Geopolitical Update : Don’t trust the stock rally – The West is not in the lead

By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 27 Mar 2020 (public release delayed by 2 days).

A powerful stock market recovery is tempting many investors back to the market, Stock prices have recovered by 15% to 30%.  But I don’t quite trust this rally in stocks. There are still some very serious issues out there and policy makers in the USA and Europe have been terribly slow on several critical fronts. They are likely to continue disappointing. Western leaders have shown very poor strategic foresight – and they have been caught unprepared to face the set of crises that this new decade will usher.

I think there will be several market recoveries and declines ahead of us. There are a number of scenarios we are currently tracking (I will spare you all the complexities to keep this short), and the risks to the downside are growing.  Not so much, because the virus has mutated of become more lethal. The bureaucracy and lack of cohesive leadership in Europe and the USA are the cause.

Three reasons, why I am cautious about the durability of the coming stock market recovery

• the cracks in the credits, bonds and commercial real estate markets
• the vulnerable financial system and real economy in the G7 – weakened by 11 years of cheap money
• the unfolding massive expansion of the state and the “socialisation” that will follow

If a much larger role for the state in Europe and even the USA lies ahead, are markets closing their eyes to reality or jumping ahead of the curve?

Markets are being actually somewhat rational. Where else can they go with so much liquidity and money sitting on the side? They are somewhat rational, because most investors are still aiming to maximise profits rather than minimise losses in this decade. Markets still miss to see the signs of the time. 

It also shows how much excessive liquidity there is, waiting to be invested at the smallest string of good news. The argument is: Bond yields are so low, we have to buy stocks. This means investors are likely to call a bottom prematurely. But that bottom may not be here yet. Not from a geopolitical-macroeconomic perspective. Investors seem to be betting that the economic package in the USA will jump-start the economy or on the sudden breakthrough for a cure for the corona virus. Both are likely to take some time though.

As I have said in recent years: this decade will see powerful disruptions, thus investors should move away from the Buy&Hold strategy that made it easy to make money over the past 11 years. They should rather TRADE proactively and aim at minimising losses. Those that have followed this advice are doing well in 2020.  I continue to see much more potential in “active trading“ than in relying on a traditional Buy Level to hold stocks for the next 5 years. Long term investors are likely to suffer heavy losses in this decade.

The West is being eclipsed by nations in the East and the South 

Despite having had almost 1.5 months lead time thanks to China’s shutdown, three months into this global crisis, European and North American policy makers look more overwhelmed than in control on the health, geopolitical, monetary and financial fronts.

Rather than shutting down air travel and borders in January or February, European policy makers said “under any circumstances will we curtail free travel and open borders”. Not only that, even urgent economic measures that should have been announced together with the lockdowns are still been discussed.

Europe’s lack of strategic foresight and leadership reminds me of the poor role it played in the Civil War in former Yugoslavia. Nations and corporations all need capable leaders, managers, administrators and advisers. But when managers and administrators try to lead nations & corporations in difficult times, disasters loom, no matter how able they may be.

Sadly, few scholars and experts in the West are looking outside the West for help or best practice. But the time for humility has come. Why is there so little discussion about Japan, South Korea and Singapore? Being so close to China they got hit early with little advance warning, but their number of casualties has been relatively low. They simply seem to have managed their response to the epidemic more professionally and cohesively. In Japan .. hygiene, collective wearing of masks and social distancing seems to be working well. In the West, the experts say masks are almost useless.

Even some emerging nations in the Southern Hemisphere have been much faster and cohesive in their response than North America and Europe. Take the case of El Salvador that stopped air travel from China on January 30th or Costa Rica that begun preparing in earnest in early January. Take also the case of Peru, which surprised the world by shutting down air travel, borders and businesses soon after the first case was reported – moving swiftly to protect businesses and to pay cash to its citizens the following week. Compared to the protracted action by European states over two months, .. the total shutdown and economic measures in Peru were announced almost simultaneously. In the EU governments treat self-employed citizens with less priority than other employees and in the UK self-employed citizens will have to wait until June for some money. Peru’s resolute & coordinated mobilisation of society, fiscal resources and the armed forces has even won praise in neighbouring Chile, the long time star of the region. But this is not a short term blip, Peru is making impressive use of fiscal resources thanks to decades of fiscal discipline. Despite its political headwinds, Lima boasts healthy inflation, healthy interest rate levels and an enviable Debt/GDP ratio of 32% – compared to 86% in the Eurozone. Most investors in Europe don’t even know that some emerging nations are managing their economies much more responsibly than Europe or the USA.

For decades, South Americans looked to Chile for leadership or best practice. Now, some experts in Chile envy their neighbour to the North. Don’t take me wrong, there have been many problems in Peru, Singapore and South Korea in implementing their bold complex measures. But the rapid action by these governments seems to be paying off.

For the first time in many decades nations around the world are looking for leadership or best practice in Asia or Latin America. We may be witnessing the accelerated decline of the West and the rise of new regional powers. This is not only the biggest crisis since World War Two. It is also probably the most humbling moment for the West in modern history.

To get the full report, you can write to c.takushi@bluewin.ch

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 27 Mar 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