Zoltan Pozsar: ‘Welcome To The War Economy’
"Welcome to the war economy, where heads of state matter more than heads of central banks," Zoltan Pozsar wrote, in an ambitious new piece called "War and Interest Rates."
The note, a lengthy affair with many more hits than misses, was made more topical by tensions surrounding Nancy Pelosi's Taiwan visit, a stopover Beijing views as a wholly intolerable affront to Chinese sovereignty and a flagrant repudiation of the "One China" policy the US routinely claims to respect.
"The low inflation wor
Pozar vs. Kolanavic boxing match!
One possibility to reconcile their views: over the 1+ year forward, Kolanovic’s constructive take plays out with moderating supply-driven war-exacerbated inflation, contracting economy unemployment uptick softening demand, less hawkish Fed, which may even recalibrate and settle for slightly higher arbitrary inflation target, say 3%. Risk assets accept the new regime of higher, but not systemically destructive, plateau in rates and start climbing back up somewhat. The only point i have difficulty being convinced is the prospect of subsiding vol. by end 2022, given forward-guidance-free Fed, EU winter, China’s faltering growth…
Over longer horizon, 3-5 years or so, potential, occasional geopolitical blowups (hardly persuasive now but i believe such events can be either inflationary or deflationary, let’s just assume they are inflationary) push the Fed to dial up their hawkishness every now and then with the scars of 2022 freshly stamped in the collective memory, rates see higher highs in tightening cycles, higher lows in easing ones (i.e. mirror image of the previous regime), thus plays out Pozsar’s bear case, not in one single full-force, epic, depression episode, but Covid-lockdowns-like rolling iterations…
Btw, agree with this from another Pozsar article: “That sense of entitlement, more than anything else, may ultimately constrain the Fed.”
Well Pozar may be correct in the short to intermediate term. As far as supply chains, they have a way of working themselves out given sufficient time. The shift away from China as a cheap manufacturing hub was already under way. Where I think he may have missed is that we are not going to globalize less, but differently. China is going to be supplemented/replaced by other export platforms. As far as energy goes, we will be making a transition to renewables and there are other places to get fossil fuels we need – but time will be a constraint there as well. There are producers that can produce more at these prices- Brazil, Mexico, Venezuela (if sanctions reduced), Iran (if sanctions end), LIbya (war) and many others. Natural gas also has become more internationalized. We are likely to see new economic relationships form- but for the next 2-3 years it is going to be rocky. Things change, but the economy is on a path to figure out how to produce more with less under the new paradigm.
Well said.
Venezuela, Brazil, Libya, and iran could very easily fall into a sphere of influence dominated by China/Russia (if they aren’t there already). The economic war model, should it play out in full, would be far more of an inflationary pressure than I think you’re giving it credit for. Indeed, that would be the point.
Remember the good ole days of trade wars being smart and easy to win? Perhaps that moron created the world where China views itself as an equal to the US and is using the significant economic leverage we gave them to push themselves closer to that objective. Course, no one is even asking how much of this is the former president’s fault. Blame it on Biden is the new lock her up or birther movement. Thinking is optional in American politics.
I agree with his basic analysis but also find it a little too binary: either a relatively quick return to the Great Moderation days of 2% inflation or a shooting war involving the U.S., NATO, Russia, and China. The more likely scenario, in my view, is a couple of years of elevated inflation (in the 4%-6% range), Fed funds rate closer to 5% than 3%, and a moderate to deep recession with unemployment gradually rising to 6%-7%.
I agree with your base case, except maybe expect inflation around 3-4% with Fed funds somewhat lower. I do not think our financialized and leveraged economy can stand 5% fed funds rate and I am a bit more optimistic on inflation as well. What you are saying is not headline grabbing but it makes sense.
Nixon, Reagan and Clinton all benefited the push for global labor arbitrage. So with them and theirs I place the useless blame. Forgiving Tiananmen, then hoping for the best with Hong Kong and now Taiwan and eventually Singapore become sacrificial lambs. Makes my brain and heart hurt. A lot of people can make piles of money if they have no principles and feel safe behind their safe walls of wealth. What surprises me the most is how billionaires like Mercer and Murdoch think they are immune to falling out of windows once the politicians no longer need their money to corrupt democracy.
Lived through the 70s. First mortgage was 16%. My income portion of my portfolio consists mostly floating rate preferred issues that pay the greater of a fixed percentage or a percentage above 3-month LIBOR. If Pozsar is correct then those preferreds will probably see their payouts increase in the future.