How we view geopolitical strategic scenarios for the future dramatically impacts our investing perspectives today.
Zeihan began with a discussion of the pivotal 1944 conference at Bretton Woods, which he believes marked a transition in the world order from competing imperial preference networks to the military-backed promotion of international free trade. Ultimately, the structure created by Bretton Woods resulted in the successful prosecution, over half a century, of the Cold War against the Soviet Union.
Today, however, the United States is one of the least internationally involved economies, with only a small share of its GDP reliant on merchandise exports. Following the collapse of communism, the whole concept of global free trade “is a policy 25 years out of date,” Zeihan said.
Changes in Geopolitical Perspectives
Zeihan identified a number of factors that will influence the international scene.
- The United States still has its Cold War military strength — notably, 10 aircraft carrier strike groups — to protect global free trade, but it sees no incentive to actually use that power, which is bad news for the rest of the world.
- Domestically, US politics are in disarray with “the party coalitions on both sides already broken beyond repair,” Zeihan said. “Even if the Americans were convinced that their economic and physical security required international engagement, they are about to step out to lunch and it is going to be a very, very long lunch.”
- The global demographic picture, when deconstructed into baby boomers, gen Xers, and millennials, has created intergenerational transfers that have economic, investment, and geopolitical impacts that vary sharply among countries. For example, Germany, with its abundant supply of gen Xers, currently has a capital-rich demographic profile generating export surpluses and can continue to fund its model — but only for another seven years. This fact, in turn, affects Germany’s ability to support those eurozone deficit countries that depend on it to keep them afloat.
- As shale oil technology reduces fracking costs — which are already heading toward $35 per barrel — the United States is no longer dependent on foreign oil. “North America, for all practical purposes, has already achieved oil independence,” Zeihan said. Consequently, the US relationship with the Middle East has radically changed.
Challenges Impacting the Middle East
Zeihan believes there are five major challenges confronting the Middle East:
- Transcontinental terror groups are indeed a very big problem, but their effects are more local than international.
- Demography across the Middle East, especially in Saudi Arabia and the United Arab Emirates (UAE), is dominated by a bulge of 15- to 25-year-old unmarried males. From a security point of view, this most affects those countries that are unable to finance an effective state security apparatus.
- US security is now a domestic concern among these nations: “The entire chain of dependencies that kept the United States involved in the Persian Gulf have all broken at the same time,” Zeihan said. The Saudis are now on their own, absent their former US support, and worried about a resurgent Iran. Both Iran and Saudi Arabia are engaged in stoking each other’s political and economic fires. The United States now views the region wholly through its other interests.
- Russia also sees the Middle East as a means to other ends. With its inherent demographic and geopolitical challenges, Russia needs a distraction and that alone explains why it is in Syria. The Russian play, Zeihan posits, was to flood Turkey and Germany with so many refugees that it sours bilateral relationships, making them incapable of taking steps to counter Russian ambitions in Ukraine. Whether it came about by accident or design, this approach wins Zeihan’s admiration for its Machiavellian effectiveness.
- Zeihan observes that whenever there is energy disruption, the places farthest away from the Persian Gulf — China, Japan, South Korea, and Taiwan — suffer the most. With the United States on the sidelines, they will need to become more involved in the Gulf.
Alarmingly, Zeihan foresees simultaneous political crises that will erode local state authorities, unleashing violence and terrorism. Capital flight, driven by geopolitical concerns, will surely follow.
“The result is a world that will fragment,” Zeihan concluded. “The result is a breakdown in global trade.”
Receive updates about the conference by subscribing to the CFA Institute Annual Conference blog.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo courtesy of W. Scott Mitchell