"The G7 Look More Like EM Now, Another Shock To The West's Worldview"

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by Tyler Durden
Tuesday, Sep 12, 2023 - 02:30 PM

By Michael Every of Rabobank

Big German Word, Big Global Problem

Today’s Global Daily focuses on a German word about the globe: weltanschauung, or “worldview”, one’s fundamental cognitive orientation, encompassing knowledge, culture, theology, philosophy, politics, economics, morals, and ethics – and even what ‘daily’ means. For 13 years post-Revolution, France had a 12-month calendar of three 10-day weeks with 10-hour days of 100 minutes of 100 seconds. We are today in ‘Duodi’ in the second week of ‘Fructidor’, with five or six Fêtes from September 17-22/23 about to add the days needed to fit it the year into the solar system. Of course, the latter is based on the Copernican weltanschauung which replaced the Ptolemaic, where the sun revolved round the Earth.

Everyone in markets has a worldview even if they don’t know it or can’t articulate it. For most it’s a neoliberal belief that free markets work best, as selfishness creates selfless outcomes; except ESG is better; the West is best; except for China; and central banks bail us all out when this all ‘mysteriously’ fails. It’s deeply unserious when you think about it, and an intellectually leaky weltanschauung isn’t saved by the odd ‘Minsky’, ‘geopolitics’, or ‘black swan’ as plasters if you haven’t actually read them.

Worldviews can change - but usually only after a huge shock for those holding them, e.g., “You can’t own land.” (Native Americans) vs. “Yes, you can.” (US Settlers); or monarchs vs. republicans; or republicans vs. theocrats; or pacifists vs. warriors. We’ve had ample evidence of that of late.

Today’s changing world is leaving welts on Germany’s weltanschauung in particular. First a Global Financial Crisis; then austerity creating a Euro crisis, only solved with un-Germanic monetary policy; then a refugee crisis; Brexit; Trump; Afghanistan; China’s policy shift; Russia’s invasion of Ukraine; an energy shock; the return of inflation and Germanic monetary policy; Biden’s IRA; African coups, EM wanting value-added green jobs rather than selling their minerals to Europe; and China flooding the EU with EVs and solar panels. Germany thought it understood how the world works, but didn’t. Yet the real problem is they still don’t have a new worldview, and are about to go full circle with a return to fiscal austerity(!) The next iteration of that cycle risks deeper disaster.

The market weltanschauung is also showing welts: those managing tens of trillions of assets still “don’t do geopolitics,” think “inflation has peaked,” and hope “rate cuts will solve this.” They are likely to be as wrong as the Germans as the world around us does not sit in line with such views.

For example, the recent G20 condemned war “In Ukraine,” not “against” it despite no Putin, and new Chair Brazil said he can visit despite his international arrest warrant: both show the limits of Western influence. China tried to block the US hosting in 2026, and Bloomberg alleged it would demand access to Western chips as quid pro quo for help with the global green transition. That didn’t occur, but what can John Kerry do if China does kick him in the weltanschauung like that? Xi didn’t even attend, underlining he isn’t interested in this forum, and favors a South-South global system. Let’s see if the BRICS11 use more local FX invoicing, i.e., dollar-priced bilateral barter, which West African state has an anti-West coup next, and if the US letting the World Bank lend $25bn more to a Global South needing trillions --costing Washington the pocket change of $2.5bn-- makes any realpolitik difference.

Ironically, the G7 look more like EM now, another shock to the West’s worldview. Canada’s Trudeau couldn’t fly home because his Air Canada jet broke down on the runway for hours!

Yet steel wheels are turning – away from the past low-inflation globalization. A new US-brokered India-Saudi-(Israel?)-EU railway deal will rival China’s Belt and Road, reroute global supply chains, and aim to pull Riyadh and the UAE away from the BRICS. The US has signed a Comprehensive Strategic Partnership with Vietnam - followed by reports exports of Vietnamese dragon-fruits and durian to China were halted for “quality checks”. We see South Korea-Japan and US (and Australia)-Philippines defence rapprochement. Indonesia declined to join the BRICS for the chance to get into the OECD - and let’s see what happens in the Argentinian election re: dollarisation. In short, dividing lines are being drawn, even if where any Potsdam-Yalta curtains may fall, and how permeable they may prove to be remains unsettled.

Meanwhile, Russia will be spending 45% of its budget on the military by year-end, and is cooperating with North Korea. So is China, which the Atlantic says ‘Prefers Guns to Butter.’ Yet while there’s money for that, there’s not for much else. Our China strategist Teeuwe Mevissen’s ‘Debt and dilemmas’ estimates local government debt alone at CNY106.7tn ($14.6tn), or 87% of GDP, so “those who are waiting for a big bazooka will likely be disappointed.” Importantly, this doesn’t mean a ‘Lehman’ moment looms, but “Regardless, China’s economy is likely to be at the start of a long process of deleveraging that will suppress economic growth for years to come.”

Indeed, the Wall Street Journal underlines that ‘Xi Jinping’s Tight Control Hampers Stronger Response to China’s Slowdown’, the Financial Times says ‘No more exceptionalism for US banks in China’, and the president emeritus of the EU Chamber in China says ‘No hope China will rejoin the world’, adding, “this leadership is willing to sacrifice economic growth for the sake of ideology. The old equation was always that China does anything to add economic growth because that was the perception of what keeps us in office. Now what keeps the party in office is utter, 110% control.” Who could have seen this coming? Anyone whose worldview included reading Marx, Lenin, and Minsky, not Fortune and Forbes.

Meanwhile, NATO will launch its biggest military exercise since the Cold War in 2024, involving 40,000 troops. Yet with low unemployment and fewer risk-averse, trigger-warning happy youngsters, where will future recruits be drawn from? And the money, as US federal debt interest exceeds spending on an underfunded Pentagon, and Germany can’t fight its way out of a wet paper bag? More broadly, we are seeing Western policy shift to match the external environment: foreign policy is usually an extension of domestic policy, but now it works in both directions.

In the US, Bidenomics is here, and yesterday’s Financial Times noted ‘America’s New Right is moving beyond Reaganism‘, as predicted in 2019’s ‘The Age of Rage’. As an example, the conservative American Compass released ‘Rebuilding American Capitalism’ earlier this summer, which argues, “Just as policymakers chose the current order, they can choose to move beyond globalization toward more balanced global flows of goods, capital, and labour.” It proposes to:

  • A Global Tariff on all imports at 10%, rising 5ppts a year until there is no trade deficit;

  • Repudiate China’s WTO Member Status and rescind its permanent normal trade relations status, rejecting WTO authority over US trade policy.

  • Prohibit US investment firms from holding Chinese assets and China from US capital markets.

  • Implement a skills-based system for legal immigration, and cap H-2A and H-2B temporary visa programs and phase them to zero over the next ten years.

On industry they want to: establish a 50% local content requirement for goods critical to national security; mandate domestic labour and intermediate goods account for 50%+ of value-added; establish a national development bank for critical industrial projects; and repeal the National Environmental Policy Act. Regarding labour, they favour meaningful worker representation; worker-led benefits; allowing sector-wide bargaining; and guaranteeing workers’ legal right to organize. All this from a wing of the Republican party(!)

American Compass also argues:

American finance has metastasized, claiming a disproportionate share of the nation’s top business talent and the economy’s profits, even as actual investment has declined. This “financialization” of the American economy weakens the nation and threatens our future prosperity.”

They propose establishing a financial transaction tax of 10bps on secondary-market sales of stocks, bonds, and derivatives to fund a pro-investment tax policy, ban share buybacks, and eliminate the tax deductibility of interest.

Can you imagine the market impact of even some of these measures, let alone all of them? They would rip up markets and worldviews in tandem. Space precludes me doing so today, but any analyst worth their salt should be able to tell you immediately what they would buy and sell, and at what price relative to today. We are talking Brexit-on-steroids and common-prosperity-on-steroids level shocks.

Regardless, you won’t get any of this in markets research --not even to say this is unlikely to come to pass, or showing similar right-left populism failed under the UK Tories-- right up until the day it eventually does. Which it may well do. That’s because it’s so far out of most analysts’ weltanschauung that even if they weren’t selling you something --which they are!-- their own cognitive bias, and their models’ biases, means they couldn’t cover the issue properly anyway.

But don’t blame them for that: just don’t *be* them.

Don’t expect low inflation and low rates and free trade and free hugs, or rising house prices and happy voters, just because that used to be how the world worked. Do expect volatility: in growth; in inflation; in politics; and in geopolitics. And *hedge* yourself where you can, how you can best.

If even the BOJ is warning of removing negative interest rates, that’s the best thing to do. After all, big German words mean big problems not only for Germany, but for almost everyone.