Pozsar Prophecies Panned As ‘Austin Powers’-Style Parody

Rabobank’s Michael Every is having none of it.

By “it,” I mean any variation on Zoltan Pozsar’s “New World Monetary Order” narrative, which I’ve described as a fairly tale, among other things.

Last year, when it became apparent that Pozsar intended to go far enough down his own rabbit hole to come out in Moscow on the other side, he got a hip check from Every in the form of a lengthy and, if we’re honest, devastating rebuttal.

Every didn’t mention Pozsar by name, but he didn’t have to. The title of his piece was “Why ‘Bretton Woods III’ Won’t Work.” Just weeks earlier, with a little help from a friend at Bloomberg and (ironically in that context) the counter-narrative echo chamber, Pozsar popularized a “Bretton Woods III” meme.

“Do you see what I see?” he asked, before modestly suggesting that what he’d seen was the future. “After this war is over, ‘money’ will never be the same again,” Pozsar wrote, in March. Bretton Woods III, he said, would be a system “backed by outside money,” where that meant “gold bullion and other commodities.”

10 months, 100,000 dead Russian soldiers and one helluva decline from the war-driven highs in both oil and European natural gas later, and the dollar is still around. Russia is losing the war, China is (mis)managing an exit from “COVID zero” (which, according to independent estimates is now “COVID 44 million”) Mohammed Bin Salman is paying Elon Musk to run ridiculous promos on Twitter for a futuristic metropolis the Saudis imagine they’re going to build in the middle of the desert (so the IRGC can shoot at it) and Pozsar, undeterred, is planning (and this is real) to launch a new series of regular notes called “the Bretton Woods III Dispatches.”

Suffice to say Rabo’s Every has read Pozsar’s latest trio of missives (one of which I discussed here) and on Monday evening in the US (Tuesday morning in other locales) he delivered a veritable clinic in sarcastic criticism.

For those unfamiliar, Every is well-versed in geopolitics. In fact, his dailies are almost all geopolitics, and unlike Zoltan, Every can write. His penchant for biting satire makes my sometimes acerbic pen look positively generous by comparison.

Most importantly, Every’s exhortations for market participants to pay attention to geopolitics didn’t begin with Ukraine. This isn’t new territory for him. “‘Markets cannot ignore geopolitics’ is an argument we have been making since 2016,” he wrote Tuesday, kicking things off.

From there, Every pulled no punches and made no secret of his intent. He laced his piece with sometimes oblique, sometimes direct, references to Pozsar’s last three notes, employing, in some cases, clever allusions that were immediately recognizable to anyone who’d read those same notes. Below are a few selected excerpts from Every. They’re in order of appearance, and are abridged.

The structure of the global economy and markets is rapidly changing, and in ways few fully grasp or address despite the lessons of history. Understandably, this is also generating some epic, ‘War and Peace,’ Russia-centric market narratives on the forces of history, Great Men and The Rise and Fall of The Great Powers (and The Great Currencies), etc. Equally understandably, these focus on the outlook for the dollar.

As a particular example, there is some excitement around an emerging ‘petroyuan’ argued as marking the emergence of a new bloc of Eastern economies backed by commodities such as oil, and linked to China’s CNY.

It is important to realize that after having long ignored realpolitik, the analytical pendulum arguably swings too far the other way to presume everything is now about war/geopolitics and nothing is about ‘peace,’ i.e., central banks or markets.

The petroyuan has James Bond-style geopolitics, intrigue and masterplans as a draw, yet it is also an aurophilic parody: ‘Eastern Powers in Goldmember.’

The argument is: Oil is traded and priced in CNY, not dollars. The dollar gets weaker, and the West poorer, and the CNY, and gold and oil, get stronger and the East richer.

But, Dr. No, things don’t work like that. CNY is not fully convertible. CNY is highly politicized rather than transparently market-driven. Chinese assets are too. China runs a trade surplus, so nobody can net earn CNY globally: There is no commodity trade in CNY for those reasons, apart from with Russia. The Gulf Cooperation Council (GCC) oil exporting countries have currencies pegged to the dollar, so don’t want reserves in volatile CNY.

However, apparently this now changes because of gold: China will allow CNY for commodities to be ‘swapped for gold’ to circumvent the above issues. That is seductive — like Austin Powers; retro and futuristic — like Austin Powers; has a cult following — like Austin Powers; but ‘Eastern Powers’ is just as silly as Austin Powers.

Let’s underline why CNY doesn’t equal gold from a market perspective:

• Gold is deflationary. Yes, pegging CNY to gold would force it higher,… and destroy its export sector, while Beijing would lose control of fiscal and monetary policy, political anathema, and more so as it tries to avoid asset price deflation. Indeed, linking CNY to gold and oil would logically deflate oil: Why would any commodity exporter want that?
• China’s gold holdings moved up in 2022, but its relative share in FX reserves (not held by state banks) is minuscule vs. dollars. What would China do with the bulk of its reserves if the dollar was dethroned — which would also destroy trade with the US/West at the same time?
• CNY is very fiat: The increase in China’s M2 base vs. its gold holdings — far lower than the US — is hardly indicative of a country ready to go on a gold standard.
• China runs large trade deficits with the Eastern commodity exporters who would want to swap CNY for gold. The Middle East’s annual bilateral trade surplus alone is larger than China’s total gold holdings.
• Capital controls that now stop CNY selling for dollars would need to apply to China’s gold stocks too, defeating the ‘peg’ for a global petroyuan.
• Logically, China would have to make other/Western fiat economies pay it in gold. The only way to make them do so against their best interests would be via Russia-style coercion — but the West resisting such moves is already a potential threat to CNY, let alone CNY ‘as gold.’

The ‘peace-time’ Fed are deep into geopolitics, albeit under the analytical radar. Markets are already aware — if disbelieving — of recent Fed-speech stating that Fed funds will continue to rise in 2023, and that there will be no rate cuts this year. While there is an anti-inflation imperative to these actions, there is also an underlying geopolitical motive: If Eastern Powers are going to push ‘gold-membership’ over the dollar — hugely inflationary, and damaging for the US if seen — then the best rebuttal is sustained, higher Fed funds to make fiat dollars more attractive than ‘commodity currencies’ and gold.

Arguably, this approach is working. Admittedly including US government intervention in oil markets, broad commodity prices are well off their recent highs. Imagine what further Fed hikes might hypothetically achieve — or be forced to achieve by commodities rising again — even if even done while de facto easing policy for the government at the same time (as the ECB, Bank Indonesia and the BOJ are all doing in various ways via new and old bond buying schemes: In short, higher rates and QE, as we argued since early 2022).

It is time to reiterate that in this geopolitical world it is large economies with resources, technology and military power — and established currency hegemony — that stand to do best.

It’s hard to keep track of the US measures being put in place across the spectrum to begin to push back against what D.C. finally perceives as allied Eastern Powers — and this process is going to accelerate. Supply chains are likely to bifurcate further, sooner than some suspected. That will be inflationary — and require a Fed response, and then a dollar response.

The US super-tanker is beginning to turn to face East — and that process will ultimately be better for new ‘mercantilists’ than old ones — with a logical flow-through to financial markets.

We need to embrace both ‘war’ and ‘peace’ arguments to understand what is really going on in geopolitics. That combined narrative is not as eye-grabbing as some others out there, but should prove more accurate over time.

Yes, it’s not War and Peace: But neither is it an illogical parody like Love and Death, or ‘Eastern Powers in Goldmember.’

There’s much more in the full note and, again, I want to reiterate that the passages above are abridged from longer sections.

On the last page of the final installment of Pozsar’s self-described “war dispatches,” he quoted Tolstoy:

The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already — without a shadow of doubt — what is laid before him.

Zoltan’s point (and I intend to delve further into this in a series of articles later this week) was to suggest that market participants unwilling to consider his Eastern-centric framework aren’t being objective and are too wedded to the Western narrative.

On Tuesday, Every also used a quote from Tolstoy:

Because of the self-confidence with which he had spoken, no one could tell whether what he said was very clever or very stupid.

Checkmate.