Is the world changing or ending? Both, probably.
We’re witnessing tectonic socioeconomic and geostrategic shifts. The latter may not herald the end of dollar hegemony, but geopolitical jostling could stymie efforts to save the species from climatic oblivion. Given i) the interplay between fiscal policy and the energy transition, ii) the read-through of increased Treasury supply for money markets and rates and iii) the nexus between foreign demand for Treasurys and geopolitics, a holistic analytical approach is both desirable and imperative.
The latest edition of The Ezra Klein Show is worth a listen if that sort of thing piques your interest. The guests are Jason Bordoff (an Obama administration veteran who runs Columbia’s Center on Global Energy Policy) and Meghan O’Sullivan (former deputy national security adviser for George W. Bush and the director of the Belfer Center for Science and International Affairs at the Harvard Kennedy School).
One passage from the summary captures the gist of what, in its entirety, is a lengthy, comprehensive debate and discussion: “The global decarbonization effort is colliding headfirst with the realities of great power politics.” The full transcript is here. According to Bordoff and O’Sullivan, “decarbonization won’t just affect what kinds of cars we drive or how we power our homes, it will transform everything from the nature of international markets and trade relations to the global balance of military and diplomatic power.”
Without trying to be gratuitous vis-à-vis one man’s new career as an independent purveyor of macro research, I think it’s important (crucial, even) for market participants to understand that there are countless experts hailing from disparate countries, backgrounds and political affiliations, whose research, careers and lives are dedicated to studying the interaction between these issues (i.e., between markets, geopolitics, foreign policy, economics and fiscal policy). In most cases, they have extensive first-hand experience to draw from, and are at the forefront of official efforts to address the myriad associated challenges.
If you’re an institutional investor and you want to pay Zoltan Pozsar the “high price” he intends to charge for his new research (which is available to “institutional investors exclusively and not retail investors,” according to Zoltan), by all means do. He’s still an authority on money markets. But do yourself a favor: Take an hour out of your day to source and peruse the constellation of free commentary from recognized experts on the big-picture debates Pozsar decided to join last year.
Of course, it’s not just Zoltan. Seemingly everyone on Wall Street (or, in Pozsar’s case, off Wall Street) has adopted some version of the raison d’être I penned for myself back in 2016. In his latest, BofA’s Michael Hartnett again touched on some of these issues and dynamics, noting that emerging markets are 87% of the world’s population, 76% of oil supply, 73% of CO2 emissions, 54% of FX reserves and 46% of nuclear weapons — but just 20% global equity market cap.” The (clever) title on the chart below sums up his point.
The “politics and policies of both G7 economies and BRICS-11 signal the end of globalization,” Hartnett declared. That’s “inflationary and will hinder the goals of net zero and peace.”
I certainly wouldn’t argue with that latter contention. Indeed, the notion that geopolitics is an existential threat to our species’ efforts to confront the existential threat, is the subject of the above-mentioned podcast episode.
Hartnett also reiterated that real assets may be poised to outperform if we have, in fact, entered a new era. The new secular view is “higher inflation, higher rates and higher volatility,” he wrote, citing “society (inequality), economic policies (QT, redistribution, taxation), politics (populism/progressivism), geopolitics (war), the environment (net-zero) and the economy (de-globalization).”
If the 1970s is your analog, real assets may “outperform financial assets as they did for the first time in a while in 2022,” Hartnett went on, referencing the red annotation in the figure above.
He was keen to point out that “new” BRICS “dominates emerging markets and holds $1.5 trillion of US Treasurys.” The implication: An expanded BRICS is a more powerful BRICS.
On that point, I’ll just quote Rabobank’s Michael Every again: “If you ‘add’ a gorilla to a great white shark, you don’t get the king of the sea AND the jungle without a lot of evolution.”
I am not any kind of political, financial, or macro expert but it seems to me that the economic future is currently held hostage by the fanaticism of the right to include a target on the back of democracy painted by the thin man.
I have not heard or read it anywhere but from my perspective a big thing to consider with our regulatory mess is that where regulations are pulled completely law suits and criminality will spring up like out of control weeds. People will seek relief, yet even the stockholm-ized who believe they will benefit by being in on the ground floor of autocracy will fail in their efforts. The powerful will become stronger and the vast majority of the so called rich will suffer degradation of power. Money will not equal power if democracy is attenuated to the will of a self proclaimed authoritarian. The markets will be phonier than they already are, and frankly they could become almost completely worthless.
What we do not love capitalism enough to protect democracy?
After reading this article and the comment by TB the song “The Times They Are A-Changin’” performed by Bob Dylan came to mind. I dialed it up on my music service. My younger self believed fervently. But the “change” I have lived through has not proven to be satisfying, to myself nor to society writ large.
What does that imply?
H. Many thanks for the link to the NY Times podcast transcript. This was the best, most realistic summary of the issues and problems related to energy and climate. Americans want to deny there is a problem, but if there is one, they say, just get an EV and add some wind machines and Bob’s yer Uncle. Not even close. The two very smart, well informed people being interviewed have nailed this thing. There are now 240 sovereign nations dividing up the space and resources of our planet. They have every right to do what they wish and as China has made clear, the biggest of these will continue to add coal-fired power plants as much as they like. Their priorities may not be ours but ours don’t override theirs. India which is about to become even more populous than China, is still in terrible shape. Half its people have no clean water and can’t even turn on a light during half of every day. The per-capita income in this BRIC is less than my cable bill. Moreover, their priority, rather than helping their people to a better life, is to spend billions to land a spaceship on the moon. Big whoop. Now what? One point I didn’t find in the transcript was that not only won’t the earth reach zero-carbon by even by 2060 (if ever) but even if and when we do that, the junk we have belched already will still be up there heating our planet. Zero-carbon doesn’t clean the atmosphere, it only prevents it from getting dirtier, which it surely will be by 2060. For many years a big part of my Saturday morning was devoted to listening to “Click and Clack, the Tappet Brothers” on Car Talk on NPR. One time a caller to the show asked one of the brothers why he didn’t espouse cars with lower emissions. His response was that all that does is prolong the problem. He said he just wanted us to burn up all the oil as fast as we could, thus solving the problem once and for all. Oh, and China controls production of over 80% of all solar panels globally.
Everyone who reads this post should click on the link and either listen to the podcast or read the transcript. Seriously. Best summary of the issues I’ve seen anywhere. Suspend your disbelief and grow a pair. This is tough stuff to accept. Human kind has actually killed a planet (just like in DOA).
… which is why I believe we’ll implement geoengineering. And when I say “we”, I mean one country (or a small group of countries) will do so, over anyone’s objections.
The US is best placed to do so, with Europe’s support but other possibilities exist. That’ll solve the alignment/coordination issue.
Great piece, I also agree the read through is that real assets are going to take back their place on top if the markets keep being markets
I find that I keep going back to look at Chart 2 in this post- which I find very frightening on a number of levels.
When you combine this information with what is becoming more and more discussed and widely known about the mafioso type behavior of the rulers in most of the Emerging Markets- it seems that people who are able to accumulate any wealth in any of the Emerging Markets, will want to take some, if not most, of their wealth out of the emerging markets and keep it in a developed market for safekeeping.
I have read that 40% of the US equity markets are held by foreign countries and foreign individuals. This percentage has risen substantially over the past few decades and I expect that it will continue to increase.
If any of Putin’s thugs (that Putin decides to kill) had a sizable amount their wealth in the US, then Putin is going to want to take that wealth for his own. Same for Xi.