Last week: Zoltan Pozsar, December 27: "War and Commodity Encumbrance"
From Credit Suisse, December 29 (many hyperlinks and emphasis omitted but available at original):
War cuts new financial channels.
What are G7 policymakers, rates traders, and strategists to do when threats to the unipolar world order are coming from every angle. They should definitely not ignore the threats, but they still do. How could they not? For two generations, we did not have to discount geopolitical risks. Since the end of WWII, the only Great Power conflict investors really had to deal with was the Cold War, and since the conclusion of the Cold War, the world enjoyed a unipolar “moment” – the U.S. was the undisputed hegemon, globalization was the economic order, and the U.S. dollar was the currency of choice. But today, geopolitics has reared its ugly head again: for the first time since WWII, there is a formidable challenger to the existing world order, and for the first time in its young history, the U.S. is facing off against an economically equal or, by some measures, superior adversary.
China is proactively writing a new set of rules as it replays the “Great Game” (see here), creating a new type of globalization with new institutions like the Belt and Road Initiative, BRICS+, and the SCO. Global warming is helping Russia add an “artic suspender” (see here) to China’s Belt and Road vision, and China, while under lockdown, forged a special relationship not just with Russia but all of OPEC+ (see here). And as Pippa Malmgren recently noted, commodity-rich Africa is now also a frontier in what I called the quest for “commodity encumbrance”.
One Belt, One Road (and an Artic[sic] Suspender) means...
...One World, Two Systems. Maybe not in these words, but I am sure you have heard these themes before and that you are aware of them. And if you are...
...you should stop pretending that this means nothing for the U.S. dollar or demand for Treasury securities. If the world is going from unipolar to multipolar; if the world is gradually drifting from “one world, one system” (globalization) to “one world, two systems” (friendshoring and Belt and Road); and if the G20 is seemingly splitting into the “G7 + Australia”, “BRICS+”, and “the non-aligned”, it’s impossible that this split won’t affect the international monetary system...
Indeed, “G7 + Australia” is being challenged by the “original” BRICS plus the “+” – Turkey, Saudi Arabia, and Argentina. Recently, the first two of these countries started to apply to become members of BRICS, and the “non-aligned countries” of Indonesia, Mexico, and South Korea matter for different reasons: first, Indonesia wants a “lithium OPEC”, Mexico nationalized lithium mining, and South Korea – snubbed by AUKUS – was “told” to uphold the “Three Nos” policy.
The G20 is becoming the “G7 + Australia” = 8 countries on one side, and “BRICS + new applicants + the thematically aligned” = 11 countries on the other. 8 + 11 = 19. The remaining member, the European Union (EU), is perhaps the most directly affected by this global “split”. Indeed, we’ve come quite a long way from the family photo of the 2017 G20 Summit (see here): Chancellor Merkel, dressed in red and grey, is flanked by BRICS heads of state on both sides – President Jacob Zuma and President Jair Bolsonaro on her right and President Xi Jinping and President Vladimir Putin on her left – strikingly, President Trump and President Macron on the outer edge of the family picture.
Back then, the big deal about the G20 Summit was President Trump’s one hour, off-the-record conversation with President Putin and the seating arrangement at the dinner table (see here), but in retrospect, and in light of this year’s events, the significance of that G20 family photo was those surrounding the chancellor.
Since then, the EU crashed out of Russia’s “gas orbit” but remains in China’s economic orbit, and the BRICS embarked on “BRICSpansion” in other directions:
Argentina and Iran applied already, as did Algeria (see here, here, and here), and as noted above, Saudi Arabia and Turkey are planning to apply, while Egypt – a neighbor of Saudi Arabia across the Gulf of Aqaba and neighbor of MBS’s signature city of NEOM project – is also planning to apply next year (see here).
Based on this list of attendees from the Ministry of Foreign Affairs of the PRC, many attendees of this year’s dialogue of foreign ministers between BRICS and emerging markets and developing countries have either formally applied or are in the process of applying to BRICS+. We have yet to hear from Indonesia, Thailand, Kazakhstan, the UAE, Nigeria, or Senegal (all attendees), but as I noted here, 2023 will be pivotal for BRICS: after a Covid-induced hiatus, China plans to host the third Belt and Road Forum (the “WEF” of the East) in March or April 2023 (see here). I expect formal applications to come in by then.
The map in this article is quite important to “internalize” because it is a map that Zbigniew Brzezinski specifically warned against in his classic foreign policy booklet, The Grand Chessboard. Therein, on page 32 of the first edition, Brzezinski shows a map that shows the world upside down (the Southern Hemisphere atop and the Northern Hemisphere at the bottom), and Brzezinski notes the following:
“how the U.S. manages Eurasia is critical. Eurasia is the globe’s largest continent and is geopolitically axial. A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions. A mere glance at the map also suggests that control over Eurasia would almost automatically entail Africa’s subordination, rendering the Western Hemisphere and Oceania geopolitically peripheral [to Eurasia]. [...] Eurasia is thus the chessboard on which the struggle for global primacy continues to be played...”
So that’s that: when “BRICSpansion” is understood from the perspective of Brzezinski’s framework, you’ll then have a good idea as to why Great Power conflict matters for your portfolio. Because paraphrasing Sir Halford Mackinder:
“whoever encumbers commodities and controls the factories rules inflation, whoever rules inflation controls interest rates, and whoever controls interest rates controls the level of the stock market and financial wealth more generally”...
....MUCH MORE (7 page PDF)
HT: Izabella Kaminska at The Blind Spot, who has been known to drop a Brzezinski or two into casual geopolitical conversation.
Whereas I just visited Mackinder a few weeks ago.
