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
Out of time, off for a swim and back to the day job…
Strategist – Shard Capital