Geopolitical Update : Middle East conflicts overlap, Battle for Latin America, Swiss Franc at risk?

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By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 1 July 2019 – Switzerland.

Dear reader (text updated on 3 July 2019, partial release to public)

As world media and investors focus on the Far East (G-20, North Korea-USA Summit, Hong Kong protests etc.) the developments they should be really paying attention to this Monday morning are actually taking place in the Middle East and Europe. While many of the combatant nations of the next two wars are lining up, the European Union is shifting to the left. We have been warning of this inexorable shift to the left as a result of Brexit. I shall comment on the EU’s shift to the left on a another report.

As I wrote in my last update, the concerns of US Central Command are becoming a reality. US allies in the Middle East are beginning to hit back at Iranian proxies throughout the MENA region. Based on my independent research, I have ascertained beyond reasonable doubt that Secretary Pompeo, Vice President Pence and Defense Secretary Esper (new) increasingly oppose President Trump’s approach versus US foes – A soft non-engagement policy visible since January 2019. The Trump Team wants to avert a military conflict in the run-up to the 2020 Elections. The view of the West Point veterans is that US foes are taking advantage of it, attacking US allies, and that will force them to retaliate unilaterally – making a military conflict only more likely. A compromise is in the making: to allow US allies to retaliate once the President’s re-election campaign gets into full swing this Fall 2019. I doubt this can be done. In the Middle East, any show of sustained weakness can be deadly.

1) Foretaste of what is to come 

Let me briefly review the events of the past 36 hours that Western media has failed to report and put in perspective:

  1. Violent clashes between Iranian forces and Kurdish Peshmerga at multiple fronts. Those units serve as ground troops for the US and Israeli armies.
  2. The US 5th Fleet was seen as moving stealth bombers into position – tactical nuclear payloads have been rumoured (of which we have no confirmation)
  3. Syria and Turkey raise their rhetoric against one another two days after Turkey fired on Syrian positions. Turkey calls for Arab nations to join it in pursuit of Israel and regaining control over Jerusalem.
  4. Haftar military forces of Lybia open hostilities on Turkey as retaliation for Ankara’s meddling in Tripoli. Ankara says it will respond swiftly to any declaration of war from Lybia
  5. Israel launches missile attacks on Damascus’ air defence bases as retaliation for this weekend’s rocket attacks from Syria on Israel and Iran’s attacks on Kurdish forces and Israeli researches say Iran could have an atomic bomb by end of August
  6. The USA launches air strikes against Al Qaida in Syria – first time since the height of Syria war. Earlier in the week British F-35s flew their first mission over Syria
  7. Hezbollah began to mobilise its battle-hardened troops in Syria back to Lebanon – a conflict draws near as Israel makes final preparations for a war on multiple fronts
  8. While Teheran and Moscow debate again the terms to deliver the advanced S-400 air defence system, Moscow advances plans for the mass mobilisation of the reserves.

I don’t think these escalations will lead to the next war, but they are a near-perfect foreshadow. What we see is the resurfacing of multiple complex conflicts converging into one wider conflict that is waiting for a trigger (or a mistake) to be ignited. Emboldened by the EU, both Turkey and Iran are assertively expanding their influence throughout the Middle East, North Africa and Western Europe.

While Europe is at Turkey’s mercy on the migrant and energy security front, several EU governments are providing Teheran with financial, political and intelligence support. My analysis shows that at least two wars are coming to the Middle East with potentially catastrophic consequences for the EU-China Trading Routes and the EU economy. One of those wars is likely to be nuclear – the fallout will be felt across the Northern Hemisphere, especially Europe.

After having taken sides in the 1’400 year old Sunni-Shia conflict, the EU is likely to be exposed to the military action and potential loss of life. It may well prove to be the most tragic strategic decision of the EU since her inception, one of the many strategic miscalculations in recent decades. Since 2015 Sunni-Arab nations view Western Europe as the key enabling ally of their arch enemy (Iran), thus the EU and her associated states like Switzerland could be treated as potential combatant states. The more benign scenario for the EU is one of widespread internal security threats as Sunni-Arabs of combatant states defend their cause by fighting their enemy’s ally from within. The next two Middle East wars are unfortunately likely to have a European showdown of some kind.

Economic-military analysis: At the current pace set by Teheran, Iran is likely to face preemptive military attacks by US, Israeli and Arab forces before it receives the formidable S400 Air Defence batteries from Russia and also before the centrifuges have enriched enough Uranium payload for atomic bombs during the last week of August 2019. President Trump. Iran may want to postpone the S400 in order to preserve support from the EU in any conflict though.

2) In the face of US appeasement, Israel hits back

Israel de facto ends 6-months of appeasement policy by President Trump: What is remarkable is that Israel hit back at Iran almost immediately, forcing the USA to strike as well. The USA was seen as retaliating for an attack that took place weeks ago. And it is my preliminary analysis that Israel Defence Forces have taken the initiative in the Middle East theatre – probably under pressure by Saudi Arabia and a few other Sunni-Arab states allied with Israel. That odd alliance is possible only due to the repeated threats by Teheran to wipe them off the map. Remarkable what the fear of extinction can do. To be precise, Iran itself feels threatened by Sunni-Arab states as well.

The recent Washington soft touch on Turkey and Iran has strengthened Israel’s conviction that they cannot hand over their security to Western allies.

Can the USA retake the initiative in this region? Over the past 6 months assertive and aggressive regimes throughout the Orient have been taking advantage of the Trump “disengagement and deferred retaliation” stance. In other parts of the world it may have worked, but not in the Orient, where weakness quickly emboldens one’s enemies. As we said in mid June, President Trump wants to avoid a military adventure overseas, because that is what he promised to his base. But his desire to avoid a military clash is being tested on multiple fronts from Afghanistan to Ankara, and from the Persian Gulf to the South China Sea. It may ultimately produce just that: a military conflict. As we said more than a year ago, the USA cannot win an asymmetric warfare in Afghanistan with Congress, the press and NGOs judging her every action. It is wise for the USA to disengage there.

Because the security deterioration across the entire Middle East cannot be stopped, the USA are quietly preparing for war and energy/trade disruptions. The USA became energy self-sufficient at a breath-taking pace exactly for that reason. It is Europe that investors should be concerned about.

3) White House split, Pompeo reasserts himself

The timing of Israel’s immediate action seems to have upset some in the White House. But my analysis suggests Sec Pompeo, VP Pence and DefSec Esper used the swift Israeli action to prompt President Trump to adjust his Soft Policy Bias. While conservative voters may not want the USA to get entangled in other peoples’ wars, they also don’t want perceived US weakness to embolden US foes. Many argue President Trump did it last month when he ordered the Air Force to “stand down” instead of striking back. That is the kind of restraint that independent voters and even Democrats have welcomed. Restraint is good, but 6 months of restraint in the Middle East makes US allies a target – From Jerusalem and Ryad all the way to Seoul and Tokyo .. US allies are angry at an all too cautious US President that – in their eyes – may be more worried about keeping his promises than containing the growing threats they see from an emboldened Turkey, Iran, China or Russia.

So far President Trump believed that moving two formidable Aircraft Carrier Strike Groups into the Persian Gulf and the South China Sea would be enough to deter US foes. He is learning the hard way that many Oriental leaders in undemocratic regimes only respond to “applied force”. A show of force without any tacit action is doomed to backfire in the Orient.

Not all was negative – President Trump risked quite some political capital when he tested Chairman Kim’s this weekend. Mr. Kim responded swiftly with a summit within 24 hours. The crossing of the DMZ line by Pres. Trump into North Korea carries a powerful symbolic weight in the region. In the Far East President Trump looks like achieving his goals for the re-election campaign. But not so in the Middle East. This may change once Mr. Kushner’s Peace Plan is fully unveiled though. I still believe a Peace Accord is very likely. Maybe a war has to be fought first, but it is coming, because all world powers want to project power on the Middle East and Jerusalem.

A compromise is taking shape

US allies in the region can’t wait until the US 2020 Elections, so – the logical compromise will be to ask them to withhold most lethal force until Trump’s Reelection Campaign is in full swing. This gives US allies some leeway. Especially those that have suffered attacks from pro-Iranian forces this year.  It is thus likely Trump may have to concede some offensive action to appease Saudi-Arab-Israeli demands for retaliation.

As I have highlighted this last month, once Israel begins to take unilateral action in self-defense or in defense of its allies (i.e. the Kurds), I expect Saudi and other Arab forces to follow suit. This is what Central Command had feared all along.

Neutralized by Congress and federal judges, I see President Trump being extremely active in Foreign Policy, Trade and Currency matters in the year following October 2019. In connection with a compromise with the US military and an aggressive “All or Nothing” domestic strategy (infrastructure, health care costs, tech giant monopolies breakdown etc.), President Trump could win either way: If he pushes them through, and also if Congress manages to stop them. The blame would be on an obstructive Congress. Although it is a long road, my current assessment is that a GOP ticket is likely to win the 2020 race.

4) European Markets are misreading the signs

This weekend’s good news from Seoul and Osaka were not really a surprise. President Xi and President Trump needed a short term truce to take home. Markets are also hailing an EU-Mercosur Free Trade agreement, but no mention is made that Mercosur as a whole is an uncompetitive protectionist block saddled with huge state subsidies and stagnating/failing economies. That is why many in Brazil want to exit it.

While I believe that longer term the reunification of the two Koreas is a likely scenario, China and the United States of America are on an inevitable Collision Course. Markets tend to extrapolate the short term and to close their eyes to the inevitable. A few years ago, China and the European Union were convinced the USA was over and done, so they embraced each other and openly defied the US supremacy. With a US-China truce in place, Washington will now shift its focus on Europe. Washington is eyeing Germany as exporting with a greatly devalued D-Mark thanks to much weaker economies locked in the EURO zone. Thus, markets are in denial of what lies ahead.

Who could benefit from the converging macroeconomic and geopolitical clouds over Europe? Some oversold Southern European assets could be offering both value and upside. I believe that after having tried populist-leftist parties, Greek voters could lead the way back to more centrist-right market oriented policies. If so, even some Italian banks may have upside.

In politics and investments, timing is everything

This week’s EU retaliation against Switzerland (and its stock exchange) is a terrible timing and not even in the EU’s best interest. It is also exposing the nature of the EU at a most vulnerable time for her: It reads “accept complete assimilation into the EU or face retaliation”. In the eyes of many critics, the misleading term “Bilateral Framework” that the EU wants to impose on Switzerland would in many ways de facto end Switzerland’s existence as a sovereign neutral state. Already now – they argue – Bern can hardly take a decision without Brussels’ approval. The past two weeks have been an amazing gift to Brexiteers. Immediately, Mr. Jeremy Hunt has had to shift closer to Mr. Boris Johnson’s position. The pro-EU conservative leader, Hunt, now eyes No-Deal preparations in order to negotiate with the EU.

London and Washington are paying close attention to how Brussels is dealing with Switzerland. I would have advised the EU to postpone implementing their threat on Switzerland until October 31st.

5) The Battle for Latin America: EU, China & Russia eye Latam – together

The EU move on Mercosur matters in the global geopolitical macro picture, because the struggle of the Superpowers is shifting to Latin America and the EU and China have a joint strategy for Latin America.

The USA, China, the EU and Russia are fighting each other to project power & influence over Brazil, Argentina, Chile, Peru and Colombia. In some nations the EU and China are working together to unseat the USA. In others China and Russia are working together. In two nations China, EU and Russia are working together. China has done her homework well: Beijing has secured a strong presence in key resources suppliers such as Peru, Chile and Brazil. But after failing to convince Santiago and Brasilia to turn their backs on the USA, Beijing has since redoubled her efforts on Lima, .. and Buenos Aires. The massive export success has made Peru highly dependent on an increasingly fragile Chinese economy though. The Pacific Alliance export champions have done a great job exporting, but have failed to diversify their economies into high added value manufacturing and globally competitive services. Mired by domestic political crises they are somewhat unaware of the global disruptions and confrontations they will be part of.

Since China is preparing for a possible war in the Middle East and a direct confrontation with the USA, it is using all the means at her disposal to make Peru and Argentina co-dependent strategic allies in the future. One is in the Pacific Alliance, one is in Mercosur. Russia and the EU share key Chinese interests in those countries. The problem for Latin nations that have openly bet on China, is that China doesn’t rule yet. Their new ally China is too vulnerable and the USA doesn’t trust them anymore. Geopolitically skilled Brazil and Chile knew that to challenge the USA is premature – they do business with Beijing, but are avoiding being part of Beijing’s strategy to take on the USA. Other Latin nations are catching up after noticing that they cannot play with the big powers and afford to be geopolitically unfit or naïve about their global struggle for supremacy.

6) Switzerland and her currency are fading away as a Safe Haven – Swiss Franc increasingly carries EU political risk

With EU laws ruling in Switzerland and large Swiss corporations -widely seen as- in the same boat with the EU, the fate of a once proud & independent nation seems to be sealed. It is being absorbed into the EU. The EU-Swiss Bilateral Agreements are one of the smartest moves by the EU over the past two decades. Locking in a nation that doesn’t want to be a member- Meanwhile winning over the big firms with ever cheaper labor and forcing that nation to adopt every new EU regulation. Thus, a massive incentive to issue one regulation after another. Integration by regulation or should I say by a regulatory tsunami ? – the bureaucrats in Brussels and Bern have been underestimated by investors. Switzerland is converging towards the EU – faster than most Swiss may want to acknowledge. The Swiss Franc is an important Safe Haven currency that on her asymptotic convergence path with the EURO, may behave unexpectedly erratically in years to come.

In the short term the Swiss Franc will also be a Safe Haven, but as we have said before, with the gradual absorption of Switzerland into the EU, the Franc will gradually lose its geopolitical Safe Haven status over time. The Swiss fiscal position may still be enviable, but – increasingly – geopolitically and legally Switzerland has to follow EU policy decisions. Nevertheless, in the event of a European financial crisis, the Swiss Franc could still play a Safe Haven role. Should the YEN be compromised, then the CHF could be the choice. But I believe alternatives will be sought. The SNB won’t be unhappy about this though. But will wealthy foreigners bring their wealth to Switzerland if they deem it as geopolitically at risk? In contrast to what some lobbies have said, the FULL ACCESS to the EU market comes at a high price.

Let’s take the Shia-Sunni conflict: After the EU embraced and sided with Iran, the EU (including associated states like Switzerland) will be seen by Sunni-Arab states as a key ally of their arch enemy in any Shia-Sunni conflict. Something very few investors seem to be paying attention to. In case of a Middle East war, Switzerland’s security could be equally compromised. Singapore and the USA will benefit from the growing erosion of Swiss neutrality, independence & safety.

7) Currencies’ race to the bottom – Money illusion thanks to simultaneous depreciations – Gold & Crypto demand

While markets may enjoy a Trade War-truce induced rally and the USD may soften in the coming months, the pieces are coming together for a powerful jolt in the Middle East at one point. One that could trigger a Risk-Off and sudden systemic demand for the USD and Treasuries. It could expose the trade routes between China-Europe to disruptions. Assets like Oil, Gold, crypto currencies, YEN would react.

With all major economies trying to devalue their currencies and pumping more liquidity, the rising asset prices are somewhat reflecting a tragic straightforward monetary phenomenon. One that quantitative neo-classical economists were well acquainted with: As key paper currencies lose inherent value simultaneously (and policy makers make asset prices rise in tandem), currency exchange rates will portray a deceitful stability.

The simultaneous devaluation of paper currencies escapes the attention of consumers and investors. Ironically, the gigantic degree of loss in inherent value of paper currencies, can be measured by the rise in asset prices. Gold is barely reflecting that.

“Let’s make inflation (assets), but let investors fear deflation (CPI basket)“

Policy makers were smart in shifting INFLATION from consumer goods to real estate, stocks, bonds, junk bonds, yachts etc. There is a huge amount of inflation, but not in the CPI basket, rather in asset .. 

To read the full report, please write to c.takushi@bluewin.ch to subscribe for his reports

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 1 July 2019 – Switzerland.

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

A distinct broad approach to geopolitical research

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) He only writes when his analysis deviates from Consensus

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