Geopolitics and Markets Review - 2nd January 2023:

It’s good to be back as we head into a new year. I hope everybody had a great Christmas and New Year. I had to convince myself that taking a week of rest and relaxing would be a good thing for me. And it definitely was. The number of ideas I’ve had for topics to write about has almost doubled in December, with many coming in the period of downtime. It was nice to let my brain wander and to spend it with people I love. But now we’re back into the decade of geopolitical chaos and I can’t wait to pick it apart and break it down.

A small side note, I set up a brand-new newsletter called Something Greater. It will be where I write any strategies that improve the quality and happiness of my life. For example, I wrote about a different method to think about life as a jigsaw puzzle. And any posts such as my top principles blog piece will be there in the future so we can keep Geopolitics Explained about the geopolitics. If that sounds like the kind of thing you’d enjoy reading, the link is in the navigation bar on the Geopolitics Explained substack.

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What Does Croatia See In The Euro?

As I took a week off, I spent very little time keeping up with the news. Does this mean the world of geopolitics and financial markets stops turning for a week? Of course not, although it might turn a little bit slower. Like everybody is nursing a very nasty post-Christmas hangover.

Photo by Grgur Vučkov on Unsplash

Croatia adopted the Euro as currency yesterday. So payment and capital can now flow in and out of Croatia quicker in relation to the rest of the euro-adopting EU. Does the Euro provide geopolitical security, but decrease financial security?

It depends on the financial structure of the country. As a member of the Schengen zone, it is easier to travel between EU states. And Croatia depends on tourism with a fifth of its GDP coming from tourism. Making Croatia easier to access for tourists is Croatia playing to its strengths. The foreign exchange costs will also be reduced.

Yet, the Euro has its flaws. Croatia will have access to ECB liquidity and tools to maintain financial stability. But decisions made by the ECB affect every country in the bloc. Inflation in the Euro was 10.1% in November, down from 10.6% in October. The ECB need inflation to drop. With members having different bond markets, the probability of something breaking in any member state rises. Especially those with high debt levels such as Italy. It can be burdened on the other member states to help out those struggling. A rise in tensions between those with sound debt markets and those who don’t are likely.

The ECB’s fragmentation tool to attempt to control bond yields of member states that spread too far apart is like quantitative easing. An inflationary action is through increasing the money supply. The ECB have a tough situation to handle, and now Croatia has thrown itself into the den.

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2023 Brings Recession, and Demand Drops

Nobody can time the market. But the negative impacts of the fastest interest rate hiking cycle seen in decades will finally become a reality.

Demand destruction could contribute to further drops in financial asset prices. Some of which, especially the indices, remain overvalued in many measurement metrics. They are above their mean reversion trend lines and are still overvalued by Warren Buffett’s Buffett indicator.