Thread by @RonStoeferle

As previously noted, i really read everything that #ZoltanPozsar puts out...His Aug 24th piece was terrific again. In this #thread I summarize the most important takeaways: 🧵

"War means industry.

Global supply chains work only in peacetime, but not when the world is at war, be it a hot war or an economic war.

The low inflation world had three pillars:

- cheap immigrant labor keeping nominal wage growth “stagnant” in the U.S.,
- cheap Chinese goods raising real wages amid stagnant nominal wages,
- and cheap Russian natural gas fueling German industry and Europe more broadly.

Implicit in this “trinity” were two giant geo-strategic and geo-economic blocks: Niall Ferguson called the first one “Chimerica”. I will call the other one “Eurussia”.

Put simply if there is trust, trade works. If trust is gone, it doesn’t. Today, trust is gone:

Chimerica does not work anymore and Eurussia does not work either. Instead, we have a special relationship between Russia and China, the core economies of the BRICS block and the “king” and the “queen” on the Eurasian chessboard – a new “heavenly match”..

the special relationship between China and Russia (”Chussia”) is a powerful one:

a marriage of commodities and industry, uniting the largest commodity producer (Russia) and the factory of the world (China), potentially in control of Eurasia…

Wars, like the currently unfolding economic war, are about control. The control of technologies (chips), commodities (gas), production (zero-Covid), and straits – chokepoints like the Taiwan Strait, the Strait of Hormuz, or the Bosporus Strait.

Wars are also about alliances. In today’s complex conflict between the U.S. on the one hand and Russia and China on the other, the world is best described by “the enemy of my enemy is my friend”

“Our commodities, your problem” is branching into “chips from our backyard, your problem” and might also branch into “our straits, your problem”

…and that’s why forecasts of a rapid deceleration of inflation are naively optimistic:
if Pax Americana enabled globalization and globalization underwrote lowflation,
the TRICKs trying to poke holes in the Pax means that inflation is a big risk.

To understand the path of inflation from here, we will have to read more history.... if trust drove globalization, and globalization drove “The Great Moderation”, distrust will drive de-globalization, and de-globalization “The Great Reflation”…

Chips are like soft drinks: Coca-Cola and Pepsi are both fizzy drinks made to quench your thirst, and
similarly, (most) chips are chips whether they were made by TSMC or SMIC, and Russian missiles can fly perfectly fine with either of them.

Like energy flows, chip flows were also re-drawn by the war. Re-drawn. Not blocked or eliminated: Russian piped natural gas was replaced with U.S. LNG for continental Europe, Taiwanese, South Korean, and Japanese chips with Chinese chips for Russia.

Remember the 3 units of Minsky?
- Hedge units can cover their payments from their incomes.
- Speculative units have to borrow to be able to make payments.
- Ponzi units can make their payments only if they sell some of their assets and are thus the most exposed to rising rates.

Minsky moments are triggered by excessive financial leverage, and in the context of supply chains, leverage means excessive operating leverage:
in Germany, $2 trillion of value added depends on $20 billion of gas from Russia… …that’s 100-times leverage – more than Lehman’s.

For the current world order...to survive the challenge, the challenge must be squashed quickly and decisively, in the spirit of the Powell Doctrine. But Ukraine and Taiwan aren’t Kuwait, Russia and China aren’t Iraq, and Top Gun 2 isn’t the same movie as Top Gun…

the West will have to pour trillions into four types of projects starting “yesterday”:

(1) re-arm (to defend the world order)
(2) re-shore (to get around blockades)
(3) re-stock and invest (commodities)
(4) re-wire the grid (energy transition)

…and commodity inventories will take off like FX reserves after the 1997 crisis,
and will involve not just food and energy but also some industrial commodities.

…and if so, any investor will have to be mindful that the above to-do-list is:
(1) commodity intensive
(2) capital intensive
(3) interest rate insensitive
(4) uninvestable for the East

Executing on the to-do-list can easily drive another
commodity super cycle, like the one we had after China joined the WTO in 2000. But that super cycle happened in the context of a peaceful, unipolar world order in which great powers had positive expectations of the future...

Uninvestability: it makes absolutely...no logical sense to roll their investments in G7 debt claims because rolling a $1 trillion portfolio of U.S. Treasury securities means that you will fund the West’s effort to re-arm, re-shore, re-stock, and re-wire against the East.

…which is why Bretton Woods III is destined to happen. It’s already happening, and we will explore the Bretton Woods III topic in detail in our upcoming dispatch: War arrend Cuncy Statecraft.

Thx for reading this #thread. The full version of Zoltans paper can be found here: plus2.credit-suisse.com/shorturlpdf.ht…

#Zoltan @LukeGromen @LawrenceLepard #commodities #inflation @wmiddelkoop @ttmygh @GoldSwitzerland @JeffBooth @JamesGRickards @SantiagoAuFund @dan_pantera @TaviCosta