Geopolitical Macro Update – 9 Sept 2016: G20 & Turkey, USA, Germany and UK

  1. Home
  2. Convergence
  3. Geopolitical Macro Update – 9 Sept 2016: G20 & Turkey, USA, Germany and UK

By Christian Takushi MA UZH, Switzerland, 9 September 2016

As usual we focus on recent developments that are being underestimated by consensus. Most likely due to consensus excessive focus on the FED and surprising economic data, but also due to one-sided coverage by the media.

I will also touch on some economic developments that are impacting the geopolitical & political realms. During this Q3 and Q4 2016 due to US General Elections we need to analyse both causality directions: geopolitics affecting the economy, and the economy affecting geopolitics. The feedback loops will dominate over the next few months and may drive the outcomes.

As we go through different analyses, you may see the growing “interconnection” of factors. The 2nd half of 2016 is a highly intense time in both the political and economic realms. They are impacting one another.

I. GEOPOLITICS – Converging towards a Perfect Storm 

Our post-modern definition of Geopolitics includes Politics and key resources available to nation states (geography, energy, military, population, technology etc.) 

1) G 20 Summit with little substance, but towering Erdogan: and governments agreed to do more of the same, but opened the door for fiscal spending. A bow to Britain and Japan. This is the first time that austerity was not a major common denominator in many years. The only area where progress was made, was energy & environment, because key economies like Germany and the USA are extending interventionist policies that hurt Oil producers and favour gas, electric vehicles and wind & solar energy.

Another thing stood out: President Erdogan played to the Russian press the role of Russia’s key ally in the Middle East. Mr. Erdogan also presented himself as the key U.S. ally in the region. The contradictory scenes at this G20 summit reflect President Obama’s Foreign Policy Ambivalence, which he has used to reshuffle the Middle East alliances. No one trusts anyone, and everything seems to go: forcing Israel, Iran and Egypt to seek protection arrangements with the USA, Russia, Turkey, China etc. Emblematic for our current liberal press, no mainstream media pointed to these worrisome developments.

Further decay of the West’s moral standing: while Erdogan was shaking Obama’s hand, Turkish forces were pounding the most loyal U.S. allies on the ground in Syria: the Kurdish militias that have bled to fight America’s war on the ground. The Kurds were let down once more by the West; with Berlin, Paris and the U.N. also looking the other way. If history is to be trusted, Kurdish fighters will not forget this latest betrayal of the West. And as Erdogan was cozying up with Putin, Turkish forces took the initiative Russia had held for 9 months. The Kurds will stand by their oath, because of their asymmetric alternatives: To die under IS or Turkish forces, or to fight with the West for more independence. But nothing gets forgotten in this part of the world. As Western powers and Russia let Turkey get away with its simultaneous assertive pursuit of several geopolitical objectives, these ambivalent signals of appeasement & opportunism are being sent to all conflict regions of the world. And we can ascertain they will backfire on the West before long, probably 2024.

A place to defend Turkey: As you may know, we refuse to join the long array of Turkey bashers in the West: in our view Turkey is using the power vacuum the West has created, and it is also benefitting from the Foreign Policy Ambivalence that the Obama Administration has advanced over the past 7 years. It is the West’s failure to overlook the geostrategic agenda of Ankara. Put in a nutshell; Turkey cannot be singled out and blamed for advancing its interests will all means at its disposal – and within the scope all other powers allow her. The West, specially the EU, NATO and the Obama Administration, bear a great part of the responsibility.

As we concluded last year: Europe is in denial of its strategic security deterioration. If I can point only one of many threats .. EU statistics talk about 3 million Turks in Germany alone, which covers up the truth: there are roughly 2 million Turks and 1 million Kurds in Germany. As Turkish soldiers are being killed by Kurdish bomb attacks (terror) and Kurds are being massacred by Turkish forces, a cycle of violence & retaliation is reaching boiling temperatures. Something that may eventually spill over to Germany-Austria-Switzerland.

2) North Korea exposes Obama’s dead-end appeasement & accelerates Asia’s rearmament: As if the ambivalent Foreign Policy of the Obama Administration weren’t clear enough (softness & apologetics to everyone except Russia of course), North Korea decided to expose America’s weakness to the whole world. Not long ago the USA issued a strong warning to North Korea after Japan, South Korea and Taiwan complained the USA is no longer complying with its obligations towards its Asian allies in the face of Chinese and N. Korean aggression. During the G 20 summit North Korea launch three mid-range ballistic missiles into the Sea of Japan, off the Western Coast of Japan, where Japanese fishing boats are active. No casualties were reported, but Tokyo was outraged. Outwardly against Pyong Yang, but innerly against Washington. President Obama had only some more words for Pyong Yang, and sent some for China, only to embrace the Chinese leader moments later. In diplomatic terms “don’t worry, that was for the press at home”.  While Western think tanks are under-reporting the military spending in Asia and keeping silent on Western appeasement of assertive powers, Asian allies of the USA are rearming and taking things into their own hands. Japan is arming Vietnam, Malaysia and specially Philippines. Even South Korea is selling fighter jets to the Philippines. Unofficially more is taking place.

Despite sabre rattling by China and North Korea the Obama Administration has only one Aircraft Carrier Group (1 out of 10) out in the Asian Military Theatre. Which is the status quo and in no way shows any Deterrence or Containment.

After having exhausted their trust in the USA, these Asian nations are embracing Nationalism and Rearmament. And according to our analysis the “point of no return” has been passed. The West is playing with fire, because Asia is probably the region in the world with the highest number of unresolved simmering conflicts, that could also shut down the Global Supply Chain. These nations don’t trust each other.  In Asia, given the cultural and religious conditions, atrocities and wars have never really been settled, apologised for .. nor forgiven. Western experts use their Greek-Roman linear-logical perspective to assume that with increased intra-Asian trade, wars are unthinkable and that educated Orientals will respect treaties. They are unaware of the Oriental circular-historical way of seeing life, their Lunar Calendar and deeply ingrained beliefs & duties. From the Bosphorus to Okinawa, the West is misreading the signs and being misled. Oriental leaders study the Western way of thinking, but Western leaders are unaware of Oriental ways of thinking. Many Oriental leaders are thus misleading Western leaders into signing Treaties, they never intend to comply with: the US-Iran Deal is only one of them. Teheran is not to blame, as it is doing its sacred duty to advance its national interests – just as we do. Asians don’t have many elaborated Treaties with one another, they know “paper” doesn’t mean much in the Orient. A personal word in private bears more weight as it weighs on one’s honour.

3) Germany’s political stability enters unchartered territory – The anti-immigration & anti-EU Party Alternative für Deutschland (A f D) overtakes the CDU in Merkel’s home State as 2nd strongest party. Although the North-Eastern State of Mecklenburg-Vorpommern is thinly populated, it is Merkel’s home constituency. And it marks the 9th time now the AfD is able to enter a State Parliament. The trend is up. Kindly, remember AfD was just founded 3 years ago and look at how the AfD has achieved powerful victories. This, despite the furious media campaigns against the AfD and its leader Mrs. Petry and despite the traditional stability of the German party landscape since WW2.  Over the last year, the AfD is winning as 2nd or 3rd largest party wherever state elections where held. Nevertheless, established parties refuse to talk to the AfD and put it off simply as a right-wing phenomenon, overlooking the many centrist conservative voters that are backing it. The media tries hard to portray AfD supporters as skinheads, neo-nazis and violent elements. Most interestingly is the fact that many AfD supporters indicate they would support also the CSU of Mr. Horst Seehofer (Bavarian sister party of Merkel’s CDU) if it would go nation-wide. This hints at the growing connection between these two parties. Mr. Seehofer leads conservative Catholic Bavaria and opposes Merkel’s mass immigration and her Islam-welcoming policies. Most recently Merkel is downgrading Israel to normalise relations with Iran. Unfortunately for the AfD, violent nationalistic elements have expressed support for it, providing the press the food for its pro-establishment narrative. Mrs. Frauke Petry also bears her share of the blame for having waited to distance herself from the Pegida demonstrations.

Germany avoids simultaneous state elections in order to keep any one party to come to power too rapidly, but experts are dreading next year’s general Bundestag elections (federal parliament)! One thing will keep the AfD in check, German companies have been raising salaries by 3-5% every year, thus passing their growing profits on to their employees.  Germany has been unique in the West for this sharing of the economic rent with workers and retirees. This will allow many voters to stay in the centre and could cap the AfD to 20% next year.  In November Austria will elect a new President, and I think the anti-immigration FPÖ will win. Mainstream media is not talking about this, but I see a growing support for one another among Austria’s FPÖ, and Germany’s CSU & AfD. Not to speak of the largest Swiss party, the Swiss People’s Party. German-speaking Europe is shifting against the EU.  Whatever happens in Germany, it will have probably a serious impact on Switzerland. Their economies are closely linked.  Should the AfD win 15% to 20% of the votes in next year’s General Federal Elections, this would be an “earthquake” in German politics. Should it surpass the 20% mark, it would either bring down Merkel’s rule, or shutter the German political process. The former would allow the AfD to attract more supporters, the latter would accentuate the growing political polarisation. It is already noteworthy, that the Green Party has become the only party warning of Merkel’s desire to normalise relations with Iran while it upholds multiple threats to annihilate Israel. Thus, the CDU is breaching one of Germany’s key foreign policy credos since WW2. Merkel’s embrace of the Iranian leader next month in Berlin may only accentuate the silent unease millions of Germans feel of their country embracing or bowing to Islam too fast. But while the Greens do the ungrateful work, the AfD may harvest the votes.


4) Excessive US Media support for Mrs Clinton shows some signs of backfiring: in the lapse of one year Fox News rises from Nr. 4 to Nr. 1 Cable News TV Channel; ahead of CBS, ABC, NBC and CNN.  Americans seem increasingly distrustful of mainstream and liberal media channels (CNN, CBS, ABC, NBC etc.). Some bias is normal and expected in election years. Americans know key TV channels are liberal in nature, but this year’s bias is taking at times the shape of systematic propaganda. For instance, CNN refused to air highly damaging FBI evidence against Mrs. Clinton (HRC) appropriately. Recent evidence indicated that US media coordinates with the Clinton Campaign about what and when they air something. It seems that many Americans are tuning in at Fox News as a reaction. Despite being the only major conservative TV channel, it is offering a different perspective if not necessarily a balanced picture of the facts. Key Fox News journalists have openly criticised Mr. Trump. Others at Fox do support Mr. Trump though. That is balanced reporting and is attracting American viewers. Looking at the dwindling lead of Mrs. Clinton over Mr. Trump, our analysis concludes that the too passionate devotion to Mrs. Clinton by major US TV channels & newspapers is beginning to backfire. Thus, many may be willing to vote for Trump to reject what they perceive as a too overt mainstream media sympathy for the DNC candidate.

I know that most experts and world leaders take Mrs. Clinton’s victory in November for granted. Even conservative analysts believe, no one can overcome the massive concerted attacks, poll manipulation and defamation campaigns that Trump is getting from the media, business, Hollywood etc.  Having said this, we should acknowledge how well Mrs. Clinton navigated the past horrible month despite shocking evidence after evidence that would have ended any other politician’s carer, albeit with broad support of US media. She understands politics and how it works .. to perfection. She stuck to her message. She also has given no real Press Conference in 9 months to avoid any accidents. The media would never tolerate that from any candidate in an election year. She relies on her gigantic machinery, and tries to stay out of trouble as much as possible.

Despite all Mrs Clinton may have done in the past (Benghazi, Email scandal etc), we need to acknowledge that she is a superbly disciplined politician. So, unlike Mr. Trump.  But, I stick to my opinion that despite Mr. Trump’s torrid missteps, the growing outrage about uncontrolled mass immigration, jobs going to foreign countries and the reckless collusion & corruption in Washington may prompt many sidelined Americans to vote for the first time in their lives and reject the establishment, allowing Trump to enter the White House. Last but not least, even uneducated people have common sense and dislike being manipulated: too much propaganda can backfire, as we saw at BREXIT. We should not rule this out.

5) US Military under pressure after crucial F-35 Joint Strike Fighter shows “significant problems”. For the 1st time in recent years some military leaders are speaking more openly about the consequences of the budget cut-backs ordered by the US Government. The new generation Fighter Jet for all US Armed Forces is having problems that go beyond the normal.  Russia and Israel can smile. Russia’s latest improvements like the new generation Sukhois have been tested successfully and are enjoying growing interest from many countries. We see this reflected in Russia demanding higher prices for their superbly manoeuvrable jets. Israel supported the F-35 development, but has its own high-tech version and capabilities to fix problems. After having cut back ground troops and mobilised strategic ground troops back to the homeland, the USA is relying more on Air supremacy. The F-35 news are coming at the wrong time. US Allies will have to rely longer on F-16’s and Russia may be able to sell more Sukhois and MIGs, a source of precious hard currency.

Conservative experts are blaming it all squarely on Obama’s spending cuts, but we should give the President the benefit of the doubt. Our research points at the impact of oligopolistic M&A on the technological innovation path; it flattens it. There is evidence that Military Technology simply didn’t keep up with the expectations set up ten years ago. And there is so much Israel would share with an ever more distant USA. No one could close the gap. Big military strategic projects take over a decade to complete, and therefore: assumptions have to be made of future developments. Analysts often love to talk about the impact of technology on the economy & investments. They omit the opposite causality. Initially M&A had positive effects on bundling research, but in recent years the size of M&A was driven by zero-interest rates and pure profit calculation. Unfortunately, huge oligopolies are having a negative impact on technology development. Allow me this example in another area we monitor: As of 2016, roughly 2/3 of all seeds in our planet are dominated by only 6 agri-related companies that are now in the process of “taking over” each other again (i.e. Bayer-Monsanto etc.). Big firms and experts always point to the synergies of M&A, but we have passed that sweet phase long ago. The reality is that innovation does not thrive in gigantic firms’ cultures. Thus, even agri innovation & protection may be constrained when the humanity will most need it – we expect the next decade to see increased geophysical disruptions. The F-35 is the latest victim of technological under–achievement of oligopolistic giants. They know, they are too big to allowed to fail. Sounds familiar.


II. ECONOMICS affecting Political & Geopolitical processes – A Perfect Storm brews 

Our macroeconomic geopolitical research points clearly to the assumption that since the 1970’s  Western nations have fostered GDP growth by a combination of three policies: mass immigration, liberal Free Trade, and lower real wages in relation to GDP (shifting the economic rent to businesses). The three combined allowed for a momentous rise in Trade Flows, corporate profits and GDP.  Furthermore, aggressive monetary stimulus turned into zero-interest rates policies allowed firms to take over one another;  leading to a Global Economy dominated by huge oligopolies. With the destruction of the crucial atomistic competition, oligopolies are not only shifting burdens to tax payers, but weighing on aggregate demand and their own organic profit growth.  As Trade, Profits and GDP hit a wall, a feedback loop has been set in motion that is beginning to affect the political discourse, policy and the geopolitical balance.

I personally believe that many Western governments have indeed used mass immigration as the most reliable & powerful tool to keep their economies growing. While fiscal spending can fail or succeed, immigrants need to eat and spend. But with growth so anaemic for almost a decade and with many parents now having both to work to make ends meet, people are asking tough and uneasy questions. Questions that ill-fated media campaigns cannot brush aside any longer.

With political and economic realms stretched and under tension during the current Global Transition Period and US Elections, sudden accelerations or decelerations in aggregate demand may lead to political and geopolitical maneuvers, and vice versa. And we may be in for a good example soon. The US Service sector showed the most rapid deceleration since 2008. If flanked by other data, this may force the Obama administration into over-drive mode via executive orders and to deflect to Foreign Policy. I expect the current U.S. Administration to stir trouble in Ukraine again to engage Russia. In times of conflict with a foreign power the Ratings of Incumbent Presidents and their respective parties rise. This could help shift focus away from the domestic issues and support Clinton’s chances to be elected as new US president. I also foresee the USA portraying great victories or progress in Iraq-Syria along with renewed conflict or crises elsewhere in the world (North Korea ?) during the coming months. But will Moscow take the bate a second time? I personally doubt it. Having said that, this has become something personal between Obama and Putin. If Mr. Putin declines, I sense Mr. Kim won’t hesitate to be in the spot light. A confrontation may serve both Pyong Yang and President Obama/HRC.

U.S. ISM Non Manufacturing PMI Index: Service Sector Activity: sharpest deceleration since 2008



Source: Trading Economics, U.S. Institute for Supply Management

III. Brief BREXIT follow up

As we have been expecting, Britain is holding up better than expected and the Pound is stabilizing.

British Industrial Production (Month over Month) surprised with resilience; although too early to relax, many observers including the BOE had expected a significant contraction. Surely, Britain faces unprecedented animosity by many European nations, thus, it may shrink going forward. Nevertheless we can expect the weaker Pound to begin supporting UK GDP from Q4 2016 onwards. All recent data and political developments confirm our first assessment that the new British Government under Mrs Theresa May is establishing a steady, predictable and yet “strong” leadership. After an initial struggle due to the BREXIT uncertainty, I foresee Britain investing again on its security, defence and infrastructure. May wants to allow the Economic Rent to reach the middle and lower class again. She understands that the perception is key, of not being left out. That Income Effect may support aggregate demand, and boost imports, but also constrain any recovery in the Trade Balance. As we said before, the decline in the UK Real State Industry is not a harbinger for the overall economy. That industry was artificially boosted by mass immigration – an unsustainable bubble is being corrected. I believe markets are putting too much hope on a weak Pound to boost British exports; that may well be in the short term. But I doubt Mrs. May wants to rely on “price competitiveness” alone: She has seen what that strategy at extremis did to many Western economies – and was critical of Cameron’s cabinet reliance on that. Longer term macro economically, a strong currency forces exporters to innovate, boosting efficiency & quality. Cheap currencies have a nice one–off impact, but later on, they are a drag on innovation.

Mrs. Theresa May seems to have a much broader picture of reality than recent UK Prime Ministers had: While Mr. Cameron sacrificed everything on the altar of corporate profits (selling out UK’s nuclear security to China), price competitiveness and austerity, Mrs. May is aware of all stakeholders and the long term. That is a good recipe for a more balanced and sustainable development. While Germany, France and Italy face a stormy next months and an unpredictable year, Britain may be – despite the BREXIT fog – the only anchor of stability in Europe for some time to come.


Source: www.defenceimagery.mod.uk / UK Ministry of Defence

And Argentina may help Britain: Argentina is struggling to renew its dilapidated Air Force. Post Brexit, it is now looking to France, next to China and Pakistan for many fighter jets. Once they get their new fighter jets with long range operability, Argentina will step up its claims on the Falkland (Spanish: Las Malvinas). An external foe would galvanise a currently divided Britain again and expose Britain’s superb global Military Base Network and recent investments. There are risks to Britain if it doesn’t perform, but chances are London will showcase strength.  London may use its new Aircraft Carriers, now under construction to project power. The HMS Queen Elizabeth will be finished next year. The Prince of Wales carrier will follow 18 months later. Based on Britain’s geopolitical power and improved consistency in policy-making, I expect the British Pound to become a firm and possibly growing part of institutional clients’ portfolios. France and Germany alone cannot defend Europe, least project power. The  EU will need Britain’s geopolitical power & network to effectively protect the Sea Lanes, supply routes and to project power.

This was an extract and prelude to our Quarterly Outlook.

Christian Takushi MA UZH, Macro Economist & Strategist, Switzerland – June 30 2016 (adapted for public during 1-13 July 2016)

General Disclaimer: Global Macro and Geopolitical Analysis are highly complex and subject to sudden changes. No analytical method is without certain disadvantages. We may change our 3-pronged outlook within less than 3-6 hours following an event or data release. Global macro analysis can be extremely time-sensitive and the first 24 hours after an event are critical for the response of a government, corporation, pension or portfolio. Only qualified investors should make use of macro reports and treat them as an additional independent perspective. Every investor should weigh different perspectives as well as “opportunities & risks” before making any investment decision. Not all our reports, research and intelligence is published here. Only our clients have the full and immediate access to it. What we release here is delayed and adapted. The research & views we post here for public access are aimed at fostering research exchange (to improve our assessment) and helping decision makers adapt their long term & strategic planning to changing realities, not for short term decisions. If you are not a qualified or professional investor, you should get professional advice before taking any investment decisions.

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.