9 takeaways I took from Zoltan Pozsar's latest research piece:
The key reasons globalization is over. The US no longer buys China’s cheap goods. Also, they no longer have access to the cheap labour China provided when making these goods. If The US wants something, it now might have to do it itself. Russia is no longer supplying Europe with cheap gas. Europe’s costs are skyrocketing and Russia has pivoted East to China.
The future is about control. Whoever controls the straits of the world controls trade through them. Think of Turkey with the Bosporus, and Egypt with the Suez Canal. Will the countries that control these points turn to the US-led system or the Chinese-led system? Global trade could run on two systems, making supply chains longer.
South Korea’s pivot away from the USA is a potential cause for war or reunification with the North.
To escape reduced growth and sustained high prices, countries might need to produce their own goods. This would be with the aim to generate economic growth from within.
In a world with damaged supply chains, productivity will take longer. The example Zoltan gives is US Stinger Anti-Aircraft Missiles. These were sent to Ukraine and the US will have to wait to get their stockpile refilled by Raytheon.
One important element of the China and Taiwan tension is chip supply. China’s military exercises were an attempt to warn the world they can control what goes in and out of Taiwan. South Korea also supplies a percentage of the world’s chips. The top electronic integrated circuit exports in 2020 were Taiwan (22.65%), China (16.74%), and South Korea (12.28%). This totals close to 52% of global exports. If both align with China, this is a big proportion of the global market.
Russia and China are huge players in the commodities market. This will further contribute to damaged supply chains as sourcing materials will take longer due to the amount taken out of global trade. Zoltan refers to this as a lack of inventory for supply chains, which is like banks having a lack of liquidity. This doesn’t bode well for inflation.
The CHIPS act takes time to put in place and leaves the US still vulnerable. 1-0 China. The US is making moves like this and has been since Trump threw technological sanctions at China, to slow Chinese tech growth. 1-1? This tally would go on forever.
Key tasks the West needs to address. Improvements in defence to maintain the US global system. Re-shoring to get around any physical limits to trade through blockades and inaccessible routes. Restocking and investing in commodities (including food) to give China and Russia less control over these markets Sourcing more self-sufficient energy sources (also increasing the storage of energy).
The end of Zoltan’s paper gives examples of where the west is already working towards these four goals. He believes these will be the biggest global trends in the world for the next five years. Do you agree?
I always find writing is one of the best ways for me to process my thoughts. If you enjoy any of these ideas, definitely drop Zoltan a follow as all his work is fantastic. If you liked my summary of his ideas then please consider dropping me a follow too. Have a great weekend.