Thread by @RonStoeferle

Folks, you know that I enjoy reading every piece that #ZoltanPozsar at #CS writes. His latest piece "War and Commodity Encumbrance" (Dec. 27th) was particularly worth reading. Here's a little #thread with the most important parts:

"A recurring theme in my dispatches this year has been that in a moment when the world is going from unipolar to multipolar, the actions of heads of state are far more important than the actions of central banks."

"Central banks will be behind the curve in this game, and if investors read only the speeches of central bankers but not statesmen, they will be even more behind the curve. The multipolar world order is being built not by G7 heads of state but by the “G7 of the East”."

"Bretton Woods III is slowly taking shape, and in light of developments to date, my motto for Bretton Woods III – “our commodity, your problem” – remains apt."

"President Xi’s visit with Saudi and GCC leaders marks the birth of the petroyuan and a leap in China’s growing encumbrance of OPEC+’s oil and gas reserves: with the China-GCC Summit, China can claim to have built a “special relationship” not only with the “+” sign in OPEC+"

"President Xi’s visit was the very first China-Arab States Summit in history, and echoes FDR’s meeting with King Abdul Aziz Ibn Saud on Valentine’s Day 1945 aboard an American cruiser, the USS Quincy."

Key parts from President Xi’s speech at the China-GCC Summit (english.news.cn/20221210/762e6…)
“In the next three to five years, China is ready to work with GCC countries in the following priority areas: first, setting up a new paradigm of all-dimensional energy cooperation, where China

...will continue to import large quantities of crude oil on a long-term basis from GCC countries, and purchase more LNG. We will strengthen our cooperation in the upstream sector, engineering services, as well as [downstream] storage, transportation, and refinery. The

...Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade, […] and we could start currency swap cooperation and advance the m-CBDC Bridge project”.

"..the world is going from unipolar to multipolar politically, but the market has yet to make the leap that in the emerging multipolar world order, cross-currency bases will be smaller, commodity bases will be greater, and inflation rates in the West will be higher…"

"Inflation traders should be paranoid, not complacent. As Andy Grove said, “only the paranoid survive”, but when I asked a small group of inflation traders
over dinner in London this summer about how the market (they) comes up with five-year forward five-year breakevens, I did

not sense any degree of paranoia in their answer: “there is no top-down or bottom-up work that we do to come up with our estimates; we take central banks’ inflation targets as a given and the rest is liquidity”. Inflation breakevens do not seem to price any geopolitical risk."

"The “new paradigm” between China, Saudi Arabia, and GCC countries is fundamentally different from the one struck aboard USS Quincy...back then, “liquidity and security” were more important for an emerging region; today, “equity and respect” are more important..."

"Put differently, “oil for development” (plants and jobs) crowded out “oil for arms” – the Belt and Road Initiative met Saudi Arabia’s Vision 2030 in a big win-win…"

"the “new paradigm” will not be funded with U.S. dollars: President Xi noted that “the Shanghai Petroleum and Natural Gas Exchange […] will be fully utilized for RMB settlement in oil and gas trade”. President Xi’s comments that “China will continue to import large quantities of

crude oil on a long-term basis from GCC countries, and purchase more LNG” underscores the gravity of the underlined quote: combined, the two basically say that China...will buy even more in the future, and wants to pay for all of it in renminbi over the next three to five years."

"Xi communicated his message on “renminbi invoicing” not during the first day of his visit ...but during the second day of his visit – when he met the leadership of all the GCC countries – to in part signal…GCC oil flowing East + renminbi invoicing = the dawn of the petroyuan."

"Why do China’s gold purchases matter in the context of renminbi settlement? Because at the 2018 BRICS Summit, China launched a renminbi-denominated
oil futures contract on the Shanghai International Energy Exchange...the renminbi has been convertible to gold..

"When was the last time you heard a head of state talk about swap lines and central bank digital currencies (CBDC)? And not just any CBDC, but a specific one:
“the m-CBDC Bridge project” bis.org/about/bisih/to…
The Project mBridge, is a masterclass in plumbing:

"Do take a step back and consider… that since the beginning of this year, 2022, Russia has been selling oil to China for renminbi, and to India for UAE dirhams; India and the UAE are working on settling oil and gas trades in dirhams by 2023;

and China is asking the GCC to “fully” utilize Shanghai’s exchanges to settle all oil and gas sales to China in renminbi by 2025. That’s dusk for the petrodollar……and dawn for the petroyuan."

"Under Bretton Woods III, a system in which commodities are collateral, encumbrance means that commodities can get scarce in certain parts of the world – and that scarcity shows up as inflation “printing” far above inflation targets…"

"Iran and China have also had a special relationship since March 27, 2021 – the Comprehensive Strategic Partnership – a 25-year “deal” under which China committed to invest $400 billion into Iran’s economy in exchange for a steady supply of Iranian oil at a steep discount."

"Let’s stop here for a moment. Russia, Iran, and Venezuela account for about 40 percent of the world’s proven oil reserves, and each of them are currently selling oil to China for renminbi at a steep discount."

"Think of this as a “farm-to-table” model: I used to sell my chicken and vegetables to you, and you sold soup for a markup in your five-star restaurant, but from now on,

I’ll make the soup myself and you’ll get to import it in a can – my oil, my jobs, your spend, “our commodity, your problem. “Our commodity, our emancipation”.

"Attention needs to be paid to the goings-on of the global East and South, especially given that this year Saudi Arabia, Turkey, and Iran have all started their application to the BRICS."

"Furthermore, following this year’s Shanghai Cooperation Organization (SCO) Summit in Samarkand, the SCO – “the NATO of the East” – granted dialogue partner status to “half the GCC” – Saudi Arabia and Qatar – and started procedures to admit Iran as a member…"

"In Riyadh, President Xi referred to “a garden of civilizations” in the context of the
Belt and Road Initiative (see here english.www.gov.cn/news/topnews/2…). Unless they involve Adam, Eve, and a snake,
gardens typically refer to a happy and peaceful place.

if Russia and Iran get along, China and Iran get along, Russia and Saudi Arabia get along, and China and Saudi Arabia get along, then the foreign ministers of Saudi Arabia and Iran engaging in “friendly talks” last week means more momentum for Belt&Road, BRICS+, and “BRICS coin”.

"The China-GCC Summit is one thing, and China’s strategic partnership with Iran is another, but both Saudi Arabia and Iran applying to pillar institutions of the multipolar world order – BRICS+ and the SCO – at the same exact time, plus the idea of “BRICS coin” as a

commodity-weighted neutral reserve asset that encourages members to pledge their commodities to the BRICS “cause”, should have G7 bond investors concerned, because these trends may keep inflation from slowing and interest rates from falling for the rest of this decade."

"It appears to me that unless the U.S. nationalizes shale oil fields and starts to drill for oil itself to boost production, over the next three to five years, we’re looking at an inelastic supply of oil and gas…
…and of that inelastic supply:

(1) China will get a bigger share at a discount, invoiced in renminbi.
(2) China will export more downstream products at a wider margin, and…
(3) China will lure more firms like BASF with discounted energy bills.

(4) Iran, with Chinese capital, will do more downstream exports too, and…
(5) GCC countries, with Chinese capital, ditto, most likely for renminbi."

"The “new paradigm”, as I see it, comes with a theme of “emancipation”: both sanctioned and non-sanctioned members of OPEC, with Chinese capital,
are going to adopt the “farm-to-table” model in which they will not just sell oil but will also refine more of it and process more of

it into high value-added petrochemical products. Given supply constraints over “the next three to five years”, this will likely be at the expense of refiners and petrochemical firms in the West, and also growth in the West. All this means much less domestic production and more

inflation as steadily price-inflating alternatives are imported from the East.

And this is not just about oil and gas…"

"Earlier this year, President Widodo of Indonesia (an OPEC member since 1962) called for an OPEC-style cartel for battery metals for EVs. Resource nationalism is in the air, but markets don’t seem to price it as a potential driver of inflation."
ft.com/content/0990f6…

"Five-year forward five-year breakeven inflation expectations now make little sense.
For two generations of investors, geopolitics did not matter. This time is different:
it’s time to get real and it’s time to start pricing the secular end of “lowflation”…"

"Commodity encumbrance cuts in the other direction too…

Consider that on November 3, 2022, Canada ordered three Chinese firms to exit lithium mining (see here reuters.com/markets/commod…). In simple terms, commodity encumbrance means…
…a total war for the control of commodities."

"I don’t think five-year forward five-year rates are pricing the future correctly:
breakevens appear to be blind to geopolitical risks and the likelihood of the above."

"Five-year forward five-year breakeven inflation expectations now make little sense.
For two generations of investors, geopolitics did not matter. This time is different:
it’s time to get real and it’s time to start pricing the secular end of “lowflation”…"

This year was just the beginning. Next year sets the stage for BRICS and the BRI: in April, China will host the fourth Belt and Road Forum...Following forums in 2017 and 2019,. the coming forum will be hosted by a China that, while in lockdown, forged a bond with all of OPEC+."

Thanks #ZOLTAN! Great job!

@LukeGromen @wmiddelkoop @TaviCosta @MarkValek @NikoJilch @JeffBooth @ttmygh @GoldSwitzerland @IGWTreport @WallStreetSilv @goldseek @BurggrabenH @AndreasSteno @MacroAlf @RickRuleRulz @Galactic_Trader