Geopolitics and investment opportunity

The global markets are at an interesting juncture, where the interest rate cycle seems set to turn along with the economic cycle, the market cycle, and the currency cycle.

I will have more to write about this in coming weeks.

However, at any such major turn, it is always key for me to reflect on what I think the true force of change will be. Since I often hold contrarian views, the analysis I will now share may not match the mainstream. That is why I think about such questions.

Under the present U.S. Administration of President Joe Biden, the geopolitical focus has been on expanding wars: tariff wars; technology wars; ideological wars, and hot wars. This policy consistency does not seem to be accidental.

There are many who have gone along with the animating idea.

“In the battle between democracy and autocracy, democracies are rising to the moment, and the world is clearly choosing the side of peace and security,” he said. “This is a real test. It’s going to take time.” 

That was a rousing State of the Union speech delivered on 1-Mar-2022.

Needless to say, I abhor what Russia has done in their invasion of Ukraine.

However, I fundamentally disagree with the Biden assessment of the proximate cause.

I do not think that there is an existential struggle between democracy and autocracy.

Differing systems of government have been a feature of human civilization since the very beginning of time. There have been all kinds of government, some for long periods. Some of the most durable forms have been absolute monarchies.

Brunei Darussalam is such a place.

That does not mean I want to live in an absolute monarchy, but they exist.

The United Nations Charter does not prescribe any system of government.

If you want to be a member of the U.N. they will not force you to take a democracy exam. They will ask you to present your bona fides as a nation state.

Taiwan is not a member of the U.N. because it is not recognized as a nation state.

This is not a "China thing" but the result of a global consensus among nation states.

The reason is UN General Assembly Resolution 1668 (XVI).

As I remarked in my previous wire on the NATO 75th Birthday meeting:

According to the One China policy, maintained by the governments of both Taipei and Beijing, there is only One China, but disagreement on where the capital city is located.

The PRC maintain this is in Beijing.

The ROC maintain this is in Taipei.

There is no great imperative to bring this impasse to a conclusion.

The downside is potentially great, for both partes, so the status quo remains.

Some commentators think that the right way forward is to tear up such conventions and to court war over Taiwan in the Indo Pacific.

Typically, such people do not live in Taiwan.

The status quo ante serves Taiwan well because it governs its own affairs.

It is up to Taiwan to decide how far they push that de facto independence.

The assertion that China fully intends to invade Taiwan seems foolish to me. 

Certainly, they could, and they will remind everyone that they might. However, they also remind nations of the understanding embodied in the U.N. Resolution of 1971.

These remarks are not intended to spark a debate over Taiwan.

I just want to state that the United Nations exists for a simple reason.

Power, coercion, and force, are no way to resolve international disputes.

However, as we can observe with the Russian invasion of Ukraine, the Israeli action in Gaza, the Chinese stand-off with the Philippines, and the unilateral U.S. sanctions on the Chinese chip industry, force, or coercive threats, are becoming the norm.

In some quarters, this is celebrated as a spur to collective action in the West

I think that is a retrograde step for one very simple reason.

The non-West is uniting.

The rise and rise of the Global South

The Relentless Rise of The Rest is the great investment theme of our time. 

This has been mischaracterized as an attempt by non-G7 nations to usurp the rightful place of The West as a hegemonic bloc. Supposedly, the world is in cahoots against us.

In all honesty, I do not believe that the 85% of global population, that live outside of Western nations, are intent on economic development to harm our interest.

The Global South is growing because it is natural to pursue development. It is human to want to get ahead.

This has benefits for nations like Australia through export trade and cheaper imports.

The toxic geopolitics of today is a counter-reaction in the West to the abject failure of our political system to prioritize the necessary areas for our own development.

1. Skills development and education to fill our chronic shortages
2. Reinvestment in Research & Development capacity to innovate in manufacturing
3. Reorientation from financial levers of economic management to fiscal levers

To a certain extent, the Biden Inflation Reduction Act (IRA) has begun the process of turning the tide for U.S. manufacturing competitiveness. However, rather than invite technology transfer from Chinese manufacturing powerhouses, it roundly rejects this.

The U.S. policies in the semiconductor industry, to block Chinese development, and the refusal to countenance appropriately structured Chinese-American joint ventures have likely cemented the long-term advantage in favour of China.

In my view, these policies will backfire in multiple ways.

The present persistence of U.S. services sector inflation is likely just the first sign of what I think will be a deepening economic malaise of non-competitiveness.

This is because negative measures of tariffs, sanctions, blockades and divestment orders will not, of themselves, improve competitiveness. They simply erect walls to protect weaker firms.

The oddity of the present situation is that there are very few institutional funds managers who are prepared to say this publicly.

I am an avowed contrarian, so I will take this opportunity to swim against that tide.

I speak now, ahead of the tide, just as I did with the ESG Blowback in Dec-2022, or my China A-Share call in Dec-2023, or my warning about Groupthink in rare earths policy.

Contrarian investors aim for the correct call ahead of time.

Last year I called out Western Propaganda as my favourite source of alpha.

I am of the West. I do not hate the West. It is actually my home.

However, I do call out foolish Western Elites whenever they impersonate lemmings.

When you all think the same way, and your premise is faulty, failure is a certainty.

Earlier I wrote in this place: Why worry about that Back-to-The-70s Show?

I outlined my view that Australia was headed to become an "Inflation Nation."

This is due to a host of unsound policies, overreliance on housing as a store of wealth, and an inability to pursue our comparative advantage to grow our economy.

These are own goals due to poor political leadership.

Notice that I am bipartisan in this sledge.

Australia has only itself to blame for the policy predicaments we find ourselves in.

(De)Constructing the global thematic

As I wrote earlier...

You could ask why any government would choose self-defeating policy.

I often do but am left with this simple answer.

National complacency leads to the glib acceptance of self-destructive policies.

Th best way to get bad times, is to start with good times, and then do what is popular.

Money printing is very popular.
Grants and subsidies are very popular.
Tax cuts and handouts are very popular.
Jingoism and blaming others for your troubles is extremely popular.

There are few policies that are popular that involve short-term pain for future gain.

The Western jingoism that now animates our (bad) decisions has a name.

Western hegemony.

We need to properly understand these ideas and where they come from.

Hegemony... and then bust

To remain as neutral as possible, let me defer to Generative AI for a definition:

You will note that our captive intelligence has learned the rules of survival under the system of Western Hegemony. 

It is fine to characterize the beast, but not to foretell its demise.

Let us revert to this contrarian for a considered simian opinion.

Bollocks! Western Hegemony is already dead. It just isn't buried yet.

That is my opinion. It need not be yours, but it informs my investment decisions.

The battle of liberal ideas

It is often stated that the noble purpose of pursuing Western Hegemony is the spread of liberal ideas to social organization, economic management, and governance.

Objectively, the West is rich, and it is held that this must be due to a superior system.

I am a rational animal who has travelled widely in developing parts of this World. I formed the impression that different parts of this World are different in different ways. I have not formed the view that any one part of this World is superior in every way.

In many ways, this liberal turn of mind would cast me as a liberal.

However, I increasingly find myself in violent disagreement with many Western liberals.

They proselytize Western views of what it means to be liberal, as the natural end-state of the human race, which must be enforced at all costs, even by waging war.

Personally, I view this as a civilizational dead end.

People who espouse such views are soon talking of adversaries, next enemies, and then the need to label every man, woman, child, dog and chicken as "good" or "evil".

After that they go to war. Die, you evil chickens!

U.S. Hegemony, and the unipolar moment have spawned much pointless war.

Through a series of conceptual metamorphoses, the Western Mind has embraced the idea that only it knows how to innovate, only it knows how to govern. 

The West simply knows best.

This is a ridiculous world view.

The fact that many espouse it, and call themselves "liberal", is ironic black comedy.

At worst, it signals a descent into the collective maelstrom of World War III.

Needless to say, I oppose this madness.

It is as foolish as it is dangerous.

Where will the battle royale of ideas take place?

In deference to my Western nature, I think it will happen in the U.S. of A.

Those who are reading this in the non-West may titter now :-)

In order to comprehend how a nation as great as the United States of America could go so totally off the rails into a wilderness of discontent, with unrestrained violence to its own founding principles, we have only to look at the end of Cold War One.

Two leaders, one American, one Russian, found common cause to deescalate.

What followed was a (relatively) peaceful collapse of the former Soviet Union.

This was met in the USA by the "end of history" and the birth of U.S. Hegemony.

I cannot consult a Chinese AI, but I can seek the opinion of a US one.

Origins of U.S. Hegemony:

World War II Context: The seeds of U.S. hegemony were sown during and after World War II. By the war’s end, the United States emerged as a major global power, alongside the Soviet Union.

Economic Strength: The U.S. economy had expanded significantly during the war due to wartime production and industrialization. The U.S. became the world’s largest creditor nation.

Military Power: The U.S. possessed formidable military capabilities, including nuclear weapons.

Institutional Leadership: The establishment of international institutions like the United Nations (UN), the International Monetary Fund (IMF), and the World Bank allowed the U.S. to shape the postwar order.

Post-Cold War Period:

End of the Cold War: With the collapse of the Soviet Union in the late 1980s and early 1990s, the bipolar world order shifted dramatically. The U.S. emerged as the sole superpower.

Foreign Policy Goals:

Promotion of Liberal Order: U.S. policymakers sought to promote liberal democratic values, free markets, and open trade. They believed that these principles would lead to global stability and prosperity.

Expansion of NATO: The U.S. played a key role in expanding NATO (North Atlantic Treaty Organization) to include former Eastern Bloc countries. This move aimed to prevent Russian resurgence and promote stability in Europe.

Democratization and Market Reforms: The U.S. supported democratization efforts in Eastern Europe and encouraged market-oriented economic reforms.

Humanitarian Interventions: The U.S. engaged in humanitarian interventions (e.g., in the Balkans) to prevent ethnic conflicts and promote stability.

Challenges and Critiques:

Unipolarity Concerns: Some scholars and policymakers worried about the dangers of unipolarity—the lack of a counterbalancing power. They feared that unchecked U.S. dominance could lead to hubris and overreach.

Critiques of Interventionism: Critics argued that U.S. interventions (e.g., in Iraq) were driven by self-interest rather than genuine concern for global stability.

Rise of Other Powers: China’s economic growth and Russia’s resurgence challenged U.S. hegemony.

Legacy and Ongoing Debate:

U.S. hegemony has shaped the post-Cold War world order, but its sustainability remains a subject of debate. Some view it as essential for maintaining global stability, while others argue for a more multipolar system.

In summary, U.S. hegemony emerged from the ashes of World War II, solidified during the Cold War, and faced new challenges and opportunities in the post-Cold War era. Its legacy continues to shape international relations today.

There you go. So simple. So easy.

If only one power had all the power and told us all what to do.

That is hegemony in a nutshell.

You can appreciate why this is so important to stop the march of autocracy.

The current consensus of the Western Power Elite is simple:

We must ensure that the right people are running this world.

This can be determined through the magic of the U.S. Electoral Process.

What could possibly go wrong?

In the present world, of Western Hegemony, as explained by U.S. President Joe Biden, it is essential to have the right folks running this world, who are democrats.

The autocrats are those who disagree with how the world is being run.

This is a pretty simple world view.

It could suit a leader who craves a simpler life with fewer doors and stairs in the way.

However, the doors and stairs of international debate are what make us civilized.

This is why Australians, like H.V. "Doc" Evatt, were so keen to build the United Nations.

Through the efforts of many, the world gained an inherently multipolar forum to settle the differences between nations, ideally without resort to military conflict.

Now that forum is widely disparaged.

A wag might remark that it should be:

The United Nations just gets in the way of those "Running the World".

This is not how things should be, and not what unipolarity is all about.

I do not know where this sorry story ends, but I can call the debate for what it is.

Essentially, we have two distinct forms of Western liberalism in the wild.

There is the liberal interventionism of Robert Kagan and his acolytes.

This holds that is appropriate for Western powers to intervene in the affairs of foreign nation states, through war, sanctions, or other means to correct their errors and spread democracy.

This has been as popular among Western elites as it has been unsuccessful.

Opposed to this trend is the liberal realism of John Mearsheimer and his acolytes.

This holds that nation states operate according to their own interests within their defensible sphere of influence. This is largely rational but may be duplicitous and untruthful.

It is a deliberate oversimplification of mine to cite only two proponents, and to reduce to only the bare essentials two viewpoints that are not always in opposition.

However, you may gather that I belong to the liberal realism camp.

When I review history, the formation of the failed League of Nations, post WWI, and the subsequent United Nations, post WWII, I see a current that favours realism.

Not every human being will agree on every question.

This has a natural corollary.

Not every nation can agree on every geopolitical conundrum.

However, the nation state is the basic construct of international law, because we do not have a universal system of law. 

Present U.S. extraterritorial application of their own laws presumes this condition to be a failure of the World. I beg to differ. It is a failure of the U.S.A.

The division of this world into the "good" people versus the "evil" people suits Marvel.

However, even in the Marvel Cinematic Universe the superheroes do not agree.

Predictably, as an American cultural product, the solution is to fight each other.

All indications are that the MCU is losing popular appeal among moviegoers.

I wonder why?

Endless conflict and war are not a good way to secure prosperity.

The MCU has proven to be a cinematic dead end.

Liberal interventionism is a civilizational dead end.

That is a thematic with huge investment implications.

Framing the investment thematic

Here is how I see the contest playing out between liberal interventionism and liberal realism. This is simply two books, whose words define the software of power.

You can read both books, and I suggest you do.

From my framing, you can tell which set of ideas I think will prevail.

In between, there may be a war, possibly a very big one.

However, I am bullish on the economic progress of the Global South.

In my view, the non-West has already decided the outcome.

The global population is 15% West and 85% non-West.

I think the vast majority of people on Earth will choose the Mearsheimer version of what it means to be liberal. If I might trivialize the idea, it works like this.

You do what you think is right in your house and I will respect what you do in your house, but don' t come and invade my house, or burn it down, simply because my house is not ordered like your house.

One can nitpick over this and assert the rule of law.

Sure. That is fine. 

However, in a civilized world, we make and remake our laws all the time.

When you "make the rules" in the international sphere, be inclusive on who gets to frame the relevant law, to whom it applies, how consistently, and to what purpose.

I am betting on the continued rise of the Global South.
I am NOT betting on the fall of the West.

As you can see, the Western notion of liberalism is NOT universal.

Even within the West, folks disagree about what it means to be liberal.

There goes my effort to define the new investment thematic in geopolitics.

There will be stock picks to follow elsewhere.

Picture credit: Wikimedia Norwegian Lemming.