By Christian Takushi MA UZH, March 16 2015.
It is time for a brief Update on the Monetary, Macroeconomic and Geopolitical Front. My comments are neither complete nor conclusive, they complement my forecast that as we move closer to 2017 world events & trends will overlap with fury. And this is likely to include even natural phenomena as well. The Big Picture of the world this month is a mere harbinger or rather a shadow of the complexity we’ll see over the next 2-3 years.
Several issues converging just ahead of Passover and Easter weekend
1) Monetary & Macroeconomic Front
As Interest Rates keep falling in key economies, many investors miss the fact that US interests are already rising in relative terms. Both the USD and US rates are rising in relative terms. The FED is achieving some of her targets by orchestrating a dramatic fall in the oil price, which is forcing cash-strapped nations to produce yet more oil to avert an “state insolvency” (Venezuela etc), which again supports the USD. Whoever buys oil has to buy USD first. To support their economies, central bankers are lowering rates. What you have is a what looks like a strong Dollar, but if you are a long-time reader of my research, you’ll know that no major currency is in fact strong – they are all debased probably beyond remedy and they have all lost significantly in inherent and intrinsic value. The USD is a monetarily debased paper currency, but the value of other currencies is currently even weaker, because they are one to two years behind of the USA in aggressive paper-money printing to intervene in the Bond Market and drive down INTEREST RATES and VOLATILITY artificially to ZERO. To accelerate this process the largest US Storage facility has increased the price of oil storage, forcing oil producers to damp their excess oil production rather than storing it. After driving down the gold price in concerted actions and intervening in the bond markets, Policy Makers have led asset prices – namely the stock market – higher. Now they are driving down the price of oil. Is there any major asset class that is still a “free functioning market”? Not really, but what is much more spectacular than governmental intervention in “Pricing Mechanisms” is that financial professionals use those govt-fixed prices to read investors expectations, implied volatilities and forward rates. Whether out of habit or another ulterior motive, I actually don’t know. And I’m not investing any resources into figuring out that since (1) we should give people the benefit of the doubt first, and (2) every investors should and is responsible for making his or her own assessment of the situation.
There is lots of talk about Economic Stagnation in Europe, but I am expecting stronger economic data in Europe during 2015: EU is investing heavily in energy, food security and now also in a military build-up. And the super cheap Oil and Euro are working as massive tax cuts and short-term competitive aids for European firms. Last but not least, the EU changed the way it measures GDP and Public Debt last November in a way that will boost data in 2015. I’m no longer surprised few people are aware of this.
2) Geopolitics and US Domestic Politics affecting the economy
Can the USA force the Oil Price yet lower to add pressure on Emerging Economies, Russia and Texas? Yes. The strong USD is not so tragic for the US economy. Domestic consumption is much more important the exports. Additionally Oil Majors are not losing as much money as in past weak cycles. They are trading so much in oil & energy, that they are benefitting greatly from the rise in volatility. The Obama Administration is waging war against oil producing economies Russia and Texas, because of geopolitical and political interests. On Russia, because President Obama needs Russia busy on her own doorsteps while President Obama can court and win over Russia’s former top allies in the Middle East. On Texas, because President Obama wants to neutralize the most powerful, religiously conservative and independent-minded US State ahead of the General Elections. The war against US Oil & Gas companies is already causing a major lack of funding for the Republican candidates preparation for the next elections.
Many people say that Cheap Oil and a strong USD have only a big Net Effect on the US economy. But you reach that sort of conclusions only with static and past-looking analysis. The world economy is always evolving and this time around I’m convinced people are underestimating the role of technology in the US Oil & Gas industry. Our contributor Jeff Petty, MBA, has shed light on it this year. Furthermore, Investors underestimate the importance of the Texan Economy in the USA. You cannot use simple statistics to understand the major importance of Texas in the US economy. The growing interaction of Texas growth engines Dallas-Forth Worth, West Texas-Midland and Houston have been the single most vital region of the US economy over the past decade. It was Texas that managed to stem the US job implosion, and lead the US economy with job creation. The Obama Administration is thus running the risk of killing or seriously weakening the US economy just before General Elections. This could be a boomerang born in superficial economic advice.
Good to have a close ally in case of a need to stabilize US rates over 2015-2017: Japan and China are each holding some 1’200 Bn USD worth of US Treasuries and Japan is printing so much paper money, Japan may need to invest USD 300 bn into US Treasuries over the next 3 years alone. Thus Japan may surpass China as largest “US creditor”. All this makes the FED’s job the best any central banker could wish these days. Yellen and Fischer can wait or hike. With Europe, China and Japan flooding their economies with “informal or printed” money, pushing their interest rates down to zero, we are seeing a US rate hike at a global macro level. The USA uses Oil production and even foreign policy as tools to maximize the FED’s Monetary Policy effectiveness – and viceversa. This is no criticism of the USA; some may not like it, but the USA is simply ahead of most nations in using all their tools and resources to advance their vital national interests.
Global investors need ample exposure to the USD in their portfolios, yet 2015 might be an ideal time to reduce USD exposure (April-May). Ahead of an economic rebound in Europe, purchases of Euro might be interesting. Nevertheless the one currency one cannot wait tactically to have exposure to is the Swiss Franc. In my opinion, the Swiss Franc is the only true Safe Haven Currency left. But you can’t go with Swiss Francs alone and away. There are scenarios that entail military, systemic and national security risks, in those instances the US as leading military superpower and leading economy will also be in demand.
On Israel elections, US strategy in the Middle East
(the chart to the right was originally presented at a CFA Institute Seminar in Zurich, Switzerland)
Tomorrow Tuesday March 17 Israeli voters go to the polls: It could be one of the most fateful elections since the re-birth of the state of Israel in 1948. Arab Israelis have joined forces this time and with 20% of the population they could decide the elections in Israel. They are keen to use their knesset seats to support Left Party’s leader Mr. Herzog, who is open to divide the land to get a peace deal with Palestine. Should the Left win, it could trigger a series of events in the Middle East that could give a second wind to the sweeping overhaul of the Landscape pushed by Pres. Obama, who is building a stronger Islamic-Arab World (a noble cause in itself), weakening the secular states, while shifting power to Islamic rulers. President Obama and the State Department envision an Islamic World with a stronger economy that can also provide energy to NATO – reducing Russia’s influence. Their risk is how to contain more radicalized Islamic terror groups and that the USA may have no real allies left after dropping her long-time allies to embrace new ones.
As I have stated before, MENA region demographics could indeed support a strong economic growth for some ten years in the Middle East if the Obama Plan is realized. Critics ask “where do we draw the line? For with this we make most terror organizations fighting IS the new normal (our new partners?). Nevertheless, if we make an objective analysis, we’d reach the conclusion that Pres. Obama will succeed with his plan, bring Turkey and Iran closer, and finally force Israel into a Peace Treaty. De facto US forces are now having to support Hezbollah and other Iran-backed groups on several fronts, this to fight ISIS. And top US military experts serve shoulder to shoulder with elite Iranian Islamic Guard officers in Iraq. The US-Iran talks in Geneva are being held and prolonged for political purposes. Behind the scenes the White House is already working with Teheran already — to the dismay of conservative forces in the US Congress and National Security circles. It could pave the road to the partition of Jerusalem in exchange for a Peace Accord before 2018. As with most peace deals that were imposed by Western Powers, this Peace Treaty will not bring lasting peace either.
Remember Pres Obama has still a full 11 months of freedom in Foreign Policy before he enters the “lame duck” period. This could be one of the most tense “12 months” in Foreign Policy in decades, because of the fast pace the White House and the State Department are pursuing to change the landscape of the Middle East. The Obama Administration is courting and in the process of winning over Russia’s key allies in the Middle East. The Ukraine-strategy is working and keeping Russia busy at home.
Other powers to seize the moment
Many have underestimated Pres. Obama, my analysis shows he is still driven by a partly noble Grand Vision, to which belongs a more united Arab World, rooted in Islam and with a strong economy. The Obama-pushed alliance of Turkey-Iran-Syria-Iraq will boast a formidable economy – but it is not perfect yet, Syria boasts still a secular leader. Both Egypt and Syria still defy Obama’s plan for a united Islam-ruled Arab world. With so much US-led change, other powers vie a chance. Britain wants to regain influence in Egypt while Italy wants to regain influence in Lybia. Most importantly Russia and China are being asked for strategic advise and military support by former US allies in the Middle East. Arms exports have exploded – simply, don’t trust the figures published by any Western think tank on it. This industry is one of the few big job-creators in Europe in recent years.
US on driver’s seat
It is highly interesting that 24 hours before the Israeli vote the USA says it will talk to and seek a compromise with Syria’s al-Assad. Indeed a compromise is a matter of time. As we have been saying, the USA is building a Northern Alliance with Turkey-Iran-Syria-Iraq. Syria has been weakened to the point of compromise. We are talking about former strong allies of Russia. The White House needs therefore to keep up the pressure in Ukraine to keep Russia as busy as possible there. It is a daring plan, but so far it is working and media is not talking about it. Instead most people are buying the mainstream version of facts. In fact few truly independent geopolitical analysts would say that Russia has anything to gain from this Ukraine Crisis. It can only lose, and it is now on damage control mode.
3) Natural Phenomena on the Rise
(chart to the right was added for illustration: All earthquakes larger than 2.5 mRS over 30 days – interesting to see how seismically active the USA nowadays is)
Last but not least: A Total Solar Eclipse is due this Friday – it should be some 60% visible in Western Europe
If it unfolds on a sunny day it could cause a sudden drop of energy supply, because solar panels are a huge part of the German Grid. Germany and Switzerland are preparing for emergency contingency to avert black-outs. Millions of solar panels will stop providing energy within seconds, but back-up systems take a bit longer to compensate the power loss. Switzerland has lined up all water-driven power stations to be prepared. The sunnier this Friday the bigger the risk of black-outs. Switzerland is becoming increasingly dependent on the EU Power Grid! It is interesting that as nation of politically active citizens, Swiss people could have missed the fact that their government has signed and committed their nation to a EU Energy Union. Energy is the basis for everything else in an economy.
A total lunar eclipse and a full lunar eclipse within a 14-day period is rather rare and could allow people to observe unusual phenomena: larger meteors, meteor explosions and other occurrences.
Those of you who follow my research know that we are expecting a drastic increase in natural phenomena that goes beyond what humans could cause: more volcano eruptions, more drastic swings in local and global weather, more powerful earthquakes, more natural phenomena in the skies and our solar system. I believe the (electro-)magnetic forces that govern most physical balances and processes on our planet are experiencing increased alteration since at least ten years and all signs point at an acceleration. That we are having more massive earthquakes at ever deeper earth-crust levels (400’000 meters below the surface or lower) sheds light on the magnitude of forces affecting the earth crust.
Here a picture of the area of visibility of the solar eclipse
All US Strike Aircraft Carrier Battle Groups have been called home – except one: It is interesting that 9 of the ten US aircraft carrier groups have been called home. The same is true for 7 out of 10 big-deck Amphibious Marine Expeditionary Groups. 85% of US Naval Fire Power is safe at ports – some undergoing serious service. At the moment the US is relying on one aircraft carrier group and three US Amphibious units at high sea to keep Global Naval Presence. The USA is not able at the moment to exercise any credible pressure on more than one threats overseas. We might thus see the US “compromising” on several fronts. My guess is Iran and Syria, Israel’s election outcome could powerfully accelerate this compromise process. Pressure will be maintained rather on Russia and especially China. Only one Aircraft Career Group – Carl Vinson – is containing China. I keep a vigilant eye on this unprecedented move by US forces. As you know, I don’t work with Conspiracy Theories (they take away the necessary respect we should have towards national leaders and make us focus on information vs disinformation), thus I believe the US Government is doing this for security reasons. The effects of a major solar and lunar eclipse so close together are a good reason to be cautious. Those things don’t happen vey often, thus we don’t have enough data to be sure the waters will be safe. Thus, I understand the USA prefers not to risk any of her vital strike groups at high sea.
=> Some conclusions: If you have missed the rally in risk assets, you may want to consider this. With ongoing massive injections of liquidity, volatility kept artificially low and markets at stretched levels, it is wise to keep one’s peace and wait for tensions to unravel (crises and corrections) before buying into risk-assets. Nevertheless with policy makers controlling most asset classes and markets, asset prices could be kept high for a long time and an external trigger might be necessary to unleash a (healthy) correction.
Christian Takushi, macro economist, in March 2015
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