The latest missive from Zoltan Pozsar at Credit Suisse. This is largely right, in my view. However, I think Pozsar is too far ahead of the curve:
- The Minsky moment for globalisation has not happened. It’s more like the Ukraine war is the Bear Stearns warning of what’s to come when China invades Taiwan and the Lehman moment arrives proper. Hence, globalisation is slowed but not yet reversin. Nobody is yet building large strategic inventories of commodities. Therefore, neither are the inflationary consequence here yet.
- Moreover, Pozsar still underestimates the problems related to, and implications of, the structural Chinese slowing. This has direct implications for falling not rising commodity prices.
- The alliance networks of Pax Americana do still have the potential to evolve into a kind of fragmented supply chain that supplies cheap stuff to one or both of the emerging liberal and illiberal geopolitical blocs which again mitigates against inflation.
- Hungary and South Korea are not the same. Hungary was occupied by a hostile foreign army. South Korea may chaffe but US troops are there to protect not occupy it, which is not to say it may still choose strategic ambiguity.
- Finally, the cyclical set-up is completely the opposite to the structural forces being described. The Fed is going hike until the economy stalls enough that the US destocks excess inventories into a Chinese and European trade shock. The depth of this looming (and very deflationary) inventory cycle may be mitigated by the slow dawning of Poszar’s structural shift but can you really see some greedy US executive squashing his margins (and bonuses) by deciding to keep higher inventories owing to the risk of Taiwan war in 2030?
- As for war commodities for weapons, China is slowing a lot faster than those volumes are rising so it is not a new supercycle at this point, though could become one if geopolitics gets ugly faster than expected.
- Another issue is that the notion that Russia can smoothly supplant diminishing commodities trades from everywhere with Russian supply is very problematic.
- There is one final issue that Poszar does not examine: climate change. Both China and Europe are in unprecedented droughts right now that are making energy problems worse. The hope that all will be forced to act in concert as the consequences of a warming planet come to bear is not lost. Then again, it could make it all worse, as it is doing right now.
Poszar’s musings are excellent and when the bomb drops I think he has got it mostly right. But human beings tend not to prepare for such events. They panic when they happen. For proof of that, we need only look to Canberra’s China “reset”…
