Peter Zeihan, in the 73rd CFA Institute Annual Virtual Conference, discussed the global order that is about to collapse. Below is a summary of his interview:
There have been two major reasons why we moved in this direction.
The American Order
The first is the American order. Before the Americans, the trade system, the trade order, globalization, all of it was a side effect of a military strategy that we designed in order to fight the Cold War. At the end of World War II, we basically said, if you will be on our side, if you will stand side by side, not with us, not behind us, but in front of us, between us and the Soviet, we will basically pay for you to be a successful country. So, the United States didn’t simply defend everybody in the Alliance network, we created a global structure that allowed countries to trade without having to have an Imperial Navy to ensure that trade that never had been happened. It never happened before. And it worked great. And we won the Cold War and then we forgot to change the system and we elected you Seven elections in a row guys who were less enthused with anything in the international system, and that ended with Trump. And so here we are.
The Demography
Second is demography. You got to remember that people in their 20s, 40s, 60s and 80s act differently. Folks in their 20s are the big consumers, the big spenders. They’re raising kids and going to college and buying homes. Once you hit 40 or 50 and early 60s, then you become the investor. Houses paid down, you’re saving for retirement. This is where the velocity of capital comes from. But then once you retire, it all goes away. But what is happening right now? Well, let me backup what started happening in the 70s in the early 80s, and especially in the 90s. As people started having fewer kids. We industrialized, we urbanized, starting with Germany and moving into the rest of Western Europe; Started in Japan moving into developing Asia, ultimately, the one child policy in China, people started having fewer kids living in smaller and smaller locations. Well, you add that up on a global scale, you fast forward today and there are very few consumption led economies left. There’s India and Brazil and Mexico and the United States. That’s about it. Most economies in the world, Germany, Korea, Italy, China, they are investment-led and export-led. Well, that only works until you hit mass retirement. And in the next few years, most countries in that export-led category will move into mass retirement and take all their economic activity with them. So that was where we were, before COVID.
What COVID Has Done?
COVID has done three things.
- It knocked the consuming economy back.
- The export-led economy is nowhere to sell.
- If you were an export-led economy, and you were transitioning to kind of post possible system, you’ve lost the income whether from taxes or exports, that came with what little time that you have left.
So, you’re dealing with a chronic recession now, a chronic depression just around the corner, and now no resources to prepare for it.
Which countries are particularly well positioned for a disorderly future, and why?
if you’re going to be dealing with a world where international connections are not as robust, and there just isn’t enough global consumption to justify export-led, you’ve got to make sure you’ve got a consumption-led system at home. So you could at least look out for your own people and sustain your own economic model. You need to have a physical barrier between you and potential rivals. So you don’t have to spend all of your money on defense. You have to be able to access resources, whether it’s energy or finance, either within your borders or very close by get it from people that you trust. The United States obviously comes in far away at the top of that list. But a few other countries that will probably do pretty well who have somewhat similar setups are France, Argentina, Turkey, and Japan. Now, obviously, not everybody has everything going for them. The French, when it comes to geographic barriers are a little questionable. When it comes to demographics, the Japanese don’t look the best. And when it comes to general organization, you know, I don’t know if anybody wants to model their lives like Argentina.
Thoughts on the Financial or Fiscal Responses
I think everybody’s doing the best they can. I have, It seems a lot of just flat out policy and competence, with the exception of a few of the mid-tier Governor’s mid tier presidents who have tried to deny that COVID even existed. So, you know, I wouldn’t look to Russia, or turkey or Brazil right now, but for the most part everyone is using what resources they have available. The problem is most of them don’t have a lot available. If you look at what you deal with, when you’re going through some sort of health crisis like this, if the economic structure of your country is just thrown backwards, the only option is for severe government intrusion, whether that’s through direct stimulus or loans, or buying up shares to companies so they don’t just collapse. There aren’t a lot of good options. And there are very few countries who have any degree of fiscal flexibility. Japan is already in debt more than any country in human history with the exception of the Chinese. the eurozone limits options in that area, and that really just leaves the United States, Australia, the United Kingdom, Canada. In that case, those last four, the ankle states were the only ones who really had any monetary flexibility going into this crisis. And they’ve already driven rates down to effectively zero. But really the US stands out not because it’s handled the crisis well, because it hasn’t. But it has firepower to bring to bear. If you put aside everything that the Federal Reserve has done, which is substantial. And look just at the fiscal side, the United States is responsible for two thirds of the fiscal stimulus of the planet right now. And it’s still experienced the quarter and quarter recession, that will probably be a look into the vicinity of 20% of GDP. Now, that gives you an idea of the scope of the problems we’re facing here, because the United States is the only consumption led economy of size left and it is the only one that has the capacity to stimulate its economy in mass. And you add in national security concerns and health concerns and Trump administration concerns. And we’re seeing a significant retooling of the industrial base in the United States to move a lot of this stuff home versus defense, and medical, it’s going to turn into vaccine medical supply, and then it’s going to go into the broader manufacturing space. If you’re American, that’s broadly okay. You’ll come out of this probably at a decent position. But if the world’s largest economy goes home in the heart of the crisis, and honestly doesn’t share its marbles with anyone else, that’s a real problem for everyone, to just recover from this crisis, much less prepare for the next one, which is probably only a couple of years away. Keep in mind that the majority of the world’s baby boomers move into mass retirement between 2022 and 2024. So if COVID lasts just through the end of this year, that gives everybody one year. That’s not enough.
Corona Virus Testing Data
Countries kind of fall into three general categories.
In group one, you’ve got Belgium and Italy and Spain and South Korea, Taiwan and Japan, countries that may have gotten a little slow out of the gate, but have done a very good job of suppressing virus numbers, kind of the threshold is about 10 to 20 cases per million. Population if you want to get into the point that you can actually do a real opening. These countries have achieved that and they’re starting now to open again. But group number two are the countries that have done the opposite. They’ve either denied that this existed or they don’t have a healthcare system or they’re just not collecting data.
On a bad day, you might say Turkey, definitely Brazil, definitely Russia, definitely Ukraine. Places that just are letting this explode and are going to be generating case levels that we just have a hard time wrapping our minds around right now.
And the third are all those countries in the middle that have done a degree of a lockdown, but either wasn’t implemented very well, or the virus has gotten away from them, or there’s some geographic constraints that are preventing these countries from really taking too many of the lessons to heart. The United States is head and shoulders in the middle of the United States is absolutely in that group right now. Indonesia is probably in that category, some of the Central American states that have had a better response. What this means is there is no global solution here and there is no global path forward. And the fact that the United States that big consumption-led economy is squarely in this middle group where the virus is now endemic to the population and can’t be crushed out. We missed that opportunity. We fail to do a good lockdown. It means that the US can reopen, it will reopen, but things are going to look different. You’re going to wear a mask just as much as you’re going to wear underwear. Your social distancing is not something that we can get away from in the way that you might be able to in Switzerland or South Korea. And that means that certain industries travel tourism, retail restaurants, amusement parks, they’re just not going to reopen in the same way that they did before. If they can reopen it all. Remember this retail travel meatpacking, you know, these are things where you can social distance, the economist calls it the 90% economy, we’re not going to get to 90% because this isn’t going to be over in three months. We’ve missed the opportunity in the world’s largest consumer to move past this. So we have to deal with the consequences now, and we’re going to be dealing with those consequences until we have a vaccine of the world’s largest consuming economy isn’t consuming. The rest of the world is not being brought along. For the ride, the US will now be exporting the virus in the way that the Chinese did a few months ago. Which means American integration with the wider world is completely off the table, which means dependent on the United States to buy your stuff so that you can grow is now completely off the table. And if the vaccine doesn’t come in.
US Election
I have been repeatedly disappointed by what the Trump administration has done during this crisis. There’s no Real guidance, there’s no real coordination. There’s no help to the states financially and technically with information and equipment. So all 50 states have now had to chart their own path. And that’s been confusing, it’s been chaotic, it’ll probably get a little bit better just because the states down know, they can’t rely on the federal system at all. But it has made it very obvious to the American people in general, and to local and state governments in particular, that they can’t rely on this administration for anything in this crisis. And that means we will have other poles of power who can shine, some governors are doing fairly well. Now, if you’re the Democratic challenger, all of a sudden Trump has gone from commanding the airwaves and presiding over the longest economic expansion in American history, to all of a sudden giving these press conferences that are how should we say creative? The problem that Joe Biden will face is to leave his basement, and it’s very difficult to campaign in this environment. There’s also one small concern I have. We have a primarily a respiratory illness and pandemic status that disproportionately targets guys over age 70. It’s entirely possible that by the time we get to November, the two candidates are gone. And then we can have a little constitutional crisis at the same time we deal with the question of who’s going to be the person.
Trump in the first two years, two and a half years of his presidency, was prosecuting trade talks with a handful of countries either country came to the United States with something to offer or countries in the United States went to and said, you know, we want to rejigger things. So Korea, Japan, Canada, and Mexico, those four deals aren’t simply negotiated but not simply ratified. They’re being implemented right now. So we’re already seeing American trade data reflect shifts towards those four countries and away from some others. United Kingdom is likely to come along for the ride before the end of the year. But first, the UK has to come to grips with the basic fact that they are not going to get a deal whatsoever with the European Union this year unless they decide to extend in the Brexit process. Again, and if they come to the United States this year, it’s going to be a bit hat in hand and it’s not going to be a comfortable negotiation for the Brits. But those five countries, that’s half the American trade portfolio already. Under normal circumstances without COVID. Get those five implemented in the United States cuts itself off from everybody else. We probably have a recession here all along the lines of what happened in 2000, to 2001. But with everything on fire, Americans aren’t even noticing that the relations with the rest of the world are collapsing when we climb out of this on the backside, honestly, it’ll be a rounding error.
About OPEC
That’s always a messy one as a rule. we don’t have good enough data on that right now. But if the Russians continue pumping full bore, I have no doubt that the Saudis are going to feel pressed to double down on their expansion. If the Russians compete just a little and just give a little bit of Hovering the Saudis that I think we will see meaningful cuts from the countries that matter within the OPEC network. Remember, that’s really just Kuwait and UAE and Saudi. Everywhere else, though, production is dropping quickly. You’ve already had a million barrels a day offline in Canada, in the United States, we’re probably going to see a quarter of a million to a half a million out of Nigeria. Basically, anyone who can cut things down without actually destroying the reservoirs is doing so because people don’t make a lot of money when crude is at $20. So it’s just a question of how these two line up. The Saudis are making their decisions day by day. The producers are making their decision state by day and that’s why oil prices haven’t collapsed more than they have. Also. We are past the bottom when it comes to global demand. And this ultimately is a demand question. We went down by 30. We’re probably down by about 20 right now. If that number to eat edge up just 215 which probably will within a month, then the disconnect between supply and demand will be considerably lower. And the amount of time it’ll take to overfill existing storage will be extended from weeks into months. I think that is ultimately what the Saudis are after, and I think they’re gonna make it.
Social Change Following Crisis
I see complete societal change following this crisis. Now, that’s not just because of Cova. That’s because of those two other things I mentioned. Remember if global order is going away, because the Americans don’t care, and the global order is going away, because demographics globally have turned inside out. This was the decade the global demographics, we’re going to flip anyway. We were going to lose a global base to a global consumption based system anyway. The Americans are just speeding that up with their geopolitical shift, and COVID is putting this into high gear. Well, what is the future look like? That’s a great question. But in an environment. Let me rephrase that differently. Since the time of the Columbus expeditions and roughly 1500 human economic interaction is based on the concept of more, more interconnectivity, more financial strength, more trade, larger populations, more technological advancement, or more, more, more, more and every step. Until this decade, the global demographic implosion plus the Americans plus COVID, means that this is the end of that model. 500 years of economic history are about to turn to end. We need an economic system that is not based on increases in size or complexity, or markets or technology or finance, all of that ends this decade. All that prep.
We need a new economic ism that deals with an imbalance between labor and capital that we have never experienced before. We’re not going to get that right on the first try. The Japanese the Europeans, they’re gonna have to try it first, their demographics are furthest along, China will be very close to the European.
So long term unless the country that it’s the hub of the manufacturing model is also a consumption-led system that you can count on it breaking to some degree. So those four big ones are gonna be Argentina, Turkey, France and the United States to paint its own thing. Definitely not consumption like if you’re part of that network. Cool. So Japan is going to try to be part of the American network. passes Canada, as is Korea as is the United Kingdom, that’ll probably work out our right. If you’re an economist outside of that work. Again, you need to find a new ism. That’s long term. We’re having a lot of transition right now. One of the things that the advanced world is discovering is that when the epidemic hits a poor country, that’s part of the supply chain model, those facilities go offline, doubly so if it’s an industry that requires relatively close quarters work for the employees be there have a chance I either have the option of social incidents in which means less technological transfer, less inter personal communication, which means or less advanced uptake of technology video, people have a conversation to learn. You remove that from the equation or half the number of quarter of the number of people that are in training, you just can’t adapt to the technology as it changes. So whether you’re in China or Malaysia or Indonesia or Thailand or Tunisia, You’re looking at fastly decreased manufacturing capacity in the short term because of COVID. And in the longer term until we get a vaccine because they can’t keep up with the technologies and evolves, if you’re an advanced country, and you still have a capital and you do have the consumption, it’s pretty simple decision in front of you. Either you can wait and go without whatever it is you need, whether it’s a ventilator or a laptop, or you can make it your damn self. And we’re seeing right now is the mass relocation of manufacturing to Europe to Japan to the United States, because they don’t have a choice. Now, some industries are more vulnerable to this sort of transfer than others. Others are pretty sticky. So automotive. Wow. You know, Trump administration was very proud of that they increased the percentage of inputs that are in vehicles and honestly, that negotiation is almost irrelevant now because if you had to get something from East Asia, you just don’t get it right now. having a hard time getting it from Mexico. Luckily, most of that interest rate In place of labor is already trained in the markets right there. textiles is one that most people wouldn’t expect. Now, most textile work is done in South Asia. But it’s done in close quarters. And it’s pretty much shut down right now. And one of the things that has come out of automation in the last four years is that you can now do most textile work with automation at a lower price point than you can with unskilled labor, human labor in South Asia. So we’re probably gonna see that industry, relocate large scale, electronics, office equipment, white goods, that sort of thing. That’s probably the next big wave. There’s nothing technologically about that. That prevents transfer. Three other industries that will probably take longer, heavy machinery, wiring and semiconductors. All of them are vulnerable, but all of them are a little bit stickier when it comes to relocation. heavy machinery only needs so many bulldozers so it makes sense to keep it in one place until you move the whole thing. semiconductors a lot of the stuff Production are all at a single facility. And that’s a multi billion dollar facility. But we’re already seeing groundbreaking in places like Arizona and so low to move some of this to the Western Hemisphere. It’s coming just won’t be as quick.
Modern Monetary Theory
Seals have been broken when it comes to fiscal stimulus, at least in the United States. Now remember, the United States it’s hard currency, and it’s the global store. So the United States has options for expanding the money supply that don’t apply to other countries. And then t specifically, I don’t think so. I I know very few people who take that specific theory seriously. But the United States really doesn’t have to worry about that because of its reserve currency status. The United States has done about $3 trillion in additional spending in the last two months. You know, that’s just ridiculous. Less than half of that the Fed had demonetised. The rest was people just looking for any way to park their cash. But you couldn’t do that in the United Kingdom, you certainly couldn’t do that in the Eurozone.
As for inflation, I think for the next four or five years, the real problem is going to be deflation. In part, that’s an aging population globally, which is consuming less. And while the industrial plant doesn’t go away, but more importantly, in the next three years, the United States is going to be adding industrial plants in order to counter COVID. But the Chinese are not going to be taking their industrial plant down. So we’ll get this weird dual system briefly where the Chinese will be building things at cut rates with insufficient buyers and just dumping the product on the market on and just the price rationale for that goes to zero Whereas the Americans will be building things out that requires capital investment, they’ll be charging more market rates for based on higher capital investment, that’s going to mean higher prices. But they’re not going to be price sensitive, because capitals in essence are free, right? You don’t need mmt to throw a bottle supply capital at things in the US.
US-China Relation
The Chinese geographic and demographic structure does not argue for success over the long term. They can only trade with the wider world when the Americans were involved keeping the seedlings safe for both exports and imports. That’s gone. Chinese one child policy has basically destroyed any possibility of trying to be in a consumption led economy now and actually really throw the very existence of China into the future to the 20 years from now. So you’re moving the equation, the Americas from the And this doesn’t end well from a china writ large. The Chinese know this, the Chinese see this problem coming. So the Chinese are deliberately wrecking their relations with everyone in order to spawn a nationalist uprising at home that they hope to steer in a creative enough direction that they can hold the country together on to the economic options that China has are completely exhausted. The questions to me, I would argue that with what the president of China is doing right now, they’re concerned that this break is going to happen within the next 18 months. So if you’re a foreigner, and you’ve got operations in China, it’s time to start getting your people out because that national backlash will not be pretty. And if you’re in China personally and you’ve got dual citizen citizenship, it’s time to start considering what your exit strategy is. Because the Chinese that you’ve operated in for the last 30 years is not the China that’s going to be there.
Source: 73rd CFA Institute Annual Virtual Conference
