West is looking much more like China – China did not become a democracy. If we are fair and objective, we ought to say “well played, China”.
Based on my independent research I see the world on a fast track journey to Socialistic big states, war and supranational Super States. The first ones to rise in Europe and Asia.
2 – Israel to seize ancient heart of Judea & Samaria (West Bank)
Just as Western policy makers are using the pandemic to accelerate strategic agendas past the ballots, global and regional actors are taking advantage of the crisis to make important geopolitical moves. The Middle East is no exception.
With government parties in Jerusalem de facto reaching an agreement this week on a compromise to extent full control over settled parts of ancient Judea & Samaria, the Palestinian Authority (PA) has been unable to rally global support to oppose the move. With the exception of European powers of course. While the PA and other liberal allies in the West are threatening a dangerous escalation, the White House has asked for a delay on the move. The positions cannot be reconciled: What Israel sees as reclaiming what was ancient Israel (biblical Samaria and Judea) 4’000-2’000 years ago, the PA and UN see it as the annexation of the West Bank, which used to belong to Jordan before the 6 Day War, albeit for a relatively short period of time.
President Trump is weighing the pros and cons of the so-called annexation on his Presidential campaign. Also whether front-running it could help reignite his campaign. While his campaign team is tipping against it (why adding to the current headwinds), the inner circle is recommending to stick to the Trump Campaign Promises – i.e. siding with Israel security and its biblical connection to the land.
Western experts, especially in the United States, make the mistake of seeing Israel as a kind of extension of US Middle East policy. Their view that if President Trump believes the “annexation” will damage his campaign, he can simply order Netanyahu and Gantz to drop it, is wrong.
My independent analysis points to Israel going ahead with a divided and even a hesitant Washington on the issue. It is a highly complex issue, but Israel is likely to go ahead and take the storm. China, EU and even US relations may be the price to be paid and war may be ushered in. Having said that, a major war in the region is only a matter of time anyway. Relations with Europe are also already damaged as Brussels’ pro-Palestinian and pro-Iranian policy doctrines have disappointed even centric liberals in Israel. Relations with the USA can never be the same after the Obama years, say center-right leaders in the Kneset. Arab leaders never had many illusions to start with – in their circular-cyclical way of thinking their conflicts have survived every major global power that has come and gone. What is there to save really? is the question pondered in Jerusalem. Ironically, albeit behind closed doors, Arab leaders in Ryad, Cairo and Dubai have more understanding for Jerusalem’s predicament than the West.
Jerusalem’s predicament becomes even clearer when we add the increasingly likely post-elections’ prospects with a Democratic president in the White House. Unthinkable for Jerusalem not to seize the last window of opportunity.
The final “tipping” factor is cautiously avoided in Western media: the growing cooperation between Israel and key Arab states. Until they have operational atomic ballistic weapons of their own to protect themselves against Iran, Arab security to a large extent – ironically – depends on Israel (and Israel’s security). Israeli strategists are aware that their close cooperation with key Arab states is only a very temporary window that will not last. That Israel will be let down by everybody else to be “on her own” is anyway part of the traumatic history of Kol Israel.
Feeling that Europe, China and Russia are empowering Iran .. and that the USA has “downgraded” them, Arab leaders see in Israel their only reliable nuclear ally – able to retaliate swiftly with nuclear weapons if an Israeli or Arab city were attacked by Iranian missiles.
All this means the Middle East could give the world a wakeup call as early as this Summer. Depending on the level of drama, Oil and Gold prices could see a jolt – and so the USD.
3 – On the Outlook for US Energy – Peak US Oil?
Markets might be underestimating the geopolitical impact of a decline in Tight Oil and Overall US Energy Production.
This is not just the case for 2020, the US Oil production is set to decline well into 2021. Barring a major surprise or geopolitical disruption US Energy Supremacy could be eroded substantially over the next two years.
Thus, while there is plenty of suppressed oil supply, as many observers say, it is my view that either the momentum of the economic recovery or the decline in US Oil production could be underestimated – potentially both. Imagine now adding to it a crisis in the Middle East. This could trigger a big shock to the dynamics of oil prices.
Well played, Russia
As we often say, Russia has very few geopolitical cards, but it plays them formidably, most of the time – the latest exception to the rule being the 2013-2015 period.
In a matter of weeks, Moscow convinced a frustrated Saudi Arabia (at the way the West sidelined Ryad as done and out) to help Russia put price-sensitive US Tight Oil out of business. China and the EU were silent supporters, albeit for very different reasons. An almost global ad hoc alliance to curtail US influence. Timing could have not been better for Russia in Spring of 2020: China was reeling from international pressure on Covid-19 still, the USA was tearing apart at the seams over the slow virus response and the Nord Stream 2 Gas Pipeline passed the point of no return. In Q2 2020 Russia has not only put Europe firmly under its Energy umbrella, it has weakened the global US Energy dominance for at least 18 months. A long time in geopolitical terms.
What Moscow makes up with patience and astuteness, Beijing compensates with shier boldness and self confidence. Both Moscow and Beijing are handling the weakness of the West smartly. With the West sitting in the trap, time is on Beijing’s side. Beijing can afford to make some mistakes and it makes sense for China to err on the side of assertiveness.
Oil and the Currency Reform
A reduced US Energy Dominance alongside the sharp economic contraction is likely to constrain Washington’s ability to use FED Monetary Policy (USD) for geopolitical purposes – as it did on China in 2014. A luxury other powers want to remove when the Currency System is reset.
A reduced US energy dominance over the next 18 months could force Washington to accelerate or postpone the pre-emptive Currency Reform it is preparing. One aimed at pre-empting currency reforms that Europe, China, Russia and some G20 nations are developing. Luckily for Washington US competitors and adversaries cannot agree upon the best course of action yet. Which doesn’t mean Washington can rest at ease as this raises the stakes for the FED over the next 12 months – a period that was supposed to be challenging even before Covid 19 came along.
Over the past two decades key Central banks used their extreme independence to build up their own geopolitical alliances almost regardless of their national interests. Even strong US military allies like the UK had for years a Central Bank that was spearheading ways to take on the USD and the FED. Since Brexit more and more governments are reining in their central banks and their complex allegiances to supranational interests.
If Washington waits too long it may not be able to reassert US influence as the Global Monetary System is reshaped by other forces. 2019 may have seen Peak US Oil just as we may have seen Peak US Military influence around the world in 2018.
4 – US reassesses Military Allies – Enter India, Exit Germany?
Not everything is bad news for America in 2020. China’s overly assertive Foreign Policy has yielded America one new eager military ally: an emerging oil-hungry India could help slow down European, Chinese and Russian plans.
A nation’s military power projection is composed of its military fire power and its geopolitical-military influence. The latter working through military alliances, intelligence sharing, economic interests and other geopolitical assets (i.e. geography, technology, demographics, monetary policy etc.).
While the US military is by far the most formidable military power on earth, it does stand more isolated than at any point in time since WW2. On paper the USA has many allies, even reliable ones like Poland and Romania, but the only major strategic allies that Washington can currently rely on are United Kingdom, Australia, Israel and Japan.
In the eyes of the Pentagon, the other US allies have de facto rendered themselves “conditional”. Some have passively or actively embraced China or Russia so much, they are seen as compromised. Turkey and Germany are among them. While Turkey has gone past the point of no return, Ms. Merkel’s successor has the historic opportunity to reverse course on China. If Berlin is serious about aligning herself more with the USA and NATO again, it will ask to join the F-35 Fighter Jet Program (see point 5 below). The question is whether the Pentagon would approve it though.
With India feeling threatened by an assertive China, Washington is actually seeking to build stronger ties with India rather than Western Europe. Too assertive a Beijing is making some mistakes indeed – The recent harsh threats against Australia and the moves against India have made the USA a favour – to the anger of Moscow, who sees future big arms sales to New Delhi in danger. We have been closely monitoring the fledgling nascent military alliance between India, Japan, Australia and the United States since 2014. Who would have thought that it would be Beijing itself that would give it the necessary momentum it has lacked during the past four years?
I expect Washington to consider offering New Delhi a modified F-35 Joint Strike Fighter Jet version to sway New Delhi deeper into this new US military alliance. Lockheed Martin’s F-35 program was probably the best military procurement decision in recent US history. The Pentagon has used it so well, it has helped compensate for the lost ground in US military influence elsewhere. The F-35 helped force Washington to rethink NATO and determine which allies can be trusted with such a sensitive “technological leap”. It further helped sway disappointed allies in favour of sticking with the USA. Thanks to Israel’s F-35 deployment, the program is also seeing satisfactory stealth combat exposure.
NATO friends are retiring
With Western Europe embracing Russia (Gas), Iran and China, a new generation of generals in the Pentagon are increasingly questioning why the USA should spend and risk so much to defend compromised European allies. This to the bewilderment of the old guard of US generals that “grew up” with NATO and hold fond memories of Europe. That generation of generals is entering retirement age though. America is instead recalibrating and putting emphasis on committed allies – like Poland and Romania, two strategically located allies that can help contain aggressions from Russia and a Middle East power.
Those who believe that the straining of US-European relations at NATO is merely a Trump phenomenon are wrong. Still, in geopolitics things are seldom black and white.
5 – New lease of life for European powers? Rise of Britain
While the West might be in the midst of its strategic decline, there is the possibility for a period of grace. One in which three European powers could play a greater role again.
Sitting in so many self-inflicted traps and facing her own moral decline, Western Europe seemed done and out.
With a leadership-shy Germany, an inward looking America and an overtly assertive China .. the stage is set for Britain to rise on the global stage. For how long? It could be for just this decade, but it could also reach beyond that depending on the global landscape? Who can keep Britain from seizing this opportunity? Only Britons themselves and probably Brussels. The latter is bent on sabotaging the rise of Britain. The idea of other EU nations seeing Britain prospering scares Brussels.
Although I think millions of Britons aren’t fully aware of the potential for the UK around the world, I sense Britain will step into this large vacuum set before it and seize the moment. The UK is in a unique position to seize this historic moment – not only is it the most important NATO and UNSC ally of the United States of America, ..
The UK is breaking away from the EU- The UK is renewing its Nuclear Deterrence (CASD)
- The UK can project power thanks to a superb network of bases and two modern aircraft carriers with F-35 fighter jets
- The UK features the world’s most agile Financial Center
- The UK can lead and enjoys a certain respect around the world
Just last week, an emerging nation that has China as its biggest customer decided to assign to Britain a massive infrastructure project. No amount of diplomacy or soft pressure by other powers could sway a competitive open public auction process away from Britain, the winner. It can happen – and this wasn’t even a Commonwealth nation or English speaking country.
A reprieve or last lease of influence for the West?
The Foreign Policy vacuum created by the current US and Chinese administrations won’t be entirely removed over the next few years – no matter who wins the US elections in November. Trust takes years to be rebuilt – US allies will want to see this from Democratic and Republican administrations.
What Berlin says might be deemed reliable in Asia, Africa, the Middle East and Latin America, … but nations are still seeking power and security (military protection). A junior partner in NATO (Berlin) can offer none of these. Nuclear-armed Britain ..
To get the full report you can write to c.takushi@geopoliticalresearch.com – Requests will be assessed and may be rejected.
(delayed & truncated release to the public of a geopolitical round-up issued on 26 June 2020)
By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 26 Jun 2020
Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
A distinct broad approach to geopolitical research
(a) All nations & groups advance their geostrategic interests with all the means at their disposal
(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers
(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories
(d) Independent time series data aggregation & propriety risk models
(e) He only writes when his analysis deviates from Consensus