Will Global Tensions Derail the US Recovery?

Transcription

1 Will Global Tensions Derail the US Recovery? May 20, 2014 by Robert Huebscher It s not the Fed s monetary policy that investors should fear, but the geopolitical tapering undertaken by the Obama administration, contends Niall Ferguson, the Harvard historian. Ian Bremmer, the political scientist and chairman of the Eurasia Group, disagrees despite some tactical missteps, he said, the current administration has achieved reasonable results. The two spoke at the Strategic Investment Conference in San Diego, hosted by Altegris Investments and John Mauldin. They were joined by Anatole Kaletsky, the economist and partner with GaveKal Research, who assessed the potential impact of today s geopolitical uncertainties on the markets. The geopolitical taper has already begun, Ferguson said, as entitlement programs are squeezing defense spending, and America is reverting to the isolationist policies of the 1930s. Meanwhile, Bremmer said the volatility due to geopolitical risk is quite great, but not because Obama is a terrible leader. The ability of the U.S. to get outcomes it desires has diminished because Americans are less willing to engage militarily, Bremmer said, and that is a structural change. The debate centered on three regions: Ukraine, the Middle East and China. Several common themes emerged, but none was as great as the concern over whether U.S. hegemony will endure in the coming years and whether turmoil in those regions will derail the U.S. economic recovery. I ll look at what each had to say about those three hot spots. Ukraine The single biggest issue today is Ukraine, Bremmer said. We are not heading into a new cold war, though, because Europe is not aligned with the U.S., China is not siding with the Russians, Russia is not as powerful as it was during the last cold war and Americans don t really care about the outcome. We need to worry, Bremmer said, because those four things mean the Ukrainian situation will get worse. Our alliance with Russia is unstable, and Putin has been unfavorably demonized by the U.S. media. From the Russian perspective, overwhelmingly the Ukraine is theirs, he said. Kaletsky agreed, and said there is no Russian who doesn t believe Ukraine is theirs, and there never will be. Russia s Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.

2 military infrastructure is tightly integrated into Ukraine s, and the idea they would let that go is ludicrous, Bremmer said. If the U.S. goal is to prevent the annexation of Ukraine, it faces political obstacles here and abroad. Obama s approval rating is 47%, but Putin s is 82% up from 60% before the crisis started, Bremmer said. In addition, the Europeans have almost bolted from the U.S. sanctions, he said. The ability of the Americans to keep the Europeans on board is very tenuous, according to Bremmer. Ferguson was the most critical of U.S. policy. He reminded the audience that Obama mocked Mitt Romney for stating, during one of their debates in 2012, that Russia was the principal geopolitical rival of the U.S. The U.S. ruled out the use of military force from the outset of the crisis, even though it had military options short of war, according to Ferguson. It could have summoned NATO leaders and deployed assets into the Black Sea. Putin s annexation of Crimea violated international treaty and was a fragrant violation of international law, Ferguson said, but Obama s reaction was passive. But he also said Obama s positions are consistent with polls, which show that our reluctance to military intervention is at an all-time high with isolationist sentiment on both the left and the right. We are so over 9/11, Ferguson said, like it didn t happen. None of the three expects U.S. military action. They debated how far Russia would go. Ferguson was the most pessimistic. He said Russia has the obvious intention of annexing more territory when they are able to. Russia s actions are just the beginning of a destabilization of Eastern Europe. Kaletsky and Bremmer don t expect anything close to that outcome. Russia knows the U.S. won t interfere, Kaletsky said. The U.S. recognizes that Putin will not and cannot back down, and that the U.S. cannot win, he said. Kaletsky expects that Putin will get to keep Crimea, prevent Ukraine from joining NATO and he will be satisfied and not take over more territory. He doesn t need it, Kaletsky said, because he already has 80% popularity. Bremmer sided with Kaletsky but said there is a real possibility of further unrest. If Kiev falls and nationalism spirals, Russia could escalate militarily, he said, and sanctions could increase and send Europe into recession. The biggest threat to Europe is Russia, according to Bremmer. He said that Russia could also retaliate against Europe and the U.S. though cyber warfare, using Kaspersky, the Russian-based anti-virus software company. The Russians have ways of responding quid pro quo if their economy is being hurt by the Americans, he said. Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.

3 But nobody is going to fight over Ukraine, Bremmer said. The Middle East The central issues in the Middle East are the Iranian pursuit of nuclear capabilities and whether the current round of negotiations, which are scheduled to wrap up in July, will succeed. Analyzing those concerns requires an assessment of the Obama administration s options and those of the Iranian government. Ferguson argued for taking a hard position against Iran. We need to end the appeasement of the Iranian regime that will ultimately lead to it becoming a nuclear power, Ferguson said. Its cynicism knows no bounds. Obama s policy regarding Syria has engendered uncertainty and ambiguity over his Iranian policy, according to Ferguson. Obama set a red line that the U.S. would respond militarily if the Syrian regime used chemical weapons, but when evidence appeared that the regime had done so, Obama called for a vote before the country responded. What is clear is that Obama will not follow through on threats, Ferguson said, and therefore he does not need to be taken seriously. The likelihood of getting a deal with Iran regarding its nuclear capabilities has improved over the last six months, Bremmer said. The process has been working and Iran has followed through on its promises, he said, without getting much money through sanctions relief thus far. We can t trust them, he said, but also said that Israelis privately have told him they are surprised at the progress. The U.S. and Israel are now aligned in their military assessments, he said, which hasn t been the case in the past. A deal is better than a probability, but it won t happen by the July deadline, according to Bremmer. If a deal happens, then by 2015, oil supply will increase by 1.5 million barrels a day. Iran will be one of the most exciting places for multi-national corporations, Bremmer said. If the negotiations fall apart, Bremmer said, then Russia will offer a third-way deal to give Iran some nuclear capabilities. Then China, South Korea, and maybe India will sign up to break sanctions and help Iran, according to Bremmer. That could happen if Congress doesn t remove sanctions after a deal is signed, according to Bremmer. I believe there is a scenario that none of the three addressed. It is unlikely that negotiations will either succeed or fail by July, and there will be no deal to be signed. The inevitable scenario, in my opinion, is that the U.S. will need to ask for more time to resolve whatever issues remain. At that point, members of Congress will ratchet up pressure to reinstate sanctions, either immediately or after a short period of time, which could result in a breakdown of the alliance now supporting sanctions. Iran surely understands this and can negotiate favorable terms ones which could allow it to keep some degree of enrichment or its plutonium reactor. Markets do not currently expect the positive outcome of a successful resolution of the Iranian issue, Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.

4 Bremmer said, and uncertainty will grow. Asia The big question in Asia is the future direction of the Chinese economy: Can it meet its energy needs, succeed in its proposed economic reforms and resolve its conflicts with Japan? China has already overtaken the U.S. as the world s largest economy, Ferguson said, when measured by GDP adjusted for purchasing-power parity. Even if China grows at only 5%, he said it would overtake the U.S. based on conventionally measured GDP in our lifetimes. China s energy dependence is the biggest story, and energy will consume approximately 20% of the country s GDP by the 2030s, according to Ferguson. This is why it has to become a superpower and not be at the mercy of the U.S. It needs a Middle Eastern strategy, he said, which it doesn t yet have. A big question is whether China will turn to Russia or to the Middle East to meet its energy needs. Bremmer said it is very likely that China will introduce a carbon tax. Its problem is that it has two populations: one wants to maintain the status quo of using subsidized coal, but the other which lives in cities wants clean air, he said. China s government must respond to both constituents. According to Bremmer, China is voluntarily engaged in systematic and real economic reform. Typically, he said, only a crisis forces such transformations. China s President Xi Jinping has built support and dealt with social instability as it has arisen, he said. It doesn t guarantee that it will work, Bremmer said, but it nearly guarantees that it will have momentum. Jinping s reform agenda will continue, and Bremmer said it is sensible. It recognizes that air quality is a disaster and fossil-fuel consumption must be limited, which could lead to a carbon tax. So far there has been no pushback, Bremmer said. Bremmer also pointed to ongoing financial reforms, including scrutinizing bad loans, allowing banks to go bankrupt and internationalizing the renminbi. Controls on foreign direct investment are loosening, and state-owned enterprises (SOEs) are becoming more efficient and transparent at least internally to Beijing, he said. Reforms may fail, he said, but if it works, it will be extraordinary. Ferguson reduced China s options to a trilemma. It can choose only two of three possible goals: radical reform, clean air or 7.5% economic growth. If its growth rate falls, Ferguson said, China s reforms will be jettisoned. Its urban population is too powerful, he said, and they want clean air. Regarding China-Japan relations and the tensions over the Senkaku islands in the South China Sea, Obama has done the right thing, according to Bremmer. He has clearly aligned U.S. interests with those of Japan, although he has not taken a position on the sovereignty of the islands. Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.

5 Ferguson was less optimistic. Leaders in Tokyo and Beijing are playing high-stakes brinkmanship and the cost of a mistake is high, according to Ferguson. U.S. relations with China have improved, Bremmer said, partly because the U.S. economy has improved stabilizing China s dollar holdings. Also, he said, those who focused on a pivot of U.S. foreign policy toward China have left the administration Hillary Clinton, Timothy Geithner, Robert Gates and others. Joe Biden is leading policy toward China, according to Bremmer, and has developed a better working relationship with top Chinese politicians than those predecessors. Bremmer summed his argument up by saying that China will be domestically stable, focused on reform and incrementally slower economically. For at least the next year, he said, things will be good. The world s policeman Will the U.S. be the dominant superpower for the next century? What leadership will be required to maintain its dominance? On those questions, Ferguson was the most pessimistic. The geopolitical taper is a state of mind, Ferguson said. He quoted Obama s 2013 statement that the U.S. did not take military action against the Assad region because we should not be the world s policeman. If the U.S. is not the world s policeman, Ferguson asked rhetorically, then who is? Ferguson quoted as astonishing Obama s remarks that he does not need a George Kennan, the architect of the U.S. s Cold War policy. Obama thinks he can do it himself, he said. We are living through the most astonishing economic reversals in history, Ferguson said. Bremmer agreed that the U.S. is not the policeman it once was, but he cautioned against assuming that its influence will wane. He said the constraints on U.S. power have much more to do with Obama and politics than with our ability to act. The U.S. spends more on its military than the next nine countries combined, according to Bremmer. Bremmer agreed that ambiguity is bad. We ve been very clear we are not the world s policeman, he said, but not clear what we want. We need to stop being ambiguous. Obama is only a small reason for the decline of U.S. global influence, Bremmer said. He also attributed the change to fallout from the Snowden affair and less support from our allies particularly Germany and China. Even if you accept Bremmer s prediction of global stability, you must also recognize the fragility of global politics. This year marked the 100th anniversary of the start of World War I, Ferguson noted, an event that few Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.

6 predicted. Obscure events an act of state-sponsored terrorism in Sarajevo triggered a global conflict, he said. The most important lesson of why the war escalated was that the British Empire believed it should taper geopolitically, he said. It did not interfere or support its allies. There are uncanny parallels between the liberals in 1914 and those in America today, he said. Not having a strategy or thinking you don t need one is very dangerous. If there is one black swan you should fear, Ferguson said, it is that of geopolitical conflict, which will fall straight out of Obama s geopolitical taper. Page 6, 2018 Advisor Perspectives, Inc. All rights reserved.