Geopolitics Is Destroying Confidence

Geopolitics Is Destroying Confidence

The humiliation of the US in August 2021 was nearly complete. We surrendered in Afghanistan, stranded US citizens behind enemy lines, handed over US$90 billion worth of high-tech weapons to terrorists, and most tragically, lost 13 marines, soldiers, and sailors in a terrorist attack that we should have seen coming.

The incompetent blunders of US leadership are even worse than that sketch. We closed a secure airbase (Bagram) while relying on an insecure airport too close to Kabul to control. We extricated the military first and left civilians behind when any novice knows you get the civilians out first and the military last.

Following the Afghanistan fiasco, it was reported that Four-Star General Mark Milley, Chairman of the Joint Chiefs of Staff, committed treason just before the 2020 election and again after the 6 January 2021 riot in the Capitol. He did this by undermining the chain of command and warning the Chinese Communist leadership that the US would not attack. He also said he would give the Communists advance warning if we did.

Can things get any worse? Unfortunately, yes.

Enemies of the US are on the march

China is threatening to invade Taiwan and is sending fighter jets through Taiwanese airspace. Russia has completed the Nord Stream 2 pipeline to Germany and now has Western Europe totally at its mercy through the control of natural gas supplies. North Korea has tested new long-range cruise missiles for the first time. Cruise missiles can easily be fitted with nuclear warheads, which North Korea is also working on.

Unlike long-range ballistic missiles, cruise missiles are highly manoeuvrable and can go through mountain passes and densely populated cities to reach their targets. These missiles are also potent against vessels at sea, which makes US sea power less effective at deterring further North Korean actions.

Aristotle said nature abhors a vacuum. As applied to politics, this means that when a power is weak or absent, other powers will rush in to fill the void. Right now, there is no functioning president in the Oval Office and the US is perceived as weak. Russia, China, North Korea, Iran, and others are rushing in to fill the void.

Aristotle was right, at least in the political realm. It will take the US years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in US power. When that happens, a loss of confidence in the US dollar is not far behind.

A portfolio for interesting times

A new depression is not coming; it’s already here. In some ways, the US economy has been in a depression since 2007, but the pandemic of 2020 cemented that reality and ended any possibility of escape.

The depression will last for years and the behavioural changes such as increased savings and reduced consumption will last for decades. The adverse mental health aspects of the depression will weigh on economic recovery as well.

To be clear, depression does not mean continually declining growth; it refers to a situation of depressed growth (with occasional technical recessions) where the economy doesn’t reach its potential or prior trend growth levels. With continued slow growth and continued high fiscal debts, the debt-to-GDP ratio of governments — especially the US — will reach new record highs and reduce growth even further.

The Big Tech companies should continue to do well since they are relatively unaffected by the pandemic and lockdowns. If they suffer at all, it will be from increased competition in their own sector and possibly reduced consumption as the economy slows down. Tech will outperform other sectors, but it is not immune to decline in line with the overall economy.

Commercial real estate will remain sluggish because of the new work-from-home ethic that even companies have come to prefer in many cases.

I don’t see cryptocurrencies as investments; I see them as speculation similar to gambling. You can make or lose money in cryptos, but it’s more like going to a casino than investing in sound companies or government bonds.

As described above, the global depression is already here (meaning weak, below-trend growth). A global technical recession (two or more consecutive quarters of declining growth) could arise inside the depression. This happened during the Great Depression, which lasted from 1929–40 and included two technical recessions: 1929–33 and 1937–38.

Of course, there is also a difference between a technical recession and a financial crisis. While I do not currently forecast a recession, one will certainly arise in the coming years. But a financial crisis may be unfolding now.

The most important market action today is all behind the curtain in the form of Eurodollar collateral shortages, quarter-end window dressing, the Evergrande liquidity fallout, and a shortage of Treasury bills. Drama around the fiscal cliff and the Treasury debt ceiling will add to the uncertainty and increase the fear factor. Markets will face a very rough ride for the next few weeks.

You cannot escape, only prepare

There are no ways to avoid slower growth and disinflation.

Monetary policy will fail due to the declining velocity of money, and the fact that printed money has been sterilised in the form of excess reserves held by banks at the Fed.

Fiscal policy will fail because debt levels are already too high. Historical evidence is clear that adding government debt when the debt-to-GDP ratio exceeds 90% does not provide stimulus. It acts as a headwind to growth. The US debt-to-GDP ratio is currently 130% and headed much higher. The government has no way out of stagnation.

Still, individual investors can prosper and preserve wealth with the right mix of gold, cash, government notes, real property, and stocks in energy, artificial intelligence, agriculture, natural resources, defence, and healthcare.

There’s no need to head for the hills or go completely to cash or gold. Investors can do well, but they need diversification, selectivity, and patience. A simple ‘buy-the-dip’ mentality using passive index funds has worked in the past, but it won’t work going forward. It’s a recipe for disaster.

In my recent editions of The Daily Reckoning Australia, we have tried to make sense of important trends in the pandemic, Fed policy, fiscal policy, and geopolitics, as well as give you optimal asset allocation.

Importantly, these trends are connected, and a setback in one area easily spreads to others. Using diversification will be a way to protect and grow your investments through crises.


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Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.