Geopolitical Trends Investors Need To Watch After The Pandemic

At this October’s iConnections Investment Institute Forum, members heard from Dr. George Friedman, Founder of Geopolitical Futures. Dr. Friedman’s analysis of current geopolitics is second to none, and revealed some fascinating insights into how the current state of play will affect the economy and investment. 

Here we publish a transcript of some excerpts of his presentation to help guide you in your decision making.  

Predicting the COVID depression

Last December our forecast was that the global economy would enter period of recession. This is cyclical and normal. It was a situation where the losers would be the greatest exporters: China, Germany. These countries are dependent on consumption by US society. 

We were happy and confident with our forecast, but then the world blew up. For a forecaster, the coronavirus takes you to a different place. We were trying to understand what Dr Fauci was telling us, trying to make sense of it all. 

We argued that exporting nations would still be at a huge disadvantage. Oil producers would be at a huge disadvantage, too, as the economy contracted. If millions of workers are pulled out of the workplace, consumption goes down. This looks like a depression. 

This is the difference between a recession and a depression. A recession is a cyclical, financial event. A depression destroys parts of the economy, destroys businesses, cuts consumption, puts other businesses out of operation, brings down some banks — it’s a long-term event that affects society. 

Surprising global economic resilience

The amazing thing is how well the world absorbed social distancing and the rest of the virus. The numbers we see in unemployment are much less than we expected. 

Food continues to be delivered, the airlines are smaller, but you can still get around, you have seen a pressure on the economy — but not a rupture in the economy. Considering it’s been eight months now, that is a surprising thing. How long can it last?

We are now looking at close to another year before we have a vaccine that is distributed. A vaccine that works. Nobody in February would have thought that nine months later we could be in this situation. 

As time grinds on the system, it grinds even more socially and politically. A depression is not a financial event alone, it is social, it is economic, despite a few trillion dollars being invested in the economy. 

How the EU and US stack up 

We are about to enter a period of even greater stress. We are sitting and watching a second wave. The most interesting place is Europe: they acted, they saw ahead, had avoided the American problem. But now they are in the same position, and have no tools left to act. 

One way to look at depression is to look at bankruptcies: in the USA you’ve seen retailers going bankrupt but that was happening anyway. You see airlines nearly making it but they were always in trouble. In Germany, you can see bankruptcies starting to line up. 

So in my eyes, the US has great resilience to things like this. It’s the Europeans, who have been really disciplined, that are now in trouble. 

When I thought of exporters being in trouble, I thought of China and Germany. Half of Germany’s GDP comes from exports. Every two-point decline in exports is a one-point decline in their GDP. Germany has the EU market, but the EU has been constricted too. 

Germany is a nation that has gone a far as it can with its model. Its control of the EU is powerful but not enough to manage Italy. Now Britain, the second largest economy, is leaving — they are the nation buying the most German cars, so how is Germany’s bluff going? 

So I see a divergence in how the US handles it. Because we are so diffuse, we’re handling it different ways. In the EU, everything holds together — until it doesn’t.

Russia, oil and armed conflict

Oil is the foundation of our economies, for our travel. The world had a massive overhang of oil — that’s corrected itself somewhat, but it leaves some countries in difficult positions. Let’s look at Russia: 70% of their exports are energy. That’s a huge amount, and exports make up 30% of their GDP. 

Russia is desperately trying to reclaim certain areas of the Soviet Union, like with Belarus, a strategic area that they were bringing under control. But they are losing their basic tool, which was energy exports to Europe. That’s in decline as demand goes down.

Russia never developed a modern economy. It’s a third world country, existing on the export of a single commodity whose price it doesn’t control. They are having internal problems while facing this problem, and they’re dealing with it by becoming more aggressive in geopolitical terms. The war between Azerbaijan and Armenia is about oil. Iran comes into this game, Turkey, and the US is in this game too, brokering a ceasefire that was broken 15 minutes later, according to the Azeris. Armenia has no oil. Turkey wants Armenia because it wants a shot at Iran. 

So we see many constricted economies looking at military options to stabilize their situation: these little wars that shouldn’t have happened but are playing out.

Chinese exports and state repression

China is the largest exporter in the world. The USA is the largest importer in the world. Normally you don’t try and tick off your biggest customer. The Chinese stumbled into this disaster; their President’s basic job is managing the President of the USA. Chinese leaders have managed President after President, they have had a debate, but the US never took too aggressive an action. 

Then Xi met Donald Trump. Trump made the same threats as other Presidents — but acted on the threats. It left China in a difficult position. Some 30% of its GDP are exports; they really depend on us. The US-Chinese confrontation really comes from the same thing that the Japanese had back in 1989-90. The Japanese didn’t have investors in their companies, they had banks in their companies. Their view was the way to pay back the banks was to surge exports, even below costs.

Now we have the same thing in China, with massive capital flight. Even middle-class people are buying apartments in Vancouver that nobody moves into. China was already a country in deep trouble. And it was having serious internal problems. In Xinjiang they created concentration camps to control the Muslims. They had probs in Inner Mongolia. Then Hong Kong took off. Then a border war with India. A series of destabilizing events. 

The richer coastal region is dependent on foreign trade, not internal trade. The interior has a standard of living the same as Bolivia. So you have one part of the country that is the same as Los Angeles, and the other part is still third world. 

For China, COVID was a gift because it justifies internal controls on their people. Following them, tracking them. But what we’ve seen in China is a tremendous repression, which they can probably pull off. Their problem is the claim now not to have any COVID: they have to make the claim that they have solved the problem, so they can say that the repression is not due to politics but the virus. 

The great Chinese bluff

The Chinese have made a tremendous propaganda success in portraying themselves as a major successful country. When you look at them they are not; they have to get their exports back. They’ve got to have more and more exports, but as the US economy retracts, or at least stays stable, the appetite for Chinese exports goes down. 

When you look at China you are looking at a country that is bluffing internationally. We know their numbers can’t be trusted. They publish their GDP numbers two weeks after News Year’s Day — big companies, even most small companies can’t close their books that quick. 

Historically, the US was China in the 1880s — we were the low-wage exporter that flooded the international markets. But when World War One ended, Europe went into depression, cutting back on US imports and pushing us into depression. 

The fact that China is in deep trouble doesn’t mean they aren’t going to be a great power. In a way, they’re more dangerous because of military force. Their greatest fear is that the US will blockade the ports. We have a Circle around china: Japan, South Korea, the Philippines, India… that terrifies China. They only have one ally: Pakistan. That gives you a sense of how powerful countries really view China. China is more vulnerable than the US is, because we can backtrack on consumption and imports. 

The US election is an economic and cultural clash

While the election is exciting the fundamental problem is intact whoever wins. Firstly, an economic problem: vast numbers of Americans are unemployed, underemployed, and never to be employed. Never mind hoping to get to Yale: their children will be lucky to get into community college. Meanwhile, the other class — the technocratic class — say that it’s a new world, and we can all use Zoom now — but you can’t if you’re in agriculture, or any other industry that cannot convert.

There’s also a cultural war. If you look at Hillary Clinton, she won the upper corner of the US, but in the rest she only won three states. Everything else went to Trump. You can see a heartland where the pain is tremendous, but also the contempt. 

These two classes clash fundamentally. In this election, at least 40% will vote for Trump. They are one side of the culture war. That’s a lot of people in the Midwest to be ticked off. We will either face the rage of Trump between the coasts, or Biden dealing with rage of the working class of the Midwest.

A global system that’s still working

We’re divided and will continue to be divided. The election will not change the rage that’s being felt. The anger is there for a generation. The US remains the most powerful country, overwhelmingly, facing a Europe which is weak and fragmenting — holding together but not knowing how. Russia, meanwhile, faces a steep decline, and China is in deep trouble. 

We are in a situation where the major powers are all trying to right themselves, and the US is the only one that is relatively stable. 

The question of depression is not closed, but we have to be impressed by the resilience of the global and US economy. The global system continues to operate: not just on trade, but in conflicts too, such as the first COVID war in Azerbaijan. 

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