Blain’s Morning Porridge Aug 23 2023: The Big Geopolitical inflexion Point is Coming
“You load 16 tons and what do you get, another day older and deeper in debt”
Jackson Hole, BRICS, Inflation, Bond Yields, the Dollar, AI and so many more things to worry about – but what does it really boil down to? Who will be trading with who, and what will be driving growth?
And… that was my holiday for 2023. Unlike Brave Odysseus who wandered the balmy Med for 10 years, She-Who-Is-Mrs-Blain and I managed a soggy two-week sailing trip, hunkered down between storms along the South-West Coast of England. We saw the sun a couple of times – it was mostly hidden behind leaden grey skies. This morning the Gods are laughing at us as the sky has turned an unfamiliar cerulean blue. Sitting out the weather gave me time to think about markets and events….
Ah… markets, how I have missed them…
This week the strategists are is focused on the Fed’s Jackson Hole gather (Jerome Powell outlining to the West what’s occurring) and South Africa, where Emperor Xi is trying to align the Global South into a grand anti-western grand alliance under the BRICS banner. Economists are trying to figure out what’s really up in China – noting the increasing paucity of real information on the state of the economy. Meanwhile, the market tacticians are watching Nvidia’s numbers later today for confirmation of the AI everything rally. They are all connected.
I am watching US politics with an accute sense of unease…
A couple of weeks ago I wrote a correction was coming as sentiment was running well ahead of reality. And so it kind of happened as an intra-month move – August is shaping up to be worst month in years for bonds and stocks. The debate about soft-landing and persistent inflation continues. Bond yields have got everyone antsy. In terms of the big picture there is plenty more uncertainty in terms of threats and opportunities – especially in Geopolitics where a number of strands are coming together towards what could become a moment of great import next year.
Let’s start with BRICS Gabfest in South Africa. Russia is irrelevant. It’s all about China trying to formalise/crown itself as the next global power. They have limited time to do so.
The consensus on the news channels is how the rise of the BRICS/Global South will boost China’s economic position and credibility as the coming economic hegemon. China has shown it isn’t afraid to pay up – though potentially coercive debt diplomacy (Belt and Road) – to buy friends. On the other hand, the developing economic crises in China: 1) the economic consequences of decades of squandered growth spending and the start realities of the corruption and waste that attends state planned economies, and 2) the demographics of a nation that got old before it got rich – is becoming increasingly apparent in the growing internal credit crisis (not just Property, but EVs and other production as well).
Perhaps the biggest issue for China is its 20% youth unemployment. There are two ways to maintain the Iron Rice bowl compact (that the state provides economic prosperity in return for unquestioned power): it can generate jobs by keeping the economy open and competitive, or it can nip dissent early through the increasingly expensive surveillance state and police who have toughly practiced “crowd control” on the Uighurs and in Hong Kong.
The fact is we simply don’t know what the real situation in China is – this morning the FT reports US tells China to be more transparent with economic data amid slowdown. (It begs the question: how can you invest in a country where economic data is hidden, and due diligence is considered economic espionage?)
The challenge for Xi is simple. It’s about timing. Can he keep China stable while building the BRICS/Global South Alliance around China? Big risk – the global south may resent being pegged to the might dollar, but would equally resent being economic outposts of China. Xi’s hope is therefore for something external to cause the South to choose to align with him…
At this point, let’s switch to Washington DC.
The man to watch in the USA is self-made billionaire Vivek Ramaswamy – GOP candidate with zero political experience who has clearly stated he has no interest, absolutely no interest, in becoming Trump’s running mate as VP in the 2024 election. At the moment the Polls are pretty close in a Biden vs Trump race. Ramaswamy will appeal most to existing Trump supporters, but his presence on the Republican slate may just be enough to overtake the lacklustre Biden/Harris ticket.
While Trump has become an isolationist because of perceived slights from Europe, Ramaswamy is a true believer! He stands for libertarian small government (sack 75% of Federal employees), climate change denier, anti-woke, and views Ukraine as a card to trade with Putin in return for Russia distancing itself from China. Putin would get the Donbas in return.
Where would Trump v2.2 leave Europe? More than one commentator has suggested the breakup of NATO would become inevitable. The miserable economic outlook, and the crisis of illegal immigration, could potentially break Europe into a Rich North and Poor South – forcing some into alignment with China. The UK would be left with little except to hope Trump/Ramaswamy may have some interest in maintaining this island as Airstrip 1 from 1984. The only alternative would be the humiliation of a reproachment with Europe.
Of course, it doesn’t have to be that bleak or destructive. Perhaps sanity will prevail – but really.. who would expect that today in US politics.
Yet, it would make economic sense to keep the US/Europe link. The US economy is proving resilient. It has the potential to lift all-boats. It remains a triumph of free enterprise and capitalism. Nvidia’s numbers later today will likely further fuel the belief in the AI everything rally – how AI applications across every aspect of modern commerce will drive productivity and profits in the West.
And here’s the thing. While we have lost faith in US politics, you can believe in the US economy. It’s transparent, its market based and although it can be deeply unequal and unjust – it works. Can we really same the same thing about China?
Here in the West we are coming to understand it’s bureaucracy in terms of planning, resource allocation and procurement that are the main drags on economic performance – they slow the economy while doing little to enhance growth. Solve these, and the Western Economic System and Democracy will look at lot more attractive to the Global South.
Full Porridge service resumes tomorrow after I clear my backlog!
Five Things To Read This Morning
Project Syndicate The Debt Supercycle Comes to China
WSJ The Electric-Vehicle Bubble Starts to Deflate
WSJ Wall Street’s China Dreams Slip Away
BBerg UK SMEs see sales sink by 20%, Data Shows
Out of time, off for a swim and back to the day job…
Bill Blain
Strategist – Shard Capital
Excellent summary of today’s status. As an American reader , your view of Vivek 2024 may be a little out on a limb. He brings a fresh voice to the arena. I still have faith ( though it is faltering) that the voters will not give us a BIDEN/TRUMP choice but better choice in both parties will emerge.
The Russia / Ukraine quagmire seems to be future view of modern warfare with both sides armed with enough technology to create a ” draw” until one player stands up throws the chess board and pieces across the room and declares we are playing a new game. Air power, strategic bombing 💣, port closures, etc
I wouldn’t worry too much about Vivek in particular, we’re in the part of the election cycle where a bunch of different candidates in the primary get their moment in the sun. In the 2020 primary, we had Mayor Pete, the Klobucharge, Warren?? and most credibly Sanders in a similar spot.
I think we’re in for Biden/Trump again, and Trump’s various trials are going to become a bigger and bigger problem for him and the Republican party in 24.
So it’s probably Biden in 24.
BRICS is a JOKE
Brazil now has a socialist president who will surely bankrupt it as all socialists do.
Russia is a terrorist mafia state who is declining rapidly
India is OK
China lies about everything and may have insurmountable debt
and the great South Africa can barely keep the lights on
I wonder who the ivory tower idiot is who coined the term.
Even the Chap who coined the Brics moniker said South Africa didn’t really qualify… Lord Jim O’Neil
Bill,
Welcome back, you were sorely missed as was the Morning Porridge.
In the good old USAofA the mood is an admixture of angst and ennui. While most eyes are on Jackson Hole many are on the upcoming appearance of the Black Hole that is Trump who will be arraigned, yet again in Atlanta on Thursday.
At this juncture paraphrasing Henry II seems appropriate:
“Will no one rid me of this turbulent beast?”
Indeed a Death in the Cathedral may be appropriate… but the real issue is how come the USA faces such a dismal choice?
Bill,
The mood of angst and ennui, is Trump the cause or the result?
The current “choices” bring to mind the following two quotes from H. L. Mencken, an American journalist, essayist, satirist, cultural critic, and scholar of politics who lived exactly one century ago. How little things change…
“Nobody ever went broke underestimating the intelligence of the American public.”
“The larger the mob, the harder the test. In small areas, before small electorates, a first-rate man occasionally fights his way through, carrying even the mob with him by the force of his personality.
But when the field is nationwide, and the fight must be waged chiefly at second and third hand, and the force of personality cannot so readily make itself felt, then all the odds are on the man who is, intrinsically, the most devious and mediocre—the man who can most adeptly disperse the notion that his mind is a virtual vacuum.
The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal.
On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron.”
Bill,
I think you way underestimate Americans attachment to Europe. UK, France, Spain, Italy, Netherlands are all places Americans know and have feelings for. NATO may disappear ( a huge mistake ), but the attachment will endure.
The remark about maintaining the Island as an airstrip might “over the top” as we say here.