Zoltan Pozsar’s Q4 Piece Breakdown:
I’m writing this to get it to sink into my own brain, but I’m going to publish my unedited trawl in case anybody reading can gain something from it.
Zoltan Pozsar is an investment strategist at Credit Suisse and his quarter paper is one of the most awaited in the financial markets. Here are the key points I took from his writing.
1) The Return of Geopolitical Risk – The end of World War Two started the biggest period of peace the world has seen. Even though wars occurred, they were in unstable areas and isolated to areas outside the developed world and so they weren’t covered. This says something about the lack of empathy and humanity the western world feels towards the developed world. It is all very selfish. So the developed and the emerging world doesn’t benefit from the current world order. So they are attempting to build their own. If they have no benefit from the current system, a change doesn’t hurt, right? The transition comes with difficulties and tension, but the vision as the fog clears could be one that greater benefits humanity if a multipolar world is established. That’s if a multipolar world doesn’t bring more tension and war between two larger groups.
2) China’s Trade Ambitions – China wants trade to return to the land through BRI, BRICS+, and the SCO. The US runs the world’s oceans with the world’s most powerful navy. And nobody even comes close. It makes sense for China to grow its trade economy over the land, far out of the US sphere of influence. Classic geopolitical theories argue who rules over the world depending on the territory they have influence over. Who can gain the most influence in a battle for trade between the Eurasian landmass Chinese system, and an ocean-based US system? The US appears to be isolating, but this cant is a quick process. A trend in geopolitics of self-sufficiency and self-interest will emerge ever stronger over the next decades. It is more noticeable with the US running the party. They are still fighting Russia and China for influence in Africa, they are still in alliances with Saudi Arabia, and Australia, New Zealand, Canada, Mexico, Japan, and the UK remain strong US allies. Geopolitical self-interests could lead to some of these relationships suffering. With the offer of the BRI system, those who believe they have more to gain by being involved will begin to sour relations with the US.
3) Impact on the Dollar and The Dollar’s Impact On Everything Else – Zoltan calls the one world, two systems “friend sharing and Belt and Road”. He states this is bound to impact the current international monetary system that is governed by the dollar. In simple terms, trade moves from the dollar to any BRICS currency if it can be established (Peter Zeihan said no chance), or Renminbi/Yuan. Regardless of the system used, any currency involving the US’ biggest geopolitical rival, offering a system that will better benefit some countries will lead trade away from the dollar. The weaponization of the dollar is also to be considered. When the US raises interest rates, every country that holds dollar debt around the world has to pay more interest payments. Many analysts think this will lead to countries reducing their dollar reserves, as well as the confiscation of Russian dollar reserves, which scared many nations that they could be victims of the same action. But, the dollar is still the world’s biggest currency by a mile (look at SWIFT’s papers released about global currency usage). Who continues to have one of the safest debt markets? And access to liquidity? Outside of a debt spiral scenario and the dollar-milkshake theory death of the dollar scenarios, the dollar remains the safest debt in the world. Will countries who rush away from dollar debt regret it when dollar debt is swapped for less secure debt? Why all this debt? Can’t people and countries buy what they can afford? No, they cannot. Debt and credit are pivotal benchmarks in the short-term debt cycle. Ray Dalio tells us all why. Sidenote: Lula being back in power in Brazil will speed up Brazil’s dollar distancing.
4) G7 + Australia, BRICS, the EU – Zoltan’s comments about The Grand Chessboard by Zbigniew Brzezinski particularly struck an interest in me. In the book, Brzezinski states that the US approach to Eurasia is of massive importance. Asia and Europe are massive productive areas in the global economy. Efforts made by China and Russia in the past would include Africa in this geopolitical sphere. Another reason the US can’t fully isolate. Countries in periods of geopolitical tension fight to gain power or maintain the power they have. The US is fighting to defend it.
5) New BRICS Members – Argentina, Iran, and Algeria have applied. Saudi Arabia, Turkey, and Egypt are planning to apply in 2023. The Belt and Road Forum will be held in China in March or April 2023. Countries in question who will attend the forum but haven’t hinted at any applications are Indonesia, Thailand, Kazakhstan, the UAE, Nigeria, and Senegal.
6) Methods of War – Zoltan includes a quote from Mackinder about the control of commodities. Controlling commodities grants the holder the power to influence inflation through the factories, which hence impacts interest rates, which in turn impacts the stock market and financial market growth and the availability of liquidity and wealth. Who wins in a battle between the Chinese commodity war and the US financial dollar war? The world’s dependency on dollars is still key. Any country that isn’t strategically aligned, or an enemy of the US will have to be bailed out of any financial troubles without the US’ help. Zoltan states China, Russia and Saudi Arabia are acting like banks for emerging markets with crushing levels of dollar debt. Will these countries get through the inevitably higher-for-longer US interest rates with help from these countries? And then be indebted to them, while still angry at the US for the dollar’s chaos it causes the global financial system in periods of financial turmoil. Smaller supply chains will exist for the security of trade. But will this occur in local currencies? Where is the benefit to one nation for receiving income in the currency of another? Would this be a problem when it comes to exchanging? Does this support the importance of gold (or other commodities) potentially re-emerging in a hard currency-backed BRICS system? If these commodities are removed from global supply already weakened by smaller supply chains, will this lead to higher supply chain stress and hence inflation returns? Zoltan quotes Perry Mehrling’s “Money and Empire”. War puts a strain on resources. This is paid for with finance, and war money printing. The supposed consequence of this is financial innovation through the changes in global supply chains. Look at what impact World War Two had on the British. Massive levels of war debt, which was financed by Lend Lease, benefitted the US. War gives countries the time to navigate debt and position themselves in the best way to emerge after a war and take advantage of the weakness of others. As I’ve mentioned, in short, to take advantage of geopolitical tension and gain power. Who will be positioned to emerge from this period of returned geopolitical risk with momentum to gain power?
7) Final Interesting Topics: Swap Lines – China is emerging as a provider of lending capital and liquidity to struggling nations. They are providing this facility to more and more countries. CBDCs – will we see them emerging more prominently in 2023? I’ve covered the impact of CDBCs here. Zoltan discusses how central banks can be interlinked through CBDCs, dubbed the “m-CBDC Bridge Project or Project mBridge”. Zoltan also pushes the US to not pursue a digital dollar to keep up with technological innovation, based on the dollar system “hierarchy” working and to “not fix what isn’t broken”.
Absolute rambling here from me. But some interesting stuff. Take the bits in bold and do your own research and predictions on where you think these topics will trend.