Recession, recession, recession.
The odds of a major economic crisis continue to rise across the globe, sparking fears that turmoil is on the horizon that eclipses the Great Recession. The cause: tariffs that disrupt world trade, alliances, and globalization, along with nagging inflation. Add to this, the compound effects of the wars in Europe and the Middle East, none of which have a clear end date.
Markets are bleeding.
Since Inauguration Day, just a little over two months ago, a whopping $11 trillion has been wiped from US stock markets, a number that is hard to comprehend. It is equal to Canada’s economy disappearing five times, Bulgaria’s economy disappearing 100 times, or the Tajikistan economy disappearing over 900 times.
In the past, such economic turbulence would give governments pause.
(“Geopolitics First” is an expression/concept of Abishur Prakash/The Geopolitical Business, Inc)
Many would suspend their plans to stop the chaos, and either walk back their actions or temper their next moves. But, what is taking place in the US is the exact opposite. The Trump administration is outright ignoring the market and economic uncertainty, putting tariffs ahead of everything else.
This is a new shift, an inversion that challenges decades, if not centuries, of political theory and economics. Usually, the market has dictated government policy. Over the past few years, the US chip restrictions on China, which included new “ratios” that would limit how much Western technology companies can sell in the Chinese market, were tempered by waivers. The US government gave dozens of tech giants various “hall passes” that allowed them to keep selling in China. Fears of market and business turmoil overpowered American geopolitics.
But now, markets are almost being ignored. Investors are being put on the same ship as average consumers and foreign governments, forced to accept what is happening and operate with complete uncertainty. Geopolitics is driving a decoupling between the state and the market.
Many will throw cold water on such an idea. But, look at what is taking place with clear and unbiased eyes, and this is the only conclusion one can come to: if stock markets plunging and recession fears mounting is not causing Washington to retreat, then the psyche of governments has fundamentally changed.
FORCED ADAPTION
If Trump does not walk back his tariffs, which is becoming unlikely as China retaliates with a 34% tariff, prompting counter-retaliation warnings from the White House, then markets face a new reality.
Their actions matter less than ever before. Withdrawing capital from US markets will not change the direction America is moving in. Like an asset, geopolitics is causing the power of investors to depreciate.
What Trump is doing, which is being closely watched and analyzed by foreign states, is forcing markets, and the broader world of investing, to accept the tariff chaos - and whatever comes next - instead of fighting or resisting it. This is an experiment to see whether the government can bend the market to its will or not.
Some investors may feel that the government cannot control their actions vis-a-vis the market. For example, as trillions disappear from US markets, capital is moving into Europe. US-based investors have poured over $10 billion in EU funds that primarily focus on European stocks. The activity taking place today is seven times more than in previous years.
However, this outflow of capital makes American geopolitics vulnerable. The US needs to keep money within its borders, not let it flow to the very governments it is clashing with. This sets the stage for new outbound investment limits that restrict where and how US investors can push capital globally, expanding on rules that focus on China today.
Forced adaption is not just going to disrupt the strategy of individuals or companies who play the market. It will also spill over into the government domain. As US-EU relations break down, Germany is debating whether to call back 30% of its gold reserves, around 1,200 tonnes, currently stored in the US, valued at almost $120 billion.
The US cannot allow this, as gold deposits secure the US economy. If Germany is allowed to repatriate gold, who is next? The US may refuse to accept Berlin’s request. In the process, it will be “locking in” countries in the US, regardless of how chaotic things become.
The market, including gold deposits, will no longer define US strategic moves abroad.
WAR MARKETS
The result of what is happening is either a war between governments and the stock markets, and by extension, the broader investing world, as the state moves in one geopolitical direction, which is vehemently opposed by investors.
Or, the markets capitulate, realizing that governments will not change course, and the limits being imposed on them leave no other option but to “surrender.”
If the latter happens, it fundamentally changes the role of markets within a nation.
Markets will no longer be just about attracting and circulating economic lifeblood within a nation. Instead, they will become a primary tool of a country’s geopolitics or geoeconomics.
If the US stock market restabilizes, at its current level or a lower one, as Washington collides with the global economy, it will indirectly mean that existing and future US investors are betting on America’s trade wars (and America’s victory). This is a radical characterization, one that many will be uncomfortable with.
It will make the US stock market a way to beef up America’s moves on the world stage. Markets have not functioned this way before. They have been wealth creation or wealth security vehicles, along with an indicator of the health of an economy.
Stock markets have not explicitly been tools of geopolitics.
This converts stock markets into war markets.
And, America is not likely to be alone in this regard.
On the eve of Trump’s Liberation Day announcement, the Chinese government informed several state agencies to limit or stop new approvals for local firms who want to invest in America. This is a move as significant as Trump’s tariff play but has not received the same attention. China is prodding its companies to either go beyond Western markets (i.e. invest in Dubai) or more likely, invest in Chinese markets. Also influencing Beijing’s new move with outbound investment is the latest America First Investment Policy, which fundamentally redesigns how much Chinese capital can be in the US.
While in China, the lines have always blurred between the state and the economy, the new rules Beijing is enforcing are something different. China is starting to redirect capital away from the US, and into local vehicles, in a way that can strengthen and offset the loss of foreign investment (i.e. FDI in China is down 99% over the past three years). In the process, Chinese stock markets will play a new role in the clash of world powers that is underway, especially as Trump threatens to raise the tariffs on China to 104%.
And, in both the US and Chinese examples, investors will increasingly be converted from neutral observers into geopolitical pawns, as they are forced to invest in a particular way and support the ambitions of the state.
3 KEY TAKEAWAYS👇
Decoupling is a global and internal phenomenon: For most people, the term decoupling evokes thoughts of the world stage, like the US and China diverging. But, as what is happening in the US shows, decoupling can also take place within nations. The US government and the US stock market are more opposed than ever, and while US and global investors may believe they can bend Washington, Trump may already have made up his mind. The more the stock market falls, the more Trump will be convinced to stay the course.
Investing is increasingly becoming geopolitical: First, it was limits on investing in China. Then, it was restrictions on M&As. Now, it is a state-market decoupling. Geopolitics is redefining the world of investment. The biggest consequence is that investing itself is becoming a “geopolitical activity.” The moment a business, government, or individual invests, they are walking onto a geopolitical battlefield with countless variables and threats.
A geoeconomic experiment is taking place in real-time: Flying under the radar of the world is a massive geoeconomic experiment, one that nobody in particular is driving. Depending on what happens next in the US, which is either a tariff retreat or a new tariff barrage, precedent will be set. Either, the market still matters or it does not. And the culprit for this profound shift in how the world functions is geopolitics.
CONCLUSION
Many seasoned investors and finance people will be skeptical of the state-market decoupling because of geopolitics. They will point to the immense integration and exposure, and the literally hundreds of investment streams that, when taken all together, cannot be ignored by governments.
However, as the state of affairs shows in the US today, what if they are wrong?
The collapse of markets has been viewed as a measure of many things. Except, what happens if the stock market falls, a recession begins, but other parts of the economy improve, like new sources of foreign investment?
What is taking place, because of geopolitics, is a redefinition of the fundamentals when it comes to stock markets and their position and place within the fabric of economies and countries.
Much of this is foreign, unfamiliar, and even vague. But that does not mean what is happening is not happening.
A state-market decoupling is occurring. It may expand or it may stay limited. But, regardless of how big or small this decoupling becomes, it will represent another geopolitical force that changes the design of nations. In this case, geopolitics is driving new internal separation, with the end goal of converting key pillars of the state into tools to fight geopolitics.
-ABISHUR/MR. GEOPOLITICS
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