By Christian Takushi, Macro Economist & Geopolitical Strategist, 24 March 2017, Switzerland (released to the public on 22 April 2017 adapted)
Humiliated by 2016 failures, Consensus is overemphasizing US-EU political risks. It understates geopolitical War Risk building up and the impact of Deregulation. Ironically, the EU risks shifting further left, not right.
We are closely monitoring three factors currently misjudged by Consensus that could potentially affect the economy and financial markets. The EU is most vulnerable to them.
After the humiliation of having missed the BREXIT and US elections outcome last year, Consensus is overstating geopolitical risks emanating from the USA and Europe, but underestimating the aftermath of the US-Iran Deal and structural shifts at the macroeconomic front. The impact of Deregulation and Tax Cuts on the US and UK economies are being underestimated. They could lay bare EU vulnerabilities.
Many analysts assume the Trump administration will lead the world into isolation, protectionism, trade wars and that both the DNC & GOP oppositions will block most Trump policies in Congress. Analysts have also been warning since last July of the potential shift of the EU to the Far Right. Although plausible, these fears are overdone.
Americans & Europeans don’t really share same values
Much of today’s wrong analysis is based on stereotypes and ‘political correctness’. Few dare to analyze the diverging values between Americans and Continental Europeans. Additionally, compared to U.S. and British voters, European voters are considerably more risk averse. Allow me to state it this way: If the EU and USA had decided in 1961 to send a man on to the moon, the EU might still be working to mitigate the myriad of risks. The USA landed Apollo XI there in 1969.
We’d need a dramatic event to force EU voters to choose drastic action. That hasn’t happened yet. I expect them to vote for the status quo or gradual change. Only in Italy there is a chance for the Voter Revolt, but Rome has shifted elections into 2018 to make a revolt as futile as possible. Held before German elections in 2017, Italian elections could destabilize the EU. In the Political Process timing is everything.
An array of secondary scenarios could be upgraded
Since January 2016 we are preparing scenarios for BREXIT and TRUMP Shock aftermaths. These scenarios are flowing into this 1st Outlook post Trump inauguration: While the BREXIT and TRUMP Shocks have reduced the risk of a war between NATO and Russia – including a direct nuclear exchange, other war risks are still building up. A large number of moderate-likelihood risks could still shape the Outlook for 2017 and the next decade.
I. Risks emanating from Trump Administration are being overstated
The Trump Team is betting on ”Deregulation and Tax Cuts” to spur the economy, while the EU may try to continue betting on “Mass Immigration and Free Trade”
Despite the tremendous forces opposing Trump and his movement, I am expecting a sufficient number of the Trump Team policies to be implemented and to revitalize the economy.
Consensus is highly critical of the Trump Team’s ability to push through Congress its ambitious agenda. And they are not without logic, since ‘Never-Trumpers’ like McCain and Graham in the US Senate and far right GOP caucuses in the House can block any bill. Thus, political analysts believe little will be passed in Congress this year. I disagree, McCain’s own “state in the state” is not without pushbacks and Americans are tired of politics as usual in D.C. Our analysis leads us to expect that at least half of the plans scheduled for this year will pass Congress or be enacted one way or the other. It may not seem like much, but it is an improvement from the total gridlock of the past. Contentious Health Care reform may have to be delayed to deal with the economy.
The combination of deregulation, Tax Cuts, shrinking of federal agencies, rebuilding of the Military & infrastructure represent a New Policy Mix. A paradigm shift few economists are willing to embrace yet. The new Policy Mix could work, but it is in such stark contrast to the economic model most Western nations have been pursuing, that this new US Administration is understandably being seen as a threat to the Status Quo. There is of course the possibility that the Trump Administration will indeed thrust the world into disastrous trade wars, stark isolation and a major global economic contraction. But we currently deem this outcome unlikely.
For four decades Western leaders pursued the opposite: bigger government, more taxes and military dismantling. They told voters that the only sensible way for ageing economies to continue growing GDP & prosperity was to accept Mass Immigration – and their Policy Mix was indeed built around the annual inflow of millions of migrants. Western leaders have therefore long argued with GDP statistics, but those GDP figures – while relevant for businesses – have proven terribly disconnected from the reality of average citizens since the 1980’s. While GDP, trade volumes and profits skyrocketed, salaries stagnated or even contracted for most in the working and middle classes. This has sparked political instability in all affected economies.
I wrote in the past about the West’s Liberal Policy Mix in place since the 1970’s. It is important to summarize it in a few bullet points (They explain why so much of the West, China, academia and media perceive the new US Administration as a great threat – it is thus to a large extent a conflict of interests and an ideological conflict):
- Mass Immigration, it has been changing the face & structure of Western societies ever faster. It puts downward pressure on domestic wages. Western leaders have increasingly resorted to illegal immigration in order to accelerate the influx.
- Free Trade, which saw explosive growth from 1985 to 2015. But it not as free as the term suggests, it is de facto ‘Managed Trade’ flanked by many protectionist measures and subsidies. More importantly part of this explosive growth came at the expense of competition, the foundation of capitalism.
- Monetary Stimulus – printing & debasing of paper money started in the mid 1970’s, which helped drive down interest rates ever lower. A key element that allowed big firms to take over competitors faster
- Bigger federal government or regulatory buildup, benefitting big firms at expense of smaller competitors, ushering rise of gigantic multinationals (oligopolies)
Together they lowered the cost of labor and allowed big firms to become giant oligopolies. They benefitted established political parties: the center-left parties with a growing voting constituency, while the big companies financed the conservative parties into agreement. It was a perfect deal that worked well at the beginning, but increasingly at the expense of competition, the middle class, small & mid sized enterprises and Political Stability.
Why Risks emanating from new US Administration are overstated
The ideological contrast between the New Policy Mix and the Old Policy Mix (one still strongly embraced by Europe, and the EU in particular) explains why so many experts are inclined to overstate the risks emanating from a Trump Administration. There is the fair risk of Trump “blowing our world up” and the risk that “Trump policies might actually work”. Both are a threat to all those that have benefitted so well from the Old Policy Mix.
Another reason is the excessive personification of a movement by the media. What would surprise many political analysts: Our analysis shows that 9 of the Trump cabinet members along with the Vice President are committed Christians. Thus, should President Trump not be able to finish his formal term, Vice President Pence would assume the presidency and continue to implement the policy platform that the Trump Team was elected on by the American people. Although the form would change, the substance would remain. There is thus more political breadth than widely assumed. Sure, in Washington D.C. and most established U.S. centers or power – with the exception of the U.S. Armed Forces – this conservative movement is derided. Nevertheless, members of Congress know that America has reached a tipping point: heartland and suburbs are unwilling to accept politics as usual, nor big city values. We are not dealing with one man, but a national movement that has attracted a large number of leaders. New as it is, it needs to learn and consolidate, though.
We see most likely a Course Correction rather than a U-Turn in USA and UK
Most political and economic analysts continue to be gripped by fear as they see the Trump Administration leading the world into isolationism and protectionism, as well as threatening Global Trade and the Global Economy. I disagree with this extreme assessment. I see the BREXIT and TRUMP shocks rather as ‘agents’ of a Course Correction. They are part of a return to the ‘historical mean’ rather than a step into the unknown. Many analysts and journalists can barely be expected to be neutral in analyzing the potential reversal of the policies that helped them thrive and rise.
Losers & winners: The risk to many decision makers is that the Trump Administration will not implode and that deregulation, tax cuts and smaller government will be ushered in. The biggest potential beneficiaries would be: small & mid sized firms, domestic companies, firms related to the rebuilding of the local and regional supply chains, infrastructure and defense contractors. Although some big Tech, Retailer and Pharmaceutical names may suffer, whole equity market sectors could sustain a powerful rally that would be subsequently explained as a Re-rating, expansion of multiples and risk premium shift.
Health Care reform has also been blown out of proportion: sure it is important, but not as important as political ideologists on both sides of the aisle and the Trump campaign in 2016 have made it. We expect that if no reform is possible due to divisions in the GOP Party, the White House will push for drastic price cuts in the Health Care realm. The USA is the most profitable pharmaceutical market in the world. ‘Obamacare’ was packaged in a highly complex tax reform in order to make its unwinding very difficult. Ideological conservatives have always erred when saying that Obama was highly incompetent. They underestimated him all the way. They also refuse to see the many positive elements Obama’s ACA has brought.
The US Military is preparing for a more dangerous World. Our analysis confirms the assessment of the Pentagon. Only the US-UK Alliance though can guarantee the military security of crucial Sea Routes on which global trade depends – Together the USA and UK have the most formidable network of strategic military bases and the Aircraft Carrier Strike Groups to project power (soon 13 combined). Neither the EU nor China can protect the Sea Routes on which their massive trade volumes depend. Europe and China are thus geopolitically most dependent on Peace, Trade and therefore the Security of Sea Lanes. The EU and China are the most vulnerable key economies. In this century, trade will be increasingly vulnerable. The EU and China will have to dramatically increase their military spending and partially abandon the Old Policy Mix. This will come too late though.
II. Analysts overstate likelihood of a shift to the ‘far right’ in the EU – the opposite is overlooked; EU could shift to the ‘left’ in 2017
Consensus has been highly nervous about the elections across Europe this year. Something we never shared nor agreed about. Because of a flawed assessment of security in the EU, too much energy has been spent on the elections in Austria and the Netherlands, while actually what really matters strategically are the ones in France and Germany.
I expect the right wing parties to achieve key victories (in parliament seats), but to fail to form the governments. I expect France and Germany to want to stay the liberal globalist course; trying to shift to an ultra-liberal course with a much bigger deficit spending and leftist agenda from 2018 onwards. Once key elections are over, and with Britain on its way out, the EU is likely to experience a shift to the ‘left’ in its economic policies. Just the opposite of the right-wing shift consensus is hyperventilating and alarmingly reporting about. There is a difference between the multi-year trend of rising opposition to EU institutions and the rise to power of right wing governments in France or Germany. Conservative governments in Poland, Hungary and even Austria cannot sway Paris and Berlin.
The EU as an institution cannot handle opposition; it is by nature and by design undemocratic. The EU is logically trying to discredit and legally disqualify any serious conservative opponent: Wilders, Fillon, Le Pen, Petry etc. But since over 60% of EU citizens rely on and trust state media; EU leaders can and will shape the narrative.
In the absence of an independently & conservatively minded Great Britain, the remainder of the EU is likely to shift left – potentially radically so. Thus, after 2017, there might be a bigger push for EU integration with those countries that remain in the union. But state media is telling us only of the threat of the Extreme Right coming to power. The bigger the threat we project, the more we can mobilize the masses to vote for the center-left candidates.
That is part of the information strategy to motivate voters to avoid a nationalist-extremist-right-winged Europe. In a nutshell: the message is “we need to join forces in order to avoid the rise of Fascist governments in Europe” and I expect it will work. Much of the momentum of the right wing parties and the imminent “threat” they pose have been hyped up by EU governments and media. And I am not belittling their secular rise.
Should Italy vote for the anti-EURO parties in 2018, then the news could shock the ECB and the EURO Bond Market. Still, politically the EU could survive it. The EU may have to consider offering Two Velocities among other alternatives. Even most EURO-skeptics in Italy cannot imagine a life without EU subsidies & support. Millions of EU voters might be very fearful, angry and disappointed about their declining living standards – the anger at the EU is big. But their reliance on the central government, subsidies, allowances, transfer payments and handouts is greater still. Even Italian EURO skeptics see Italy as too weak to venture outside of the EU. Most Greeks may blame the EURO and Brussels for most of their plagues, but they are still not ready to back the idea of an independent Greece without subsidies and billions in transfer payments from the EU. The truth is the EU crippled the most dynamic Greek industries (among them the superb Greek agricultural sector) in the first place, making the country dependent on EU handouts.
Short term the EU may see continuity and rejoice at having avoided a Trump-like shock. But mid-long term, an overregulated Europe will struggle even more as a revitalized US economy (followed by Britain) powers ahead after tax cuts and deregulation. I see Europe potentially going on a confrontation course with the USA. A direct clash it cannot win.
III. War risks are building up: Aftermath of US-Iran Deal, a new war in the Middle East looms. Watch Iran & Turkey during Aug-Nov 2017
The media is constantly reporting about the destabilization of hot spots such as North Korea, Ukraine, Syria-Iraq etc. But few connect the dots or provide in depth analysis. Decision makers – overloaded by a barrage of superficial news – think they are informed and grow de-sensitized. They don’t see the simultaneous escalations in North Korea, South Korea, Ukraine & Israel – The fact that Israel was quiet for years until the US elections and the odd timing of revelations that thrust S. Korea into its worse crisis in decades. This is simply Geopolitics at work, no need for conspiracies, as our approach explains: All nations and groups advance their geostrategic & economic interests with all the means at their disposal. It is indeed an advantage in this century if you can analyze geopolitics-politics with an economic holistic mindset, rather than an ideological worldview.
Shedding some light on the seemingly complex chaos & confusion of our time
We have warned that if the Democrats lose the US elections in 2016 they will join forces with intelligence holdovers, the EU, UN, China and the rising Islamic powers (Iran and Turkey, or one of the two) to thrust the new Trump Administration into a complex impasse of international crises. Our analysis shows that Ukraine and the Korean Peninsula are subsidiary targets. The ultimate target is Israel. With the drumming up of a Russia-Trump connection, the Liberal Forces in the USA and Europe have managed to vastly neutralize the Trump Administration in its Foreign Policy ambitions, for now. We ascertain that this is laying the ground for future escalations especially in the Middle East, where Liberal leaders hope to see a debilitated Trump Team face one of the biggest crises the world has seen since 9/11. Leading liberal leaders in the West have three (four) conditional allies: Iran, Turkey and China. The three of them have their own reasons and interests aligned. North Korea is the fourth opportunistic-uninvited player that is likely to take advantage of this global alliance.
- Turkey remembers in Nov 2017 the 100th anniversary of the Fall of Jerusalem to Christianity
- Iran is being pressed to lead the Arab world against the USA or Israel in Aug-Sep 2017
- China has the option to escalate tensions in the South China Sea to fully absorb Trump’s White House
Consensus is overlooking a brewing crisis in the Middle East. One that was set off by the Obama Administration. While the West was totally absorbed with Syria and Iraq, Turkey and Iran have been expanding their power under the shield of Obama’s policies – all smartly crafted and almost impossible to be reversed. Iran and Hezbollah in Lebanon are in close contact with Liberal Leaders from the USA, EU and UN. They all share currently similar interests and the same enemy: the new Trump Administration. Liberal Forces are putting pressure on the US-Russia and US–Israel relations; two vulnerable interfaces of the White House. With Russia under pressure, Russia’s ally Iran has maximum boldness and freedom at the moment. it is a window that may start closing by September 2017.
In November-December 2017 the 100th anniversary of the Fall of Jerusalem will be marked in Ankara: when German and Turkish armies surrendered Jerusalem to the British forces ending over 600 years of Muslim occupation. Turkey will be very active then to show to the Muslim World that it is “back”. The process should reach its height in November 2022 – 100th anniversary of the fall of the Ottoman Empire/Caliphate. It is likely that during this Summer 2017 Iran and Hezbollah may engage in warfare with a Sunni state or Israel. After that Turkey will be advancing its influence on the EU, Russia and the USA, taking advantage of EU’s predictability and limited options by the USA in the Syria ground theatre. Turkey and Iran are the backbone of the new Islamic Economy (Caliphate); but they are also archrivals.
(The above analysis uses our Western-Oriental approach to Geopolitical Analysis; while Westerners are linear-logical in their thinking, Oriental politics is often driven by a circular-historical-religious way of thinking. Religion is the most underestimated Geopolitical Factor of our time)
This possible armed conflict has a likelihood of less than 20% at the moment, but is the most underestimated potential conflict in the geopolitical-military landscape.
IV. EU is most vulnerable to above risks: If USA and UK deregulate successfully, Mass Immigration in the EU will be again an issue
Should the New Policy Mix of the USA be somewhat successful, the EU could be in trouble. The emphasis on Deregulation and Tax Cuts is a paradigm shift from the Policy Mix of the West since the mid 1970’s, one that centered on Mass Immigration to promote GDP growth & globalization.
Mass Immigration was a wonder tool for Western political parties and big businesses: It lowered salaries, provided for extra GDP demand & revenues, increased and rejuvenated the labor force. It benefitted big business groups, the main donors of conservative parties. Those millions of immigrants also were welcome by Liberal and Leftist Parties as their new voting constituencies. In the USA, most Latin immigrants vote for the DNC. Thus, conservative and leftist established parties benefitted from mass immigration, tolerating ever more illegal inflows of people.
But as I have shown before, Mass Immigration did not boost GDP per capita: Japan doesn’t promote immigration, unlike the EU. In a given year Japan may take as few as 300’000 foreigners, while the EU may take 3’000’000. But as the chart above shows, the EU is not able to sustainably grow GDP per capita faster than Japan. Currency adjusted their GDP per capita paths are actually similar.
While GDP and profits are tracked, the costs of immigration are “socialized”. Looking specifically at the challenging period of 2007-2015, the EU failed again to increase GDP per capita more than Japan, although it took in millions of immigrants and aggressively devalued her currency. The EU and Japan are at opposite extremes in immigration and thus worthwhile comparing. My point is this: massive illegal immigration tremendously benefits businesses and allows politicians to reach their GDP Growth targets (the easy way), but it fails to clearly benefit normal workers and it puts law-abiding immigrants in a difficult spot. It also weakens the trust in the Rule of Law.
The economic impact of the paradigm shift could be substantial, and as I ascertain this is currently being underestimated by consensus. Should the USA and Britain manage to perform well economically, it could expose the EU’s biggest vulnerability: her drive to big government and her over-regulated markets. More people will ask about the rationale for the EU’s desire for mass influxes of foreigners. It may also affect Switzerland that may have made a fatal mistake. It prioritized “Access to the EU market” above all else. Being it a small open economy, it should have prioritized Global Competitiveness. While EU member states disregard EU rules mostly unpunished, Switzerland is held captive to multiple Bilateral Agreements under the harsh watch of Brussels. Bern has tied itself to the EU, but is at Brussels’ mercy and yet isolated.
Military confrontation and geophysical risks are building up and overlapping with other trends we monitor. maximum overlap likely during August-September 2017. Political and business leaders should take precautionary measures
Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, in March 2017, Switzerland
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