By Michael Every of Rabobank
The Social Network of Liberty
Bloomberg exceeds itself today with its truly myopic focus. It is thrilled enough about a social media giant which thinks we all want to wear headsets all day (hypothetical note to self: go long optometrists/opticians and skin cream?), “because virtual reality moustaches”, and which just decided to open a corner-shop as a visionary idea, narrowly exceeding slim expected growth in user numbers to run THAT as its main Asia morning headline rather than anything else.
For example, the further pivot in Indonesia on palm oil exports, saying locals come first, that has seen global prices for that food staple up 10%: obviously people with virtual moustaches eat virtual food. Or the will-they-won’t-they of EU gas payments in/not in roubles, where it is still unclear who is going to keep getting Russian gas, and who is going to comply with EU sanctions: obviously people with virtual moustaches need virtual heat and energy.
Or Russia’s Putin warning countries who interfere in Ukraine will be met with a “lightning-fast” response, adding, “If someone intends to intervene into the ongoing events from the outside and creates unacceptable strategic threats for us, then they should know that our response to those strikes will be swift, lightning fast… We have all the tools for this – ones that no one can brag about. And we won’t brag. We will use them if needed. And I want everyone to know this.” Obviously people with virtual moustaches get full protection from these kinds of threats.
Or China’s Xi Jinping stating he wants to Chinese GDP growth to be faster than that of the US in 2022,… in order to show that his one-party system is superior to Western democracy, and the US is in decline, according to a Wall Street Journal report. To be fair, that leads even Bloomberg’s Shuli Ren to write an op-ed stating ‘China’s Xi May Soon Learn You Can’t Eat Statistics.’ Indeed, aren’t these guys supposed to get that with their (superior) New World Order, non-fiat, based, old school schtick?
Or, that just a day after I wrote “‘Why Bretton Woods 3 Won’t Work’ is working”, as the ‘doomed’ US dollar continues to soar, which said that if the West shifts to a more geopolitical economic stance, that it would stay that way, we get a Mansion House speech from UK Defence Secretary Truss which says “geopolitics is back”, argues for a “reboot” in the free world to a new global economic and security ‘Network of Liberty’.
Truss states, “Three years ago Vladimir Putin said Western liberalism was dead. Last year President Xi argued that the west is declining. In April 2022 things look very different…Those who think they can win through oppression, coercion, or invasion are being proved wrong by this new stand on global security – one that not only seeks to deter, but also ensures that aggressors fail… We must be prepared for the long haul. We’ve got to double down on our support for Ukraine… Heavy weapons, tanks, aeroplanes – digging deep into our inventories…. We will keep going further and faster to push Russia out of the whole of Ukraine…. Inaction would be the greatest provocation. This is a time for courage not for caution.” Putin just gave specific warnings on this.
Truss says the post-WW2 global architecture no longer functions and signed treaties have little meaning (**cough** Northern Ireland **cough**) and makes a deserved dig at ‘ze Germans’ that “Wandel durch handel… didn’t work”. Instead, “We now need a new approach, one that melds hard security and economic security, one that builds stronger global alliances and where free nations are more assertive and self-confident, one that recognises geopolitics is back.”
The new policy approach is based on three areas: military strength, economic security and deeper global alliances.
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On the military: “In the words of President Zelenskiy: “Freedom must be better armed than tyranny.”… Spending 2% on defence must be a floor, not a ceiling.” That’s a *lot* of state spending for a *long* time. Moreover, “We need a global NATO. [It] must have a global outlook… We need to pre-empt threats in the Indo-Pacific, working with our allies like Japan and Australia to ensure the Pacific is protected. And we must ensure that democracies like Taiwan are able to defend themselves.” That brings China and its new ‘Global Security Initiative’ of ‘Yankee, NATO, AUKUS, Quad Go Home’ slap bang into the equation along with Russia.
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On economic security: “We recognise that growth from cheap gas and money syphoned from kleptocracies is growth built on sand. It’s not the same as real, sustained growth from higher productivity and greater innovation… We will always champion economic freedom. But free trade must be fair – and that means playing by the rules. For too long many have been naïve about the geopolitical power of economics. Aggressors treat it as a tool of foreign policy – using patronage, investment, and debt as a means to exert control and coerce. They are ruthless in their approach… It’s time to wise up. Access to the global economy must depend on playing by the rules. There can be no more free passes…We are showing that economic access is no longer a given. It has to be earned. Countries must play by the rules. And that includes China… China is not impervious. By talking about the rise of China as inevitable we are doing China’s work for it. In fact, their rise isn’t inevitable. They will not continue to rise if they don’t play by the rules. China needs trade with the G7. We represent half of the global economy. And we have choices.”
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On deeper global alliances: “Our prosperity and security must be built on a network of strong partnerships. This is what I have described as the Network of Liberty…In a world where malign actors are trying to undermine multilateral institutions, we know that bilateral and plurilateral groups will play a greater role. Partnerships like NATO, the G7 and the Commonwealth are vital… we want to keep growing our ties with countries like Japan, India and Indonesia. We also should build on the strong core that we have in the G7 [which] should act as an economic NATO, collectively defending our prosperity. If the economy of a partner is being targeted by an aggressive regime we should act to support them. All for one and one for all.”
True, the UK is a relatively small global economy at loggerheads with the EU. True, this is a government whose many critics point out couldn’t organise a heavy-drinking session in a brewery, but can and did under lockdown in Downing Street, whose backbench MPs make ‘Basic Instinct’ smears against opposition front-benchers, and whose front-benchers are accused of watching porn in the House of Commons. Regardless, the UK has been a thought-leader in the past, and this *is* thought leadership. It must surely be a better option than doing nothing, accepting the ‘realism’ of imperialism, or Germany turning down the temperature of their public swimming pools to support Ukraine(!)
The implications of this happening are, as I have argued since 2017, that the world fractures but the West gets to keep the lion’s share of what matters most – and the US dollar soars.
This is not to say that this *will* happen, or immediately, even if both Truss and Yellen are now saying it. Words, like Chinese imports (when you can get them due to lockdowns) are cheaper than local action. We all said Build Back Better a lot while not meaning it for a second, or even knowing WHAT it meant.
The difference here is that the Network of Liberty (with some de facto illiberal members, as during the first Cold War) is something people CAN understand and IS focused. It’s just very, very disruptive to the status quo.
Then again, so is Elon Musk, who just tweeted he wants to buy Coca-Cola to put the cocaine back in it. (And as some ask how someone so exposed to China can be a true free-speech libertarian – including those who are not free-speech libertarians, and are also deeply exposed to China. We shall see, I suppose.)
Markets need to be paying close attention to all of this, and not the usual quarterly frippery. They didn’t follow those warning of the GFC before 2008 (**cough**), or the sea-change in politics that saw first Brexit, then Trump, then trade war, then China’s ‘common prosperity’ shift, and now Russia’s invasion of Ukraine: can one call that a pattern, if one is a Wall Street analyst, or is one constantly being surprised? Nor did they predict the political swing in the West towards social justice that has spread to said Wall Street analysts, the US Treasury, and even the Fed (although let’s see what that means for monetary policy now push has come to shove).
One needs to build a wider network of reading than quarterly earnings reports or GDP data to predict these kinds of things.
In pure market terms, but reflecting these underlying shifts, look to the travails of the BOJ, meeting today, and JPY. If you want another example, consider the outlook for CNY. If you want a third, read the Bloomberg op-ed arguing ‘The Hong Kong Dollar’s Peg Has Become Untenable’ because of changes in Hong Kong, geopolitics, and relative US and Chinese monetary policy stances. Can you imagine the market volatility if, as the op-ed author suggests, “The only question, really, is whether the Chinese government wants the hassle and expense of defending the Hong Kong dollar’s peg or whether it just bows to the inevitable?”
He goes on to add that, “Much of Hong Kong’s status as an Asian financial hub was derived from the fact that its legal system was robust, speech was free, and it was a nice place to live. Now, if anything, capital is fleeing Hong Kong. Bank deposits are falling, the benchmark Hang Seng Index is down 40% since early 2018, and the H-share index of mainland Chinese equities is lower than it was at the nadir of the global financial crisis. None of this bodes well for the Hong Kong dollar. The Hong Kong Monetary Authority likes to say that it runs a currency board, making the dollar peg virtually unbreakable. Actually, it doesn’t and it isn’t… over the years Hong Kong has watered down its currency board… The dollar peg is now really only a target.” Somewhere, Kyle Bass is hyperventilating.
Another similar question from the other geopolitical side, as one thinks of this topic, and links back to Truss, is if Hong Kong is still considered an integral part of a ‘Network of Liberty’ or not: that is as this week saw the Hong Kong Foreign Correspondents’ Club cancel its annual human rights press awards days before it was due to announce the winners, out of fear it would violate the city’s wide-ranging national security law.
So, enjoy the wild market swings of extrapolating mild earnings and user numbers vs. massaged expectations. Just recall life is about more than social networks and virtual moustaches: it is perhaps increasingly about historical fears of men with moustaches, and emerging networks of liberty (and, by Manichean definition, autocracy).
