By Michael Every of Rabobank
Byron, Shelley, and Churchill
We have some wildly bullish markets out there right now. US equities have to be beaten back whack-a-mole style, it seems, as regardless of what happens it is ‘always time to buy stocks’. Especially when “important indicators” say it is; until “important voices” say it isn’t.
Moreover, and running counter to that enthusiasm, natural gas prices just hit new 14-year highs in the US and close to record levels in Europe, as other energy sources literally dry up in the summer heat. After a lag, that will drag up other energy with it because of substitution, and then everything else will get dragged up too as a result. For example, zinc surged too yesterday after one of Europe’s largest smelters announced it would halt production in September due to higher energy costs. And lots of things use zinc.
The West is in trouble on the most fundamental level with Europe at the epicentre – as explored in ‘An unfolding gas crisis in Europe’, which concludes: “It it is all but certain that the European economy will face some hardship this winter.” And not only Europe.
We also have wildly bearish takes on such matters, however, among which the recent missive from Pepe Escobar, 'The Second Coming of the Heartland’, takes the cake.
The title deliberately apes Yeats’ ‘The Second Coming’ and its infamous beginning: “Turning and turning in the widening gyre; The falcon cannot hear the falconer; Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world, The blood-dimmed tide is loosed, and everywhere; The ceremony of innocence is drowned; The best lack all conviction, while the worst; Are full of passionate intensity.” It also nods to Mackinder’s ‘Heartland Theory’ that who controls the Eurasian “World Island” controls the world. Then he quotes philosopher Byung-Chul Han, who directly channels Marx on the disruptive power of “financialization” to such a degree that the Bearded One might want to sue for plagiarism. All good points.
Yet the writing’s tone and passion leans towards Coleridge, Byron, and Shelley: “This unelected gaggle of insufferable mediocrities --from von der Leyden and Borrell to that piece of Norwegian wood Stoltenberg-- may dream they live in the pre-1914 era, when Europe was at the political centre. Yet now not only “the centre cannot hold” (Yeats) but Eurocrat-infested Europe has been definitely engulfed by the maelstrom, an irrelevant political backwater seriously flirting with reversion to 12th century status.
The physical aspects of the Fall --austerity, inflation, no hot showers, freezing to death to support neo-Nazis in Kiev-- has been preceded, and no Christianized imagery need apply, by the fires of sulphur and brimstone of a Spiritual Fall. The transatlantic masters of those parrots posing as “elites” could never come up with any idea to sell to the Global South centred on harmony and much less “community”…. We still do not have a post-Tik Tok Tintoretto to depict the collective West’s multi-wallowing in Dante-esque chambers of pop Hell. “
And you thought this Daily could get a bit colorful at times!
Of course, this West-bashing is contrasted with the marvels of the Silk Road (and, unspoken, its gas resources), its stalactites, and the spiritual-and-economic promise of a “community of shared future for mankind”. Indeed, all the piece really lacks is, “In Xanadu did Vlad Putin a stately pleasure dome decree.”
On which note, the Russian president just railed against the US-led “unipolar world order”, stating its time “has now come to an end”, and that the only way to diffuse global tensions is by reinforcing “the modern multipolar world system,” – or, to militarily escalate in order to deescalate. That’s as he also just used an arms expo to claim Russia’s weapons were “significantly superior” --read cheaper-- than their western counterparts, as tried to plug them to Asia, Africa, and Latin America. Meanwhile, in economic terms, he stressed: "[Western] hegemony means stagnation for the whole world, for the whole civilization. [It means] obscurantism, the abolition of culture, and neoliberal totalitarianism."
Against this backdrop, many in the West are still focused on whether now is the time to buy frivolous stocks, assets, or housing.
Note that Escobar’s and Putin’s latest offerings come just over a year since the collapse of Afghanistan’s pro-Western democracy; as Iran haggles like a bazaar merchant with the EU and US’s bizarre negotiating team over a nuclear deal – as it looks like the US is walking out without buying despite the EU flashing them a give-away look that says, “But honey, I really want it!”; as Russia embraces North Korea, whom nobody else will touch with a bargepole; as Turkey strikes a closer economic relationship with Moscow too; and as Taiwan remains in the headlines.
Things are really happening, and fast. And the West is really in deep trouble on many fronts – many self-inflicted. Frivolity and been the order of the day for far too long.
Yet if coloring in countries on maps was the key to success then the Soviets would have won the Cold War. Making geographical connections work economically is the key. As covered in ‘Why Bretton Woods 3 Won’t Work’, the countries lining up to forge a ‘Heartland’ are largely large, sparsely populated places that sell the same stuff. Turkmenistan can export gas to Kazakhstan, which can export gas back in return: both can export gas to Russia, in exchange for more gas. Only China stands out as a producer of things - and yet it still relies on Western markets to prop up its own economy and currency, given it has too little demand and far too much supply.
Indeed, not only are we seeing headlines about “multipolar world systems”, but ones saying ‘China’s Belt and Road initiative on brink of crisis as numerous projects fail’; and ‘G7 infrastructure plan to rival Belt and Road Initiative could force Chinese firms to ‘match global standards’’. (None of which surprises someone who years ago gave a presentation titled ‘One Belt, One Road?’)
Moreover, China’s grand strategy actually apes Mahan instead, who said the ‘World Island’ doesn’t matter: coastal areas and oceans do. Ironically, Byron and Shelley would have shared Mahan’s thoughts, through an opium fog, even though they lived before him, because that was the British grand strategy before it was the American or the Chinese. And it can be anyone’s again.
Even the far east of the West such as Australia, whose focus on Xanadu is all about the sad passing of Olivia Newton-John, is now aware of these ‘big picture’ issues. The US is passing bills to try to bring back high-tech industry, and regulations to stop China advancing in the same field. Europe is rearming, and talking about changing its environmental regulations to allow it to dig for home-sourced lithium, cobalt, and graphite. In short, things are starting to stir.
Moreover, rates are going to continue to rise to keep a lid on inflation and, whisper it, to keep capital flowing to the West. The RBNZ is seen going another 50bps today, despite signs of its housing market slowing sharply, though we will look to see if they back another two 50s after that to take rates to 4%. Expect the same trend from the Fed despite the poor US housing data seen twice this week(?) Let’s wait for the latest minutes later today and see. That said, Australia’s new monthly CPI measure sends the message that ‘local inflation has peaked’ according to Bloomberg: and the RBA are still among the least willing to wake up and smell the coffee despite their being replete with commodities making them a geopolitical winner.
In short, the West has made enormous strategic errors, is suffering for it, and will continue to. But that doesn’t mean it can’t get its act together long-term under the sudden realisation of the fight it is in. We’ve been here before, after all.
Churchill, writing on June 5, 1938 noted:
“There is at the present an almost total absence of defence... We have not got a dozen modern anti-aircraft guns in the country…. it is a delusion to think that for the next two or three years there will be any contribution to our defence from [scientists]. As to the R.A.F., it is at present less than one-third of the German Air Force, and the rate of production is at present less than one-third… The Germans know our position very accurately, and it is our own people who are living in a ‘Fool’s Paradise’.”
Yet the British turned it round to win WW2 – albeit with US and then USSR help after 1941. Then again, where is the British pound trading today?
The UK, and the West, must focus on the structural ‘Heartland’ challenge --however flawed that rival also is-- and now scarce resources. That is what economics is supposed to be about: and it does NOT involve cutting interest rates to prop up meme-stonks, pictures of monkeys wearing sunglasses, frivolous consumption, rentier housing markets, or the price of commodities the West is still reliant on from “multipolar” rivals.
Neither is it about tax cuts. Churchill never said, “All I have to offer you is blood, sweat, and tears, lower taxes, and higher house prices.”
There is me going down my own ‘Escobar’ path, perhaps. But I leave the last word to Shelley – and feel free to interpret it however you want:
“I met a traveller from an antique land,
Who said: "Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shattered visage lies, whose frown
And wrinkled lip and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear:
'My name is Ozymandias, King of Kings: Look on my works, ye mighty, and despair!'
Nothing beside remains. Round the decay,
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.”