By Michael Every of Rabobank
This Daily has long taken the stance that geopolitics is now geoeconomics and so impacts global markets, and that the rest is commentary. The latest set of headlines reinforce that belief.
President Biden made a surprise visit to Kyiv on Presidents’ Day, pledging “unwavering support.” (As former President Trump is to go to Ohio, the scene of a disaster of a different kind: it remains to be seen if geopolitics is good 2024 politics if it ignores local economics.)
The EU’s top diplomat says China will cross a ‘red line’ if it sends arms to Russia, matching US rhetoric from Secretary of State Blinken. Borrel stated Chinese Foreign Minister Wang Yi “told me that they’re not going to do it, that they don’t plan to do it. But we will remain vigilant.” US Senator Graham put it more bluntly on TV: "If you jump on the Putin train, you’re dumber than dirt. It would be like buying a ticket on the Titanic after you saw the movie."
Yet the Wall Street Journal, which already alleged China is sending dual-use technology to Russia, now claims ‘In China, worries about a weakened Russia prompt a rethink’, not suggesting Beijing will jump on the Biden train, but floating that its peace plan out this Friday may contain an implicit threat: peace now (on de facto Russian terms), or China really may supply Moscow with lethal aid. That would extend the scale and length of the conflict: and buying a ticket on the Titanic for China; or the US; and either way for ‘2023 is not 2022’ those in a happy-clappy claptrap trap.
Japan’s Kyocera already says China is no longer viable as the world’s factory due to US technology restrictions, and that production there only makes sense to sell in China rather than to export from it; Bloomberg reports the Pentagon isn’t sure how to start stripping Chinese suppliers out of its production lines – but political pressure means it will try; Turkey denies exporting electronic equipment used by the Russian military as well. The common thread is an ongoing bifurcation of global supply chains which means higher structural inflation. Nobody is as cheap as China once was – including China.
Meanwhile, the Netherlands is warning of Russian attempts to sabotage its energy infrastructure. Again, geopolitics meets geoeconomics meets markets, implying higher structural inflation as a tail risk, unless you ‘assume’ it away (as explored in our report on balance of payments and balance of power crises).
Yes, there are other factors involved, such as post-Covid changes to labour markets; or what China is or isn’t doing in terms of stimulus, as Beijing reportedly asks banks to hold back from increasing loans. However, if geopolitics is now geoeconomics and so impacts global markets, is it really a surprise that February’s RBA minutes showed a 50bps hike was considered; that tomorrow the RBNZ is seen going 50bps to 4.75%; that the ECB is seen going 50bps too; and that a slew of Fed speakers just threatened to step up to 50bps again? The rest is commentary.
Even so, that comment needs some commentary too. The phrase ‘the rest is commentary’ is taken as a reductive, no-nonsense, American way of thinking. While that may be true, that isn’t its root or even the full saying. Both lie in the Talmudic story about the first-century rabbinic sage Hillel, who a gentile provocatively asked to teach the whole Torah (the first five books of the Hebrew Bible) while standing on one leg. Hillel stands on one leg and replies, “That which is hateful to you, do not unto another: This is the whole Torah. The rest is commentary - go study.”
Besides being a lesson in good politics, international relations, and economics that we never live up to anywhere, the key point is that today we omit the “go study”, which changes the meaning of the phrase. It is not that the other 99.99% of the Torah is “commentary” to Hillel, but rather that commentary on the core message requires that 99.9% of study; indeed, you cannot make sense of the core message without it.
Translated back to today, it’s not good enough to say ‘geopolitics is now geoeconomics impacting markets’ and the rest is commentary. That statement requires detailed study into the details and implications. Equally, no amount of study will help if you don’t accept that core principle first.
Sadly, far too much market analysis still falls into the first or second camp. Conversations between the two, and between both and those who accept the key statement and study it, tend to be tense, or see people speak past or over each other. On which note, back to the Talmud.
The rival scholar to the open, “liberal” Hillel approach of debate is the strict, “conservative” sage Shammai, who when asked the same question about the Torah hit the man with a stick for his audacity. Indeed, although overlooked, tensions between the Hillel and Shammai camps rose to the point where some scholars of the Jerusalem Talmud state Shammai’s followers at one point killed Hillel’s over a Torah dispute. That is a lesson in bad politics, international relations, and economics that we still seem to live up to everywhere.
Please - go study!