Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, Switzerland – 11 March 2018. (public release 72 hours delayed).
I worked until Sunday on this analysis, and events over the past two days have further reinforced my assessment. The ousting of Mr. Tillerson and the arrival of Mr. Pompeo prepares the way for a more assertive US Foreign Policy. The new US diplomacy chief is the anti-thesis of the newly appointed German Foreign Minister. Coincidence? The rift between the UK and Russia is remarkable, too. I don’t quite buy the official narrative. Moscow is a tough geopolitical power, but it gains nothing from getting rid of a former agent at this stage. Rather the opposite. Mrs. May greatly benefits from the row, because the conservatives want their party back (from the liberal arm led by May); and they would like to see Mr. Rees-Mogg replace Mrs. May. The challenge was imminent, but now it is certainly off. Meanwhile, Saudi and Israeli military frenzy also point to a build up of tensions. The White House is trying to address North Korea before it can focus on Iran. But the Israeli cabinet in Jerusalem doesn’t share Washington’s confidence it can be done (read: wait). I believe the timing of Tillerson’s departure was influenced by Prime Minister Netanyahu’s recent visit to the USA, where Netanyahu gave a stern warning of what is brewing in the Middle East.
The likelihood of the fat-tail risks allured in this report is increasing. Here the key messages of this report:
– Economics and Geopolitics are becoming increasingly interconnected
– USA prioritises North Korea over Iran in Q2
– Israel might have to strike pre-emptively, pulling USA into conflict before Mid Term elections
– Are markets in for a surprise? Trump may sacrifice Earnings of multinationals (stock market) to advance National Security and to attempt to save GOP majority in Congress in 2018
Economics and Geopolitics are becoming increasingly interconnected, and 2018 may be a showcase period demonstrating this dynamic two-way relationship.
The import tariffs to protect US National Security boosted demand for US Treasuries and helped cap the rise in US Bond Yields. The USA is currently exemplifying how a world power uses all the means at her disposal to advance her interests: monetary, trade, treasury, energy, foreign and military policies are being deployed.
The very strong US job data of the past 12 weeks and last week’s slowdown in wage growth along other developments are giving the current US Administration a respite at the domestic front and some foreign policy leeway. As fund managers or economists would put it: “Washington has regained some Risk Budget”. A number of recent developments may have increased the likelihood that the GOP might be able to avert a disaster at the Mid Term elections in November 2018. The prospects for a Republican majority in the Senate have improved slightly, while the potential losses feared in the House seem more “contained” as at the start of the year.
Setting priorities in a year of serious constraints
Since the regained leeway of the Trump Administration is likely to be short-lived, we think Washington is prioritising North Korea over Iran, while trying to buy time on other geopolitical fronts. And there are plenty of them: The new US Nuclear Strategy identifies Russia and China as major threats. Israel’s discontent with Washington’s softened stance on Iran may force Israel to take unilateral military action to contain the build-up of Iranian hard assets in Lebanon and Syria. We believe PM Netanyahu traveled to Washington to make this clear to the White House. In Europe, Germany’s continued embrace of China & Iran is raising more questions in conservative US military circles regarding Berlin’s true allegiance.
Although NATO leaders hail their support for NATO, the Alliance looks dysfunctional and at risk. While the EU expects the USA to potentially go to war to defend Europe, Brussels and Berlin are treating China as the new protector of the (European) Liberal Order. Relations between Berlin and Washington have never been this cold since WW2.
Since December 2017 domestic politics in the USA, Russia, Germany and Israel have been having a negative impact on the Global Geopolitical landscape. Where they did not exacerbate tensions, they reduced America’s and Russia’s ability to reign in on allies or take risks. As a result a military clash between Iran and Israel cannot be ruled out this year. Elections in both Russia and the USA in the coming months have led to a most assertive behaviour by Turkey and Iran. Brought together by Moscow, the former foes are working together to encircle and threaten Israel from Lebanon, Gaza and Syria.
To Israel’s frustration the Pentagon has assessed that North Korea poses a more imminent threat to World Security than Iran. Although both are seen as very serious threats, it is obvious that US military & intelligence circles have estimated that North Korea is just months away from achieving nuclear ballistic operationality, while Iran is believed to be further away from it. This is based on domestic enrichment capabilities, though, thus it assumes that Teheran has not already purchased the necessary enriched Uranium using the hard currency it received from the former US Administration via Switzerland. The US-Iran Deal de facto shields Iran’s ballistic program and allows Iran to use the hard currency to buy enriched Uranium. Interestingly, most experts that disagree with our analysis on this matter have never read the comprehensive US-Iran Deal itself.
Our independent analysis shows clearly that Iran no longer has to use its centrifuges – the centrifuges are there primarily to buy time and to boost national pride. Having said all the above we see Iran simply advancing its interests with the means at its disposal. The European Union sees Iranian Gas & Oil as a strategic back-up source of energy.
While Israel’s current impatience with Washington can be understood (the Jewish state faces possible extinction in a mass conventional attack or nuclear first strike), Washington’s tough choice can only be appreciated if one tries to assess the complexity of the global geopolitical landscape, of which the Middle East is only a part of. Our research shows nevertheless that longer term all global geopolitical forces will converge in the Middle East and boil into eruption over Jerusalem. The following illustration shows how global risks are shifting and interacting with one another at aggregate levels. Thus, for a politically constrained Washington to temporarily expose Israel to a higher risk from Iran is a calculated risk. One that could back-fire as we go into the Fall.
Advantage Moscow, Ankara & Teheran
Moscow, on its part, has been mindful of igniting any conflict that could “ruin” the FIFA World Cup in June-July 2018, because Russia is the host. Moscow was planning to use the FIFA World Cup for a charm offensive, in order to ease the economic sanctions. That plan received an unexpected boost and shake-up after the “Left” was able to stage a coup in German politics: The SPD allowed Merkel to gain yet another term as Chancellor in exchange for unprecedented concessions and influence in the new German government. The Social Democrats are not only steering Germany to the liberal left (as we have predicted since 2016), they will dominate Foreign Policy. SPD leaders have for years built up relations with Moscow and Teheran using their own back channels. The outgoing German Foreign Minister, Sigmar Gabriel (SPD) has already started talks with Moscow for sanctions relief. The biggest immediate beneficiaries of the political shakeup in Germany are undoubtedly Russia, Iran and Turkey. Gabriel’s successor Heiko Maas is also from the SPD and is partly known for having restricted Freedom of Speech in Germany as Justice Minister.
As Washington focuses on North Korea in the short term, Turkey & Iran are most self-confident and stepping up their pressure on Israel. All intelligence we gather points to the fact the Israeli cabinet in Jerusalem has been told to be patient until after the Mid Term elections.
Against this complex backdrop the Israeli Armed Forces are already preparing for a possible conflict on multiple fronts. With thousands of advanced rockets and mid range missiles aimed at Israel and just minutes away in case of a surprise attack, the IDF may have to launch a pre-emptive strike. A conflict involving several countries could follow. It is, thus, the Middle East that could awefully disrupt the calculus of Washington and Western Europe.
Trade relations and equity investors could be sacrificed by Washington in 2018
Highly focused on GDP and corporate earnings, consensus still underestimates the full magnitude of the current US economic revitalisation. Although we ascertain that geopolitical risks will help cap the rise in the 10 Year Bond Yield in 2018, in case of an emergency we believe the Trump Administration will sacrifice the earnings of US multinationals to strengthen National Security.
We believe the Trump Administration will risk trade frictions and even limited Trade Wars in order to advance National Security interests in 2018. The Trump team has already fulfilled other key campaign promises and a defiant China or other trading partners may force President Trump to fulfil his campaign promises on Trade. He will otherwise disappoint his many supporters that are carefully watching ahead of the Mid Term’s. I humbly think most experts err in their belief that the White House will talk tough, but ultimately never dare to confront China and other trading partners.
Finally, most American voters in the suburbs and the heartland are barely invested in stocks. And our analysis shows, it is the suburbs that may determine the outcome of the Mid Term elections. We are convinced the European Union has too prematurely assumed the USA are out and China in.
Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, Switzerland – 11 March 2018 (public release 72 hours delayed)
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