What Is The World Coming To?


By John Nicola, CFP, CLU, CHFC

 

A summary of John Nicola’s discussion with Peter Zeihan, geopolitical strategist and author of The Absent Superpower and The Accidental Superpower.

If you’ve been tuned into the international news recently, you’ve likely noticed we are in an era of increasing global geopolitical upheaval.  Aging population, shifting energy accessibility, and international populist / isolationist sentiment are leading us toward a very interesting landscape as wealth managers.

 

THE GLOBAL LANDSCAPE

We recently had the opportunity to speak with respected geopolitical thought leader Peter Zeihan about his books and the current economic and political outlook.  There are three major themes that he focuses on.

  1. Impact of demographics on future economic growth.
  2. Shale oil as a game changer for both overall energy supply and U.S. dependency on foreign oil, which is having a major impact on both trade issues and foreign policy.
  3. The ongoing move towards U.S. isolationism, which has been building for years and will increase going forward.

With these in mind, we aproached Peter with the following questions and then began the discussion. We summarize the discussion below.

  • Given the three major themes Peter sees as driving the U.S. political environment and economy, what are his views over the medium-to-longer term on inflation, interest rates, and markets in general?
  • Peter expects military wars to erupt as a result of both a fight for oil supplies outside of the North America and America’s disengagement. Why would countries go to war over oil if the supply of it is in excess of demand and they can easily buy it in open markets?
  • Is the populist shift in politics seen in the U.S., England, and France going to continue?
  • How much better does Peter expect the U.S. economy to outperform other developed nations, especially Canada?
  • Can Peter share with us his own investment philosophy and asset allocation strategy?

 

THE ABSENT SUPERPOWER

The main focus of Peter’s second book, The Absent Superpower, is the shale oil revolution and how technology has now lowered breakeven costs for much of this oil to about $38/barrel, and that number should drop to about $25 by 2020.  In effect, if one considers all fossil fuel production and considers North America versus just the U.S. as a contiguous energy zone, then it is already a net energy exporter and is no longer dependent on foreign oil.

Peter believes that the establishment of Bretton Woods in 1944 and the post-war role that the U.S. has played in being policeman to the world and also the  market of choice for mercantilist countries that rely on export driven growth, is coming to an end.

He would expect to see many if not all of the following outcomes occur:

  • The Democrats are still in disarray and many of their Senate seats are up for grabs in the 2018 mid-terms. That could make Trump filibuster proof.
  • The media got Trump wrong and Zeihan feels this is partially due to lower quality foreign journalists, a resulting impact of the internet on major news organizations.
  • Trump’s rhetoric on immigration is being tempered by his own advisors who point out the need to have more highly-trained immigrants coming in on B1 visas. Expect compromise as we move forward.
  • However, Trump’s policies are, in Zeihan’s opinion, simply a manifestation of trends that were occurring in the U.S. long before he became a candidate for President. His timing has proved to be fortuitous for his campaign.
  • Most current illegal immigrants are coming from Central America. Net Mexican immigration is already negative.
  • The U.S. will withdraw from the WTO in order not to have to abide by trade rules it sees as opposed to its national interests.
  • It may withdraw from NATO unless countries such as Germany at least double their allocation to defense spending. An unlikely result given Merkel’s mandate.
  • Populists such as Marine Le Pen and Geert Wilders from Holland are moving from fringe parties with 15% of the vote to major parties with perhaps 1/3 national support by the next elections in both France and the Netherlands. Even if they do not win leadership, their influence will change EU policies on trade and immigration much the same as Trump plans to do in the U.S.
  • He expects the Euro to fail and perhaps the entire EU.
  • Zeihan feels that leaders of this ilk already control the Philippines, Russia, China, Poland, and Turkey.
  • Global aging is deflationary, but the U.S. has the best demographic profile of any developed country and is better than China’s and several other developing countries. This means he sees the U.S. moving into a secular age of economic growth above global averages for the next twenty years.
  • The U.S. is already reindustrializing for other reasons and its trade deficit has been dropping anyway, partially because of a reduced need for oil imports.
  • This in turn will continue to strengthen the U.S. dollar in relation to most countries.
  • With respect to Canada, he sees us having the most favoured status with the U.S. and we are part of their overall energy independence. He also feels that Alberta Oil will go south and not to the west coast or East with a new pipeline because of Canadian politics.  He sees some risk of Alberta leaving Canada and perhaps becoming part of the U.S.
  • On a regional basis he feels Texas and the U.S. south east have some major advantages while some gateway cities dependent on foreign trade such as San Francisco, Seattle, and L.A. could take a hit. Overall though, Zeihan is bullish on the U.S.
  • While interest rates will likely rise, the macro environment driven by demographics will keep those increases modest by historical standards.

Perhaps Zeihan’s most controversial observations are the ones he has with respect to future military conflict.  He sees three potential future wars.

  • Russia vs. North Europe (including Scandinavia) as a last ditch effort for Russia to extend her borders to more easily defensible ones that require her to get close to the former borders of the USSR. Russia is an aging country with a declining population and would not be able to accomplish this in another five to ten years.
  • Saudi Arabia vs. Iran. This is political, religious, and also about oil.  Iran is stronger and will try and extend its influence over the Middle East, especially if the U.S. pulls back.
  • These two wars impact oil production and create a potential military conflict amongst North Asian countries (China, Japan, and Korea) that are all oil dependent.

 

IN SUMMARY

My overall impression of both the books and our discussion with Peter was positive.  I think on big questions such as technology, oil, demographics, and political shifts, he has assessed the environment correctly and I think his economic forecasts based on that could easily occur.

I also agree with him that the U.S. has more potential in terms of growth than most other regions of the world, and over the last number of years we have increased our exposure there and we will likely see that continue to grow.

Where I struggle with his conclusions is with respect to the likelihood of three wars to be fought, more or less, over commodities (mainly oil).  It seems to me that without current conflict there is no shortage of oil globally.  And between technology and renewables, it is likely within a few generations that we will leave a lot of fossil fuels in the ground.

I do feel that the Euro is a bad idea since monetary union without fiscal union has proven to be a major challenge, but that does not mean that the EU has to break up.  I understand why European countries want to control their own currencies and immigration, as Mexico, the U.S., and Canada do within NAFTA. The EU can still be an effective free-trade zone without a common currency or fully open borders.

On March 15th the Netherlands voted for a Liberal coalition in its latest elections and dealt a blow to the aspirations of Geert Wilders, the far right candidate of the “Party of Freedom” (PPV) ­– perhaps a brake on the growth of populism in parts of Europe.

What Peter has done for me is to make me think about how key factors could make a material difference to how the future unfolds.  Both a worthwhile read and conversation.

In terms of how this information impacts our firm’s investment strategy and view on the global economic path, we look forward to sharing our thoughts with you at NWM’s upcoming 2017 Strategic Outlook Events.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. NWM is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.