Hyperlinks and emphasis omitted, available at original.
From Credit Suisse, Jan. 6:
In 2019, James Sweeney, then chief economist at Credit Suisse, popped into my office and said “you know this pandemic and lockdowns... this is where your world [funding] and my world [global industrial production] intersect, because supply chains are payment chains in reverse”. I thrive on memes, and after James’ blitz visit, we quickly wrote Covid-19 and Global Dollar Funding, a piece that explained why the pandemic would lead to a major funding crisis...
In 2022, Pippa Malmgren became my source of macro stimulus. Her meme that “World War III has already started, but it’s different from “traditional” world wars: it is a hot war in cold places [like Svalbard, underwater, cyberspace, and space], and a cold war in hot places [like islands in the Pacific, the DRC, and the Sahel]” inspired me to write four “war” dispatches last year: War and Interest Rates, War and Industrial Policy, War and Commodity Encumbrance, and finally, War and Currency Statecraft. In these, I identified six fronts (meaning “hot wars”) in “macro-land” (a “cold place”) where Great Powers were going “at it” in 2022:
the G7’s financial blockade of Russia, Russia’s energy blockade of the EU, the U.S.’s technology blockade of China, China’s naval blockade of Taiwan, the U.S.’s “blockade” of the EU’s EV sector with the Inflation Reduction Act, and China’s “pincer movement” around all of OPEC+ with the growing trend of invoicing oil and gas sales in renminbi. Those were six geopolitical events in one single year, that is, a geopolitical curveball to deal with every two months.
I don’t think 2023 will be different: in a number of regions in Europe and Asia, the threat of a hot war is real; the BRICS are set to expand with new members (“BRICSpansion”), which means more de-dollarization of EM trade flows; CBDCs are spreading like kudzu, with Türkiye the latest country to launch one; and with the launch of every new CBDC, the potential of Project mBridge to diminish the role of the dollar in FX transactions and trade invoicing will rise as it interweaves BRICS (and soon BRICS+) central banks into a global network to rival the global network of correspondent banks on which the dollar system runs.
War – in one form or another – was a theme that defined macro not only last year, but basically every year since 2019: trade war with China; the war on Covid-19; war finance to deal with lockdowns; war on inflation, as we overdid war finance; and war then spread to engulf Ukraine, finance, commodities, chips, and straits as discussed above. Monetary and fiscal responses were just that – responses to mother nature and geopolitics – and with geopolitics getting more complicated, not less, investors should remain mindful of the threat of non-linear risks in 2023.
In my previous dispatch, I noted that investors are not particularly well trained to deal with geopolitical risk, because for generations geopolitics didn’t matter – anyone who traded securities or ran a portfolio since the end of World War II, did so in the cocoon of a unipolar world order, under the cover of Pax Americana.
But as I argued here, the unipolar world order is being challenged, and as I argue on the front page of today’s dispatch, war has been and will likely remain a theme until the quest for world order (that is, “control”) is settled. When Henry Kissinger writes about how to avoid another world war (see here), and Niall Ferguson writes about the risk of Cold War II spilling into World War III in an op-ed on Bloomberg (see here), you know that something is definitely up...
Henry Kissinger’s year-end essay and Niall Ferguson’s new year essay are not the types of essays that you normally read alongside sell-side outlook pieces, which suggests that this ain’t your parents’ “global macro environment”, and it ain’t your grandparents’ either. We have to go way back in history for direction...
....MUCH MORE
