“The current state seems to be one of insufficient dialogue and escalation,” JPMorgan’s Marko Kolanovic wrote, in a dozen-page report called “Geopolitical tectonic shifts.”
Notes directly from Kolanovic’s desk are a relative rarity these days. Since ascending the research ranks at JPMorgan, “authentic” Kolanovic notes (if you will) are few and far between. It was thus a surprise to see 12 pages of “pure Marko” on Tuesday.
Kolanovic described a head-spinning shift in the geopolitical sphere, where developments are unfolding more rapidly than at any point “since the fall of communism.” He mentioned the war, of course, but also the BRICS, “major” changes in the Mideast, fissures in global trade and energy security and “increased political and ideological divisions in the West.”
Marko’s assessment overlaps in some respects with that of Zoltan Pozsar, who became a minor celebrity among market participants in 2022 thanks to a series of missives positing the dawn of a “new world monetary order” he immodestly dubbed “Bretton Woods III.” Kolanovic, an actual market celebrity, said Tuesday that the unipolar world “is increasingly coming under pressure and possibly coming to an end.”
He tallied the “relative economic rise of the East and South,” and noted that while the share of global GDP accounted for by Western Europe and Japan has declined, the economic importance of China, South Asia and the Middle East has expanded. “From the former communist bloc and Non-Aligned movement, new alliances are growing,” Marko said.
Kolanovic recapped familiar aggregates. The expanded BRICS would account for a very large share of GDP, nearly half the world’s population and more than a third of its land mass, with the latter serving as “a proxy for commodity resources.”
The figure above shows the economic balance between the West and East shifting. Marko warned of a Thucydides Trap as competitors seek to usurp US hegemony. He also suggested the Middle East, and particularly Saudi Arabia, could become a non-aligned mediator for global disputes, trade-related and otherwise.
“Rebalancing in the Middle East comes as a natural result of two decades of largely unsuccessful Western involvements, the economic rise of China, the West’s stance towards the energy industry and other ideological divergences,” Kolanovic wrote, adding that the Saudis could “acquire a status analogous to Switzerland in 20th century Europe: Not aligned with any one bloc or warring party, and facilitating trade and dialogue with all.”
I assume Marko won’t mind if I offer a couple of counterpoints. First, and as discussed in these pages at length last month, it’s one thing to hold summits and admit new “members” to a club, and another entirely to achieve concrete results through that club. Aside from the “BRICS bank” in Shanghai, the group counts precious few achievements. That’s certainly not to say the individual members haven’t accomplished anything. It’s just to say that as a collective, the BRICS is more concept than anything else. In the final analysis, success hinges on execution and competence, not on raw output or resources. Just ask Venezuela, which has the largest oil reserves on Earth and nothing to show for it other than hyperinflation and poverty.
Second, no force — economic or otherwise — is sufficient to overcome the sectarian divide in the Middle East. While relative peace is possible, there will always be Sunni-Shiite strife. The Middle East is never, in my judgement, going to be a dependably stable locale. Monarchs and sundry sheikhs can build all the gleaming cities they want, but at the end of the day, the Middle East is a region defined by oppression and intractable religious violence. Sure, standards of living are bound to increase in some population centers, and visitors can see plenty of Rolls Royces and Lamborghinis in the Emirates, but just as we shouldn’t lose track of the preponderance of dictators in BRICS+ (which includes Saudi Arabia and Iran), we shouldn’t harbor any delusions about the Middle East.
If you ask Kolanovic, the region’s “geopolitical leverage” should increase going forward, in part due to the concentration of fossil fuels there, but also due to solid growth prospects and its “strategic location between East and West,” which both have “interests in the region.” JPMorgan expects commodity prices to stay supported “for the foreseeable future.” (On Tuesday, Riyadh prolonged voluntary production cuts through December in a bid to bolster crude.)
Kolanovic warned that Europe is acutely exposed to geopolitical developments, which “could have a particularly negative long-term impact.” The US, he said, is “largely self-sufficient in terms of energy, food and demand for goods and services.” Not so much in Europe, though. “With the increasingly firm resolve of the European Commission to confront Russia (and perhaps even China), Europe is upping geopolitical risk factors for its economy,” he cautioned, before suggesting it’s “not inconceivable” that Europe could splinter into a collection of new states, depending on how things develop in a prospective multipolar world.
As for the US-China standoff, Marko called that “the biggest source of risk for the global economy and markets.” He fretted over Western countries’ reliance on China for revenue growth and their dependence “on supply chains and production in China.” In a nightmare scenario where the US and China end up at war, the read-through for the global economy and markets “likely would be dire,” Marko said.
He then walked through strategies that both sides might pursue going forward. Kolanovic judged that economic measures including tariffs, trade restrictions, investment restrictions, stock de-listings and supply chain decoupling are more injurious to the West than the East. “In totality, Western democracies and political order are likely more exposed to an economic downturn and asset valuations, so these measures are unlikely to be successful either,” he wrote.
Marko mentioned the energy transition, which he likewise suggested might backfire. “It increased the long run price of energy giving geopolitical leverage to Russia and other commodity rich countries, alienated traditional US allies in the Middle East and alienated energy-poor third world countries,” he said. “At the same time, these industrial initiatives boosted the economy of China, who is becoming a leading producer of EVs and solar panels, etc., given its industrial efficiencies and energy pragmatism.”
He also described US soft power as less effective due to the perception of leftward political drift. “During the fall of the Soviet Union, the US was projecting soft power and had a great influence via values that were broadly embraced by the population of the communist bloc [but] this has changed over the past decade, and current Western values are often perceived as too progressive and out of sync with the values of more conservative/religious populations of the global South/East.”
I’m compelled to offer a straightforward assessment of that: In my opinion, there’s no such thing as “progressive.” There’s just the way modern, democratic societies are trending on net. Policymakers in Western democracies (and corporations too) have a choice: Go with the (admittedly slim) majority, or try to lean against it. Recent Supreme Court rulings in the US on matters about which public opinion is clear are an example of the latter strategy. And the GOP’s underwhelming performance in the 2022 midterms speaks to the perils of such a strategy in democracies. I would argue (and I’m on solid academic footing here) that it isn’t the citizens in the global East and South who aren’t on board with current Western values. Rather, it’s their governments, which in many cases are autocracies that cynically leverage appeals to conservatism as a way to hold onto power.
Kolanovic mentioned “free speech, anti-socialism, small governments and support for religion” as the values the US projected to defeat the Soviet Union in the battle for ideological supremacy. Well, China under Xi is a communist dictatorship and a totalitarian state. So, extreme socialism, huge government and no free speech. In Saudi Arabia (and basically everywhere in the Middle East) women are property. I could go on about life in many of the BRICS+, but I think readers get the point. If the socioeconomic conditions that persist in the BRICS+ are the bar to clear for the US to project soft power in the 21st century, America can hurdle it wearing 100-pound ankle weights.
Ultimately, Kolanovic described a perilous conjuncture for the world. Global investors, he counseled, “should agnostically assess all possible outcomes, including one that we think is more likely — that things may become worse before getting better.”