Thread by @RonStoeferle

Happy New Year, dear friends!!!!

You know that I enjoy reading every piece that #ZoltanPozsar at #CS writes. His latest piece "War and Currency Statecraft" (Dec. 29th) was again very much worth reading.

Here's a little #thread with the most important parts:

"What are G7 policymakers, rates traders, and strategists to do when threats to the unipolar world order are coming from every angle. They should definitely not ignore the threats, but they still do.

How could they not?"

"For two generations, we did not have to discount geopolitical risks. Since the end of WWII, the only
Great Power conflict investors really had to deal with was the Cold War, and since the conclusion of the Cold War, the world enjoyed a unipolar “moment”... –

Geopolitics has reared its ugly head again: for the first time since WWII, there is a formidable challenger to the existing world order, and for the first time in its young history, the U.S. is facing off against an economically equal or, by some measures, superior adversary."

"China is proactively writing a new set of rules as it replays the “Great Game” (amazon.com/Great-Game-Str…), creating a new type of globalization with new institutions like the
Belt and Road Initiative, BRICS+, and the SCO."

"Global warming is helping Russia add an “artic suspender”to China’s Belt and Road vision, and China, while under lockdown, forged a special relationship not just with Russia but all of OPEC+ (see here plus2.credit-suisse.com/shorturlpdf.ht…)....

And as @DrPippaM recently noted, commodity-rich
Africa is now also a frontier in what I called the quest for “commodity encumbrance”."

"One Belt, One Road (and an Artic Suspender) means…

…One World, Two Systems."

"…you should stop pretending that this means nothing for the U.S. dollar or demand for Treasury securities.

If the world is going from unipolar to multipolar; if the world is gradually drifting from “one world, one system” (globalization) to “one world, two systems”...

(friendshoring and Belt and Road); and if the G20
is seemingly splitting into the “G7 + Australia”, “BRICS+”, and “the non-aligned”,
it’s impossible that this split won’t affect the international monetary system…"

"The G20 is becoming the “G7 + Australia” = 8 countries on one side, and “BRICS + new applicants + the thematically aligned” = 11 countries on the other.
8 + 11 = 19. The remaining member, the European Union (EU), is perhaps the most directly affected by this global “split”."

"Indeed, we’ve come quite a long way
from the family photo of the 2017 G20 Summit (g20germany.de/Content/EN/Art…): Chancellor Merkel, dressed in red and grey, is flanked by BRICS heads of state on both sides – President Jacob Zuma and President Jair Bolsonaro..

on her right and President Xi Jinping and President Vladimir Putin on her left – strikingly, President Trump and President Macron on the outer edge of the family picture."

"...the BRICS embarked on “BRICSpansion” in other directions: Argentina and Iran applied already, as did Algeria, and as noted above, Saudi Arabia and Turkey are planning to apply, while Egypt – a neighbor of Saudi Arabia across the Gulf of Aqaba and neighbor of MBS’s..

signature city of NEOM project – is also planning to apply next year (see here: arabnews.com/node/2127586)."

"2023 will be pivotal for BRICS: after a Covid-induced hiatus, China plans to host the third Belt and Road Forum (the “WEF” of the East)
in March or April 2023 (see here reuters.com/world/asia-pac…). I expect formal applications to come in by then."

"when “BRICSpansion” is understood from the perspective of Brzezinski’s framework, you’ll then have a good idea as to why Great Power
conflict matters for your portfolio."

"The ugly part of BRICSpansion is that the one thing that the BRICS are most aligned on is the de-dollarization of their fast-growing, bilateral trade flows, and so “BRICSpansion = more de-dollarization”."

"Secretary Jack Lew was right when in 2016 he said that “the more we condition the use of the dollar and
our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the grows”. Indeed."

...“deflection” is the anteroom of de-dollarization:
our starting point to understand de-dollarization should be a book by Zoe Liu and Mihaela Papa (cambridge.org/core/elements/…)

Since the outbreak of the war and the freezing of Russia’s FX reserves, both current and aspiring BRICS members sped up their de-dollarization efforts:
The book was published just before
the outbreak of the war in Ukraine and highlights the “plumbing” that’s been put in place.."

"Kindleberger: “war is a hothouse and places
enormous strain on resources, which finance is used to mobilize. […] Financial innovation occurs in wartime. […] War both cuts off old connections
in trade and finance and [drives] the fashioning of new. War cuts new channels”.

"For the Fed, the swap lines are about backstopping the past (past surpluses).

For the PBoC, the swap lines are about underwriting the future (“Lend-Lease”)."

"CBDCs and the idea of replicating “the U.S. dollar network” with a network of central banks via CBDCs is revolutionary. Project mBridge is just the beginning....For the Fed, I’d just reiterate: don’t fix what’s not broken. CBDCs are an existential threat."

"To emphasize: crypto is about the distaste for QE, not an appetite for digital cash per se, and the regulated liability network of the Fed
offers digital cash, not “un-printable” money. In the U.S. we don’t need a CBDC."

"What is a G7 rates strategist – yours truly – to do when geopolitical trends are set to shape dollar funding and rates markets, and a total financial war and a
total war for commodities (that is, the encumbrance of commodities, see here) has been and will remain a driver of...

price action....and as I have warned about at length above, this year, the “BRICS+” appear to have accelerated the pace of cutting “new channels”…

To better serve, I’m going to adapt…
…and to better serve your investors, you should adapt too."

"The world is splitting in two. So is the monetary system. The dollar is at a crossroads.

When I think of the dollar, I think of Jean-Claud Van Damme’s voiceover during
his “epic split” ():

preserving the dollar’s hegemony will be an “epic feat”; like speedbumps for Van Damme, BRICS mean pain for “Jean-Claude Van Dollar”.

Have a happy and healthy 2023…"

#ThanksZoltan, great work as always!!!

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