“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.