Rabobank: “Such Planning. Many Geopolitics. So Strategy”

By Michael Every of Rabobank

Doge Eat Doge

“Well it’s a dog eat dog; Eat cat, too; The French eat frog; And I eat you; Business man, when you make a deal; Do you know who you can trust? Do you sign your life away? Do you write your name in dust? Hey, hey, hey! Every dog has his day; It’s a dog eat dog; Dog eat dog.” AC/DC

We see more and more references to “mercantilism” in the financial press: but most readers still don’t understand what the word means. We see increasingly frequent talk of “grey zone” tactics: most have only a greyish view of what they mean. There is discussion of the eCNY (China’s new digital currency) – and very few grasp the multi-faceted implications associated with that. We do, however, see headlines like “The drums of war are beating”, which anyone in markets can fully understand – but then still choose to ignore.

Now we have France threatening to cut off Jersey’s electricity if the UK won’t move on fishing rights, prompting the UK to send armed vessels to the Channel Island. (And prompting a member of the UK Board of Trade to call French President Macron a “Poundland Putin”, and conclude: “How should we respond? One obvious step is to reduce our dependence on electricity generated in the EU. We mustn’t be in a position again where we can be blackmailed as Jersey is. More widely, we need to rethink our geopolitical goals. Just as our trade is going global, so should our strategic assumptions. For decades, we rightly focused on the defence of Europe through NATO. But can we continue to defend an antagonistic EU, with all the joint operations and intelligence-sharing implied? Our truest friends, like our richest prospects, lie across the oceans. It is clearly time to raise our eyes.”

Meanwhile, the UK will reportedly stockpile key metals for electric cars, such as lithium and cobalt, to “beat the Chinese threat”. And the G7 in June is likely to propose a joint response to economic coercion –presumably not from France– that would, it is whispered, maybe even see members promise to buy any goods China boycotts. (So happy days for Aussie wine? There are worse ways to fight a Cold War.) Moreover, the EU is preparing to respond to US President Biden’s “Buy American” stimulus with a new law that would let it effectively shut out firms from countries where European businesses are barred from state tenders. That’s also aimed at China, but will infuriate DC given the political capital to pass the contentious stimulus bill requires it to be directed inwards, and there is nothing except the EU stopping the EU from passing its own EUR4trn package so it doesn’t have to rely on the US for growth.

If you think that law will annoy the Americans, consider Germany had promised to send the Bayern frigate to sail alongside the UK (and Dutch, French, and US) carrier group through the South China Sea, the largest demonstration of joint Western naval power there. However, as Chatham House notes: “…rather than coordinating with European allies, let alone the US, Germany is doing its own thing…The Bayern will now also make a port visit to Shanghai and, because this is scheduled to take place before the Bayern enters the South China Sea, some officials worry that it could actually convey the impression Germany has in effect asked China for permission, therefore strengthening rather than challenging Chinese claims over the South China Sea.”  

Yes, there is confusion or delusion about what this all means in markets, so they choose to ignore it. That’s because of a poverty of strategic thinking, which lies in the fact they don’t even have the vocabulary to describe what is happening due to decades of neoliberal reductionism: in an Orwellian or Wittgensteinian process, this has shrunk the ability to even conceive of the real problems – let alone promote solutions.

Is all of the above “economics”? Well, yes. But it’s obviously far more than that. Where is the page on this in the textbook? Is it “trade”? Yes, but not of the Ricardian kind we are taught. Is it “finance”, or “technology”? Again, yes – and yet so much more than both. “Ah!”, say markets, “Then perhaps it is that magic cure-all word: geopolitics”? Well, yes: but what does that mean? Take that down to the national level and see if the conceptual ‘model’ describes anything: “Why did that move just happen in markets?” “Politics.” “Ah, okay then. Now I understand.”

There *are* schools of thought out there which bridge the historical, cultural, social, psychological, political, economic, financial, logistical, technological, geoeconomic, geopolitical, diplomatic, national security and, yes, military fields. Try “International Political Economy (IPE)”, or “Grand Strategy”. But do our central bankers, finance ministers, or markets grasp the reality of such a dog-eat-dog world? No. They are navel-gazing, even though interest rates –and swap lines— and fiscal policy, and capital flows are all vital tools/weapons within IPE.

Markets now get the latter on ESG when they aren’t green-washing: but they seem less keen on realizing there will surely be a geographical/political component to this too. (“Money should go here: not there!”) Brazil also just hiked rates by 75bp to 3.50% despite being ravaged by Covid-19: see all the inflation we aren’t having? That is as the US five-year breakeven inflation rate broke 2.7% yesterday, the highest since July 2008, although the 10-year US Treasury was lower on the day at 1.57%. The Green issue and inflation both factor into Grand Strategy at the highest level, most so when it comes to *food*!

Some Western politicians are now starting to wake up – and, just as one would expect, the implications are huge for those markets that didn’t see this shift coming. Unlike Bill Gates, the White House now backs a temporary waiver of Covid-19 vaccine patents. Of course, related pharma stocks were hit hard yesterday. Yet in what way is a US Grand Strategy helped by allowing firms to rake in mega profits in a world in which realpolitik ‘vaccine diplomacy’ is so evident? See the recent public fury in India against the US over vaccine hoarding, for example (And imagine a map of the world where India isn’t a friend of the US, and yet the US still has a strong hand in the Indo-Pacific; and project the Asian economy China is most worried about in the long term.)

Meanwhile, many of the West’s best brains’ personal grand strategies are…Dogecoin: “It is cute. I buy it. It goes up. I get very rich, very fast.” And it is indeed up 12,000% since January, for those who think this means anything meaningful. Yet the SEC says it is reviewing short-selling and swap rules after GameStop and Archegos, to try to stop the “gamification” of markets. And making a joke like Dogecoin worth more than a US Dollar is surely a game too – “Such planning. Many geopolitics. So strategy.” Even Microsoft and Amazon are calling for crypto regulation. The key point is that gamification does not help the US in The Great Game underway. And if it loses that Game, then everybody holding Dogecoin ‘wealth’ needs to start wondering how the PBOC might value such socially-useful ‘assets’.

As such, in the end it’s likely to be dog-eat-Doge.