Zoltan Pozsar Bears Witness

“If there is trust, trade works. If trust is gone, it doesn’t.”

So said Zoltan Pozsar, in a new note documenting the dissolution of the “two giant geostrategic and geoeconomic blocks” atop which sat the “three pillars” of the low-inflation world.

The blocks were “Chimerica” (cheap Chinese goods helped offset the impact of stagnating US wage growth from cheap immigrant labor) and “Eurussia” (German industry, and Europe more generally, were powered by cheap Russian gas). Pozsar described a “heavenly” arrangement: The US and Europe were able to pay dollars and euros for Chinese goods and Russian gas, respectively, and those dollars and euros were recycled back into G7 claims or, for the uninitiated, claims on hard currency, and particularly developed market fixed income.

It worked until trust was lost. The divorce of Chimerica and Eurussia created a new marriage — a new “heavenly match,” which I’d be more inclined to call an unholy union, but I suppose it depends on your lens.

It’s interesting how Pozsar seems, in my opinion, to subconsciously favor China and Russia due to what comes across as a fascination with sea change. The “special relationship” between the two countries, which both of their autocratic leaders proudly tout whenever the opportunity arises, is “a little bit as if one disenfranchised spouse (China from the Chimerica union) found another (Russia from the Eurussia union) to form an economic union out of revenge,” Zoltan wrote.

But “revenge” for what, exactly? Sanctions, in Vladimir Putin’s case and pushback against the Trojan Horse-style spread of Chinese hegemony in Xi’s (e.g., through Belt and Road, and so on). But “revenge” perhaps isn’t the best word choice. It can suggest the vengeful are legitimately aggrieved. Russia invaded Ukraine and, by all credible accounts, including copious on-scene documentation, first-hand testimony from grieving real spouses and the bodies of bound (and sometimes badly burned) executed civilians, committed war crimes. Xi, arguably, committed “light” genocide in Xinjiang, openly commandeered Hong Kong’s democracy and presides over the Mainland as an iron-fisted autocrat bent on one-man rule. It’s far from obvious that the world would be a better place if he presided over it as well.

There’s plenty of “Whataboutism” to be had. Hua Chunying and Maria Zakharova will readily regale you with non sequiturs. The history of the West is, in part anyway, a story of monarchical rule, conquest and, in the Americas, genocide and slavery. And that’s to say nothing of the US’s misbegotten military adventurism over the past half century.

None of that, however, changes the fact that Russia “did something [Europe] couldn’t tolerate,” as Pozsar euphemistically put it. That “something” was a war of conquest on European soil, the first since Hitler. Nor is it relevant in the context of America’s efforts to prevent Xi’s unqualified autocracy from supplanting America’s nominal democracy at the top of the geopolitical food chain. Pozsar’s description of the Chimerica divorce is laughable. The US, he contended, is just mad because China “want[s] to build 5G networks globally and make cutting-edge chips with cutting-edge lithography machines.” Sorry, but there’s a little more to it than that.

Regular readers know I’m the furthest thing from a flag-waving super-patriot. I’ve delivered critiques of Western society in these pages that wouldn’t make it past a junior editor at any mainstream financial media outlet, let alone compliance at a major bank. There isn’t a bank analyst on our (rapidly dying) planet that has anything on me when it comes to derisive accounts of duplicitous, hypocritical Westerners.

However, it’s absolutely critical that we don’t lose context in our sometimes belabored efforts to find it. No one wants to live under Putin. Period. At this point, I’m reasonably sure that even the Kremlin’s pet oligarchs are upset with him. (“Dude, where’s my yacht?”) And a world beholden to Xi is a world under the thumb of Mao.

I realize it’s now fashionable to pretend that soft autocracies are preferable to broken democracies. The US Republican party now openly espouses Orbanism. In May, CPAC was held in Budapest. Even if you’re inclined to such thinking, note this: There’s nothing “soft” about Putin and Xi.

As it happens, Pozsar made Orban a centerpiece (although not the centerpiece) of his latest grandiose exercise in interrogative prophesying. Hold that thought.

“If I step back, I see a fierce, geostrategic game of chess in progress on the Eurasian landmass,” he wrote, imploring readers (and by now, it’s far from clear who the audience is — certainly not STIR traders, who would’ve tuned out three sentences into Pozsar’s latest) to “forget the BRICS.” Instead, we should focus on the TRICKs — Turkey, Russia, Iran, China and North Korea, which he described as “an alliance of economies sanctioned by the US getting ever closer economically and militarily.”

I should state the obvious. Turkey is a NATO member, and while the S-400 dispute, the standoff between Ankara and Brussels over refugees during Europe’s migrant crisis and Recep Tayyip Erdogan’s fairy tales about Western forex conspiracies all underscore the tenuous nature of the relationship, it’s not obvious that Pozsar’s “alliance” characterization is accurate vis-à-vis Turkey. Russia is now a vassal state of China. So is North Korea. And Iran is a vassal state of Russia. Turkey doesn’t fit into that equation. Or at least not neatly.

There’s much more to be said about Pozsar’s August 24 missive, including and especially how this all fits into the inflation picture. But given the extent to which many market participants are inclined to deify Zoltan, I think it’s important to note that his latest feels, at times, like a stream-of-consciousness-style manifesto penned by someone longing for a historical “moment” — a diary entry from someone excited to bear witness to an epoch.

With that in mind, and with the intention of according the inflation discussion the requisite consideration in a separate piece, I’ll leave you with the following passage from Pozsar, presented without further comment.

The US’s “no -response” to China’s sea and air blockade of Taiwan puts South Korea in a very difficult situation given the fact that the U.S. decided to not include South Korea in the AUKUS defense pact. As Pippa Malmgren has recently noted: “the feeling in Washington, D.C. is that South Korea chose China over the US; their “strategic ambiguity” is now clear. Seoul is no longer fighting China’s ambitions in the North. […] If the two Koreas are reconciled, there is no need for the US to station 30,000 troops to protect South Korea ” – and that may well explain why President Yoon didn’t meet Speaker Pelosi. No way you say. Damascene Conversions happen only in the Bible, but not in geopolitics. You are wrong: read history or grow up in Hungary. I was eleven years old when on June 16th, 1989, a young Viktor Orban demanded that Soviet troops withdraw from Hungary. That was just months before the Fall of the Berlin Wall on November 9th, 1989, an event we associate with the birth of globalization and economists associate with the birth of the “lowflation” regime. Could South Korea’s “strategic ambiguity” be a precursor to an “Orban-like” moment in South Korean foreign policy? Could South Korea, feeling the heat of the checkmate that it is in, demand that US troops withdraw from its country? History does not repeat itself, but it rhymes and similar to how that Orban’s foreign policy is different from this Orban’s, that South Korea making chips is different from this South Korea making chips: Chips may thus be at risk not only in Taiwan but also in South Korea. But all this makes the US’s choice between supporting the Hungarian Revolution against the Soviet Union or Egypt against Israel, Britain and France in 1956 a geostrategic child’s play. The geopolitical events of 1956 hold one important lesson for the markets today, which is that the units of wars are battles, and sometimes, even great powers choose their battles. Battles on multiple fronts (Ukraine, Taiwan and the question of South Korea) mean that priorities can change. In 1956, oil was more important than Hungary, which is why I grew up on the Eastern side of the Berlin Wall, watching movies about what life was like on the Western side of the Berlin Wall. Today, living in Manhattan, the capital of Western civilization, I am watching the East in action, and wonder whether the US will manage to maintain the existing world order or, like in 1956, decide to prioritize between NATO’s footprint, chips or oil. Or worse – could the TRICKs checkmate the US on the Eurasian chessboard? I have no idea. Neither do you. And neither does the Pentagon.


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24 thoughts on “Zoltan Pozsar Bears Witness

    1. I actually think the opposite. I think he needs to find a higher calling. There isn’t anything he doesn’t know about money. He’s the only person on Earth who could navigate the labyrinthine plumbing of the dollar-based financial system without getting lost. He (literally) created the blueprint. There’s nothing else left for him to do in that arena. He could write every note penned by every short-end strategist at every major bank, by himself, in his sleep. I think that’s part of why he’s ventured out into other things. I don’t agree with a lot of what he says, but he’s a genius. And the best way to deal with geniuses is generally for governments to identify them and employ them in the service of some greater purpose, where “greater” doesn’t necessarily have to mean noble, just something more consequential than what he’s doing now. The idea that Zoltan is still writing notes for a sell-side firm is, with all due respect to Credit Suisse, a great mind going gradually to waste.

      1. Is Zoltan old enough to collect a pension from Credit Suisse? If so, he could retire. I imagine they would give him a great pension. Then he would be in a position to espouse whatever assertions, grandiose visions, or beliefs that he wishes to share by creating a site on WordPress…

      2. You could pull down the video clip in Good Will Hunting, the main character being interviewed by the NSA. Being instrumentalised is no bueno for oneself. Hopefully he is genius enough to refuse to be instrumentalised. A bit like Einstein.

  1. “At this point, I’m reasonably sure that even the Kremlin’s pet oligarchs are upset with him. (“Dude, where’s my yacht?”)”

    I suspect quite a few are upset at more than losing their yachts… There’s been an epidemy of murder/suicide amongst oligarchs with wives and kids getting killed… That’s… not okay.

  2. Can I read the whole piece without a subscription? H, I’m curious about your take on S. Korea here.

    Last I checked, the NATO alliance has a much stronger military and allies across the globe. Even if Trump/DeSantis moved us into isolationism and further into a real life Idiocracy, could China take out Japan / Australia / UK / France / Israel?

    I hope the government identifies me soon, definitely wasting my time trying to enlighten young software engineers.

    1. Nobody can “take out” UK, France or Israel. Those are nuclear powers.

      But these, even adding Australia, Japan and whatnot would be unable to do much if China decided to invade Taiwan or Vietnam. And Ukraine is already fighting its heart out but is in a difficult position and, without support, would probably succumb to Russia.

      1. Yeah, “one does not simply ‘take out’ Israel,” to employ the Lord of the Rings meme. They’re… let’s just call them “formidable.” I mean, Hezbollah has had some “success,” but a lot of that is just the realities of asymmetric warfare. Notwithstanding the challenging (to put it mildly) geography, I wouldn’t want to be on the wrong end of a full-on, no holds barred IDF military campaign. There’s no telling what they have in terms of weapons. And I don’t think anyone, anywhere would be terribly excited about finding out.

  3. There’s been a ton of chatter around the world about the end of globalization and predictions of global economic restructuring. There’s also been some chatter about it providing a pretext for world war. Pozsar’s South Korea observation blindsided me, but it makes sense. And he provides a clear and useful view of the global landscape for alliances being formed and pieces falling in place for possible war.

    One point to note from my perspective… Russia weakens itself everyday by engaging in a fruitless war. In parallel, China, a genuine, major world power, grows smaller every day as the CCP reaches out to grasp and control capitalist (and freedom-seeking) impulses among Chinese businesses and people.

    Everything I’m reading suggests that the Russian economy and its capacity for war will be woefully weakened after the war in Ukraine is over. And while the west helps Ukraine to rebuild, Russia, having the largest landmass and resources in the world, will largely be sidelined on the world stage for more than a decade.

    But China has not crossed the threshold of outright aggression. The other day Henry Kissinger suggested the US administration should be reaching out to China and starting a conversation. I think Henry Kissinger is correct, as he was in the 70’s.

    1. Questions about Russia:
      – What will become of the oligarchs?
      – What becomes of the valuable tech workers who left Russia after the Ukraine invasion?
      – What will be the disposition of Russia when the war is over?
      Will it be like a bee’s nest that’s knocked out of a tree?
      Will they express any wish for connecting more closely with Europe?

    2. Sorry, but: “October 7th, 1950: Chinese People’s Liberation Army invades Tibet without provocation.” Tibet, while considered a Chinese autonomous region, is officially ruled by the Chinese which annexed it decades ago.

      1. Exactly! That is the problem. China has those impulses. We should have no delusions about this. The official position of the US has always been that Taiwan is part of China. But the same was true about Hong Kong, which was supposed to remain democratic until 2047 under the agreement with the United Kingdom that facilitated its turnover to China. There is no similar agreement about Taiwan, which is merely a greater logistical challenge to occupy and control.

        The idea of Chinese capitalism, though it seemed to be a promising vision in the 1970s and gave Chinese families and businesses hope during the 20th century, seems to have become a contradiction in terms in recent years. The CCP is slowly and gradually, but certainly clawing back control of broader Chinese society on a granular level. Forget the idea of open capital markets in China. Bejing is applying compulsive control of their economy.

        If I had a business in Taiwan, I would deliberately and as quickly as possible move the operation to another country. Sure, I’m an American and I’m used to having the freedoms of capital markets and life and liberty protected by the US constitution. But the Taiwanese have also been free and enjoyed open capital markets since the time of Chiang Kai-Shek. I can reckon how they may feel when China floats their landing craft close to the Taiwan shore.

        1. Open systems allow evolution while closed systems do not. This at least partially explains why closed economies (autocracies) fail while open ones can repair and heal. When nations become autocratic it’s their creativity that flees first taking along with it the new ideas needed to right the ship.

  4. H

    It was interesting to see you use the phrase “vassal states” for Russia and China. Essentially that notion is medieval and I couldn’t help but want to turn to some of my map books from that time frame to see what the world looked like 500 years ago and who the vassal states were. Globalization really started in the middle ages under the aegis of Mercantilism and external resource acquisition. Also, while globalism has been declared dead, China doesn’t seem to know yet as exports are still rising.

  5. Would just note that Robert Kaplan laid out the same thesis (Eurasia + India as the “new” geopolitical center of the globe) in his 2018 collection “The Return of Marco Polo’s World.” TL|DR version: as neoliberal globalization wanes, four legacy empires — Russian, Ottoman, Persian, Han — will try, and succeed, in reasserting themselves while at the same time their rump states suffer a loss of internal cohesion; Europe, as the longtime economic and intellectual engine of “the West” will continue to lose power and relevance vis-a-vis revived Eurasian empires; and the U.S., though no longer the sole global superpower, will remain a leading global power thanks to its advantageous geography, large internal market, and democratic institutions. (We can only hope.)

  6. Remembering back to the period before WW2 Nazi Germany and Stalin’s Russia were ‘aligned’. And then Germany attacked Russia (realizing that their regional goals overlapped and they would be in conflict anyway). I don’t think China will ever completely trust Russia nor will Russia ever completely trust China. Ultimately their goals will overlap. China needs what Russia has – vast amounts of raw commodities and will never let Russia gain an advantage making them equals militarily. Russia wants desperately to get to the same point as China in the size of their economy and industrialization. But will never get there because their political system is so corrupt and unfulfilling for the people. And, again, China’s education system will leave Russia in the dust.

  7. Pozsar’s views are colored too no small extent by the place and time of his birth. Magyars may leave their country behind but rarely do they shed their cynical worldview whether it is informed by a brilliant mind or not.

    Regarding this piece, I am less sanguine about Turkey’s intentions and actions than Heisenberg – based on his comments – appears to be. Staying as a US (and NATO) ally seems intuitively the course that is most likely to pay off for Turkey. Yet Turkey sees itself as a potential great power and there undoubtedly is a point where it would be willing to roll the dice in order to fulfill its ambitions. As for South Korea, I do not doubt that Korean politicians are well aware of the geopolitical neighborhood they inhabit. Should the US fail to convince as a protector, I am certain that China and Korea will arrive at a modus vivendi based on historical precedent.

    Ironically, if TRICK is to challenge American hegemony and try to establish a new world order it will be due primarily to the US and its policies. Far from not being tough enough on China, the real threat is backing China into a corner where their leaders may conclude that fighting (even at a significant overall disadvantage) is preferable to being forced into becoming a collapsed state. China faces enough major challenges that it may never achieve parity with the US much less overtake it as global hegemon. If such is the case, American policy makers have to finesse the bilateral relationship as the situation evolves.

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