Geopolitical Update: Turkey & China face off America and struggle. Berlin braces for shock in Bavaria

Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, 17 Aug 2018 – Switzerland (public & adapted release 22 Aug 2018)

Monitoring geopolitical, macroeconomic and financial markets trends is complex, but it can be interesting and even rewarding when the pressures of the political process are vented through exchange rates and asset prices.

As the convergence of geopolitical and macroeconomic forces advances across the globe, the pace of events accelerates – This summer is a witness of that.

These bullet points reflect key developments and our assessment in a nutshell ..

• A very assertive America pushes back against China & Europe – Side effect is stronger USD. Washington ready to reign in on USD
• West underestimates religious zeal of Turkish people to advance Islamic reforms
• As economic situation worsens, Teheran forced to negotiate or deflect into a conflict
• Anxiety is beginning to give way to distress in China as repression mounts
• Germany’s government parties brace for disastrous Bavarian elections in October
• USD has been replacing Gold as safe haven; Gold has investors puzzled
• The weak link in the North Korea-South Korea-US landscape: Pyongyang takes advantage of Seoul’s appeasement policy

I will elaborate now on those developments, where we disagree with consensus the most

Geopolitics affecting economies & markets

As we have been forewarning since 2016 an assertive America is making America’s economy fire on all cylinders while fear & anxiety are beginning to bite in the business confidence of Europe and China.

I also maintain my view that geopolitical-political forces are pushing the EUR-USD towards 1.10 before November 2018. The USD is partially replacing Gold as Washington keeps a very tough stance against foreign governments ahead of the US Mid Term Elections .. and possibly until mid 2020. The strong USD is a side-effect of an assertive US Foreign Policy and an accelerated global Arms Race. Nevertheless we are identifying signs that Washington is preparing to reign in on the USD later this year. Political chaos may be a cheaper way than a FED move.

Gold thrives on political upheavals and financial risks with a monetary background, but as risks engulf the global military balance and systemic security the USD replaces Gold. I can put it in other words: Gold has no military force that projects power and provides security. No security, no trade.

Most of the crises we are currently facing are not primarily monetary in nature. Geopolitical & political forces are the main drivers and they are exacerbating monetary imbalances. Thus, markets are rational as they partially replace Gold with the USD as an ultimate safe haven. Many investors see the mounting troubles in the world and are puzzled by the decline in gold prices. Some embrace conspiracy theories that Gold is being manipulated – but we see little signs of that presently.

Monitoring Turkey and China – Religion matters

While the situation in Turkey is fluid and challenging, a solid majority in Turkey backs the Islamic course of Ankara. Something that Western institutions struggle to acknowledge. We thus expect any potential financial “panic” to have a limited political impact. I expect the regime to survive and and the Islamist Reforms to be continued. The Western press is very exact in what it suppresses to communicate. After the EU embraced a new partner in the Middle East (Iran), the press now portrays President Erdogan as a dictator that has taken Turkey hostage. Not quite the truth – while President Erdogan has suppressed democratic rights, the West ignores that fact that a majority of Turks supports the chartered course. Mr. Erdogan is in fact implementing the will of the people. The West did the same in Venezuela, where Mr. Chavez was depicted as an outright dictatorial “caudillo”. Fact is the people elected him into the presidency – not once, not twice, .. four times.

Back to Turkey – I hear many experts say that the economic distress will weigh on consumer confidence and ultimately sway people away from President Erdogan. I disagree. The religious & political fervour are still much stronger than the economic pain. Thus, while there is likely to be casualties in this Turkish drama, consensus errs once again in underestimating the religious zeal of the Turkish people.

Turkey is worthwhile watching. Having Ankara missed the time to hiked interest rates, I wouldn’t be surprised if Ankara welcomes a war on Israel from Gaza in order to deflect .. and shift the attention of the Arab world and the UN to Israel’s troubled borders. The big efforts by the Netanyahu Administration to reach a truce with Hamas – and so avert a new war – seem to confirm our assessment. Israel senses danger: Turkey and Iran face serious economic threats at home and are badly in need of an external crisis.

The situation in China is somewhat less transparent than in Turkey, but potentially more destabilising for global financial markets. While an autocratic regime can control what we read and see, anxiety is spreading behind the scenes across China – and has now reached the government apparatus. Let’s make no mistake, with growing economic-military power and enabled by the West, China is not becoming a more democratic state. Quite the opposite – the repression of critics and non-sanctioned religious groups (Christians, Tibetan Buddhists etc.) is advancing and Western leaders & media are looking the other way. The stepped up repression has converged with detentions for corruption charges and the tougher US stance on Beijing. Perhaps for the first time, a growing number of mainstream Chinese are concerned about both politics and religion: about the “power grab” in Beijing and the the millions that are harassed or persecuted, because of their religious beliefs.

I think this is a source of concern for mainstream Chinese: Their most respected scholars and government officials were caught by surprise by the tough US stance on trade. Many of these thought leaders are now blaming President Xi Jinping, his total power grab (some see it as a semi dictatorship) and his premature challenge of the US as superpower. Many in China are demanding that China returns to its quiet & low key rise to power. President Xi Jinping is responding to the discontent and relaxing monetary policy. Even in China popular sentiment cannot be overlooked.

Berlin talks tough on China and immigration to avert a disaster in Bavaria

The German government recently blocked the takeover of a German company by a Chinese group. The German state media hailed this as a more cautious stance against China to protect European interests. We have looked at this and concluded that this is a political diversion. Berlin is highly committed to her growing strategic alliance with Beijing – and it has already allowed China to obtain much vital German technology. The latest move is rather an effort to win back conservative voters at the upcoming State Elections in Bavaria (Bayerische Landtags-Wahlen). Berlin is suddenly talking tough on China and on some immigrant circles to help the CSU and SPD. It is about damage-control at the crucial Bavarian State Elections. I am expecting shocking losses for the government parties CSU and SPD this October. We expect the SPD to lose some 40% of its voters, while the CSU could lose over 1/5 of its voters.

If the CSU crashes, Merkel’s coalition could be at risk. Many CSU base factions have demanded a pull-out from the government coalition of CDU-CSU-SPD in Berlin and a return to the traditionally conservative CSU agenda. For over a decade Merkel has moved the traditionally conservative parties CDU and CSU as well as the formerly Leftist SPD away from their original beliefs to the liberal center of German politics – It helped perpetuate Merkel’s hold on power. We expect the Greens and the AfD to win big as they fill the vacuums left by the big parties. The rise of the AfD on the “right” could lend momentum to a growing conservative movement within the EU encompassing Bavaria, Austria and Poland. The EURO faces a potentially difficult October, but might be able to benefit from the political chaos in London and Washington in November. We are releasing shortly a separate report on the German political process.

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Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, 17 Aug 2018 – Switzerland (public & adapted release 22 Aug 2018)

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

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Our broad approach to geopolitical research is distinct & independent

(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 – 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) We only issue a report when our analysis deviates from Consensus