A good model for it is the one of an earthquake. Tectonic movements are slow and steady, invisible to the naked eye. As long as the present situation persists, the rock barely moves, at best bends a bit.

But the force of geology, or of history, is not so easily satisfied with stagnation. The more time passes, the more invisible pressure accumulates. The immobility turns into a shiver, and a few slight tremors.

And then a brutal bang.

Suddenly, all the pent-up forces are released at once in one catastrophic event.

Because the rupture point is invisible and impossible to predict until after it happens, the timing of a (geopolitical) tectonic shift is impossible to forecast. But when the bend turns into a shiver, and then into a tremor, you know you are getting real close.

The end of 2024 has been such a moment.

I am now sadly convinced that we are heading for a major global conflict, and as citizens and investors, we’d better prepare for it.

This is probably the last report that will deal with that topic. All my readers should consider themselves warned, and subscribers will see the reasoning behind it.

As a result, further investment reports will be either focused on “safe zones” or sectors that will benefit from the mounting conflict.

Read more

As I am writing, rumors for an Israeli large-scale attack on Lebanon are mounting, following the unprecedented explosion of thousands of pagers in an attempt to decapitate Hezbollah, or at least, “terrorize the terrorists”.

And apparently, also plenty of other devices spread throughout the country far beyond Hezbollah militants, and among civilians.

This follows 12 months of war in Gaza that reduced pretty much the whole area to rubble and killed most likely what is estimated to be hundreds of thousands of civilians.

It has severely damaged Israel's international standing. Not helping is the abysmal optics of regular genocidal rhetoric by government leaders or parliament debates about the right or wrong of raping prisoners.

Slow Escalations

Since the attack by Hamas on 7th October 2023, Israel has been in the midst of a grueling war that was expected by many to either stop sooner or escalate into a full-blown regional conflict.

Instead, a few curious things happened.

The first is that Israel seems to be trapped in a death spiral of escalations against civilians, while also never truly achieving military victory against Hamas, a much smaller force.

The second is that despite extremely strong rhetoric and regular very demonstrative threats, Iran and its allies, especially Syria and the Lebanese Hezbollah, have done very little so far.

An exception is Yemen, which against most expectations (except if you followed me back then), has for all practical purposes defeated the US Navy and managed to keep the Red Sea closed. For that matter, poor and distant Yemen has caused as much or more damage to Israel than Hezbollah so far.

This led to this strange situation:

• Most Israeli supporters are dismayed by the poor performance of what propaganda described as “the best army in the world”, seeing it unable to defeat Hamas in any durable fashion.

• Most anti-Israel commentators are dismayed by the “weakness” of Iran and the lack of escalation, even after the direct assassination on Iranian soil of the Hamas leader.

This is a strange war where both sides are talking big threats but seem to do their best to avoid escalation. Israel because it needs to “finish” with Gaza first, and Iran because it clearly considers itself not ready.

So there is more to this than meets the eye. And getting it right will clarify why investors should build a portfolio with a base case of a much wider Middle East war happening soon.

(as a preamble, I must emphasize that I assume both pro and anti-Israel people are among my readers, please stay civil in the comments. For my part, I will as always focus on accurate as possible forecasts)

The Israeli Position

Read more

So I will try to organize events a little, by theme and by order of importance as well as in a somewhat coherent narration (as much as possible), starting with the most significant news first.

Gold Woke Up

The price of gold and silver is shooting up, with both hitting their highest points in 5 years and gold at its highest point ever!

Physical silver traded at around $35 in China, essentially sucking the “paper” silver out of the West through arbitration.

This is emblematic of the progressive return of gold into the monetary system, something I discussed almost a year ago.

The reason is that gold will be the natural, and truly ONLY possible currency for intra-BRICS trading, especially with the association expanding to new members quickly.

This does NOT mean that ordinary people will start paying in gold coins, nor that we will see a gold standard quickly replace fiat currencies.

But what it does mean is that monetary reserves will not anymore be stored in sanctionable dollar bonds that can be stolen at any time by Washington DC, even from nuclear superpowers.

Nor will trade imbalance between multiple partners be settled in USD or local currency, less say for example the triad Russia-India-China.

India's trade deficit with Russia will be settled in gold, which will use it to buy what it needs from China, which will use it as a reserve or as a financing tool for Belt and Road initiatives.

In the long run, losing the USD reserve status would cost the US at least 1 TRILLION per year, which is roughly what it pays currently in interest on the debt OR the whole military…

Tariff, Sanctions & High-level Visits

Visiting China

The US sends Blinken and Janet Yellen citing China, respectively to threaten them for selling stuff to Russia, and to beg them to buy more US debt.

Blinken’s visit has been accurately resumed by X users as:

Yellen’s visit success can be measured by China's sale of USD -denominated bonds, the largest EVER.

Meanwhile, Putin visited Xi Jinping with:

• Multiple industry leaders

• Former defense minister Shoigu

• Foreign minister Lavrov

• CENTRAL BANK DIRECTOR Elvira Nabiullina

Sanctions

Meanwhile, trade wars and diplomatic activities are on overdrive.

The US is looking to sanction everyone not complying. This of course includes Russia, but also China, under the nonsensical accusation of “overcapacity”, aka. higher productivity than the West.

• The 100% tariff on Chinese cars is just the beginning. It comes together with more semiconductor sanctions, quantum computing sanctions, green energy sanctions, etc..

  • China’s semiconductors will be the topic of the next report in this newsletter as a result

No wonder China is feeling that the West is a little hostile.

At this point, the West is all stick, and the carrot has rotten.

The likely result is that the Western block will start lagging behind the way the Soviet Union did.

Where the USSR missed the boat on computers and automation, the West will miss the boat on 4th generation nuclear power, 4th industrial revolution (automation, smart factories), drones, EVs, renewables, superconductors, advanced biotech, etc.

MORE sanctions

Even countries intended to be used as tools against the Eurasian Tripod (Russia+Iran+China) like India are not immune from sanctions threats, because they dared … get a stable energy supply from the first Iranian deep sea harbor of Chabar.

Another country that can brace for a flurry of sanctions is Georgia. They dare want to know when an NGO is financed abroad.

Mind you, not banning said NGOs. But force them to declare who pays their bill. Never mind the proposed law is almost a copy-paste of a US law, it is of course a “Russian law”.

With 25,000 NGOs in a 3.7 million people country, or 1 NGO for every 154 inhabitants, elderly and newborn included, foreign interference seems a likely realistic occurrence.

A protest of up to 60,000 people against the law would also mean 3/NGO, not really surprising that this amount would fear losing their “job”.

Visits in person by foreign ministers and parliament members from the Baltic states, Germany, or Iceland to support the protesters reinforce the idea of a Maidan-like coup tentative to push Georgia into the meat grinder.

Ukraine Weakening?

The other big news is that Ukraine seems to be increasingly on its last leg militarily.

This will not surprise my readers, but it is important to notice that it cannot be hidden under propaganda anymore.

Some of the signs:

• Ukraine lost almost all the small amount of territory gained during its summer “offensive”.

• A new front opened around Ukraine's second-largest city, Krakhov.

  • Despite the limited size of Russian troops (less than 30,000 soldiers), Russian advances have been surprisingly quick, breaking the pattern of a static attritional war.

  • The region apparently has no defensive line built, mostly because all the money was stolen and the equipment purchased just piled up in the woods instead of installed correctly.

    

• Forced mobilization is turning even more brutal, and a new mobilization law will now hunt for every man from 18-60 without restrictions.

• Rumors of ANOTHER front opening in SUMY in the next week would stretch Ukraine’s reserves even further.

• In the upcoming months, an attack on Kyiv from Belarus could even be possible, but not very likely yet. Another option could be crossing the river toward Kerson in the south.

As mentioned before, the moment of truth about Ukraine escalating into a global conflict is getting closer.

Tactical nuclear drills by the Russian army made the risks pretty clear.

Either the USA abandons the failed Zelensky project like it did South Vietnam, or it doubles down with NATO boots on the ground, and all bets are off, with European soldiers expected to bear the most of the casualties…

World Disorder: Riots, Assassination, Mass killing

While these larger-scale events happened, the Slovakian Prime Minister Robert Fico was almost assassinated for political reasons.

A strong proponent of NOT helping Ukraine, Fico even predicted these risks a few weeks before in an interview.

Only days later, the Iranian president and foreign minister die in a helicopter crash.

Fico's wannabe assassin might be a “lone wolf”. And the Iranian presidential crash could have well been an accident.

But of course, it is hard not to feel something fishy is going on with opponents to Western power.

Especially in the case of Iran, as the president was coming back from Azerbaijan, a country that received a lot of weapons from Israel recently, as well as murky intelligence connections:

In the same weeks, Turkey claims to have foiled a new coup attempt against often double-faced Erdogan. To make it more complicated, remember: Turkey is Azerbaidjan's most enthusiastic supporter.

Also, rumors of an assassination attempt against the Saudi crown prince floated on social media, with the veracity hard to assess.

Secret CIA armies in foreign countries, including Europe, committing assassinations? I will just let you read about Operation GLADIO for the ones who do not know yet about it, and let you judge for yourself if it is likely…

Israel

These political turmoils also came on top of the bombing of Iranian diplomatic personnel in Syria by Israel, a big red line to cross.

The bombing led to a short lived attack by Iran on Israel, consuming 1-1.5 billion dollars of air defense to shoot $50M of Iranian drones and missiles.

The same cost imbalance persists in the Red Sea and Yemen as well, with a cargo ship hit every other week.

Israel's situation keeps degrading militarily, as it struggles to beat Hamas in Gaza while displacing starving civilians once more in Rafah.

The final goal seems still to be the deportation out of the country of the whole Palestinian population of Gaza.

This led to a warrant for an arrest of Netanyahu issued by the International Criminal Court (ICC) for a wide array of war crimes and essentially genocide attempts.

This degrading of international capital & goodwill is a dramatic threat to Israel's survival, more than any military pressure could ever be.

It is not clear what will be the consequence of the last days’ Iranian helicopter crash and ICC warrant, but the risk of a broader escalation of conflict in the Middle East keeps rising.

Also, to stay true to form, the US senators had already preventively threatened with sanctions the ICC judges AND THEIR FAMILIES a few weeks ago.

Others

Meanwhile, somewhat of a sideshow and a distraction, France’s colony of New Caledonia is in chaos from independentist insurgents.

It might be good for nickel spot price, with Caledonia the 3rd largest producer.

And insurgents have oddly enough been armed by … Azerbaidjan, in retaliation for France's support of Armenia. And yes, this is an official accusation by the French government.

I swear it feels like Baku could be the theater of a new Casablanca movie these days.

As a more disheartening sideshow, but one with potential consequences, the Baltic states (where I live) are looking to persecute (no other word possible here) Russian pensioners and an Orthodox monastery that barely survived the Soviet persecution.

although representatives of the Ministry of the Interior have previously promised that no churches will be closed either way, Läänemets told err.ee that if they don’t willingly leave the Moscow Patriarchate, the state “will have to apply through the court for a forced termination of activities.”

As an Estonian Orthodox myself (converted from Roman Catholicism), but not under Moscow jurisdiction, I cannot express how short-sighted such policies are.

Are we attacking religious communities in a worse manner than the Soviets now?!

Let’s keep politics out of religion, shall we?

Conclusion

The last months have vindicated my strategy, with unfortunately most areas evolving toward the predicted directions of growing instability and Western decline.

From an investing point of view, defense stocks seem the way to go, or maybe even better as technology risk is real for individual defense stock, just the ONLY tungsten mine available in the Western bloc.

Chinese hardware technology stocks are also a buy. Consider that the US had to put a 100% tariff to become somewhat competitive against Chinese automakers. Guess who will sell more cars in the coming decade in South America, SE-Asia, Russia, India, the Middle East, and Africa?

Oil & gas are also still a good way to edge a close of the Hormuz Straight, especially the Colombian stocks previously discussed.

You can read the full analysis in the link above, but as a quick reminder, this is how it can be synthesized:

Considering the current conflict with Russia is an ultra-archetypal land vs sea conflict, this is highly relevant:

• The autocratic & hierarchical Russia, preferred infantry and mass artillery to fight trench warfare to control people closely related ethnically

• Fighting the democratic trade hegemon of the West relying heavily on mercenaries & proxy forces, and leveraging financial sanctions, and high-tech solutions to subdue its perceived enemies.

An Old Idea Becoming Outdated

This framework of the sea (thalassocracy) versus land (tellurocracy) is a centuries-old framework that has proven to be very useful.

But these archetypes are all as ancient as at least the Roman Empire and Carthage.

And I am convinced that a new model is slowly emerging which differs from both land and sea power, due to the growing importance of innovation, infrastructure, and industry.

One that has been aborted several times in the 20th century, but is now coming to fruition in China.

While quite intellectual, the idea discussed in this article will have extremely useful applications for investors who want to predict the Chinese (and the world’s) economy in the coming decades.

And accurate predictions cannot rely on outdated models.

Industrial Powers Geopolitics

Land/Tellurocratic societies offer a lot of meaning, identity, and cohesion. They are also remarkably sturdy and excellent at monumental buildings and “civilizing” hard lands. But they tend to be less free, less flexible, and often less prosperous.

Sea/Thallasocratic societies are more meritocratic, prosperous, and innovative. They are also more divided and offer little meaning to life beyond the accumulation of money and social status.

A good tellurocracy offers stability and meaning to its citizens and will build a cultural legacy lasting millennia (Rome). A bad one is a 1984-like Orwellian nightmare (the Soviet Union or Maoist China).

A good thallasocracy is innovative, rich, and free (think post-war America). A bad one is an oligarchic decadent nightmare straight out of Brave New World by Huxley.

Both paradigms operate with a few common assumptions that were un-discussed in the pre-industrial world:

• Wealth is mostly stable over time, and a zero-sum game between powerful nations.

• Wealth either comes from land (to be conquered) or trade (extracting wealth from the land owners and other nations)

• Societies are relatively unchanging, and so are the economic models of nations.

• The wealth of a region is mostly stable and caused by a mix of stable cultural traits and geographical features (navigable rivers, natural resources, climate, etc.).

Of course, these assumptions have gotten increasingly shaky since the onset of the industrial revolution.

Wealth is now much more a factor of education, innovation, and the rule of law. The scale of production and specialization become other key factors, much more than in the pre-industrial economies.

This means that a country can now become wealthy or even a great power despite missing key features like a friendly climate or a large population.

With the rise of industrial warfare, the key feature to being a great power is not anymore how many men you can conscript, nor how many vassal states are part of your trade network.

Instead, how many tons of steel per day you produce, how many barrels of oil you refine, and how many tons of explosives can be put into shells become the king makers.

The geopolitics of industrial powers do not have to be the same as pre-industrial societies.

The Repeated Abortion Of Paragocracy

As both nomenclatures for sea and land power use Greek (telluro=land, thalasso=sea), I will keep this system to describe what is in my opinion a new emerging model.

I named it paragocracy, from the Greek “paragogí” which apparently stands for industry/manufacturing (if any Greek speaker has a better option, please tell me, languages are not my strongest skill).

There have been several industrial powers emerging since the mid-19th century already. But CULTURALLY, they have all stuck so far to the pre-established patterns of land or sea-based power.

The UK was definitely a massive industrial power, but kept focusing its geopolitical attention on a vast network of vassalized nations and a trading empire “on which the sun never set”.

The Soviet Union was definitely an industrial powerhouse but stuck to the previous pattern of tellurocracies: focus on autarky, authoritarian leadership, and strong ideological control.

The USA is a more interesting case, as it is a country that started as a land power and acted as such: isolationist, expansionist through constant land wars of conquest against its neighbors, highly religious, etc. Its foundational model was Rome and it showed.

However, through a combination of English cultural heritage, historical accidents, and conscious decisions by an elite more interested in the sea-based English oligarchic civilization, it slowly changed.

It is today an archetypal thalassocracy, ruling over a vast trade/monetary empire of tributaries, vassals, and allies, with a focus on crushing or breaking apart all potential rising land-based empires (Germany twice, the Soviet Union, China, etc.).

To this day, the US is still a land torn apart between these 2 civilizational directions, today manifested by the Heartland fly-over-country Trumpers tellurocrates versus the coastal and urban Democrats thallasocrates.

The Rise Of Chinese Paragocracy

It is maybe logical that a new model for the industrial and scientific age would emerge from out of Western civilization.

China is a nation that has an extremely long history, but also a model that utterly failed by the 1900s. What is still remembered in China as the “century of humiliation” caused a complete breakdown of the ancient Chinese civilization model.

And a rebirth from these ashes.

It was a different model than the sea-based trade focus and the land-based military-religious focus. Instead, for millennia, China has been highly dependent on a bureaucratic meritocratic system to organize its society, with the foundational ideas of Legalism, Confucianism, and Chinese Buddhism.

I described in a previous article a year ago the new Chinese economic model. In many ways, this article is a systematization and expansion of the observations I did back then.

To resume it briefly, I argue that China was none of what it is usually described by clueless Western commentators.

Instead, its pillars are:

1. A Millennia-Old Culture: providing not only the 3 main influences mentioned above but countless other complex philosophies like the Hundred Schools of Thought. Or Taoism.

2. Decentralization: most is decide at the region level, to the point that the Chinese Communist Party sometime struggle to get its policy implemented.

3. Meritocracy: Officials go up in rank only after having achieved good results in small scale posting, like a town, a state-run company or a region.

But none of these pillars are sufficient to understand the direction the Chinese economy is taking.

For this, the framework of Paragocracy I am establishing is needed.

Paragocracy 101

At the core of every society are the key collective values and goals.

Tellurocracies highly value a sense of identity and safety. For this they leverage religion, military power, demography, and social control.

Thalassocracies highly value individual freedom and wealth. For this they leverage trade, finance, ideology, and informal networks.

Paragocracies highly value production and science for their own sake. It is a society obsessed with material progress and mass production, in contrast to tellurcracies’ obsession with stability/safety and thalassocracies’ obsession with social/ideological progress.

This also reflects in which social class ends up dominating their respective civilization.

If land power archetypal leaders are a military man, a priest or farmer and sea power’s a trader, politician, or an academic thinker, industrial powers’ leaders are engineers and builders.

It is not an accident that almost all the CCP top leaders are chemists, rocket scientists and other technical profiles, instead of the usual generals, intelligence, lawyers & bankers.

I think such a society was somewhat emerging in Germany pre-WW1, but got instead taken over by the Prussian military aristocratic class, and further destroyed in the economic disaster of the Weimar republic.

The Positive Sides of Paragocracy

The obvious positive aspect of such a system is that it can accomplish A LOT.

It avoids both the stagnant conservatism of farmers/soldiers/priests and the parasitic/self-destructive tendencies of the merchant & intellectual classes.

Looking back at China, it is clear that it is currently a society obsessed with production.

And it gets things done like no other.

• 28.4% of global manufacturing output is Chinese.

• Its high-speed railroad network of 45,000 kilometres is 2/3 of the world’s TOTAL.

• It produces:

  • 54% of the world’s steel production.

  • 51% of cement.

  • 77% of batteries.

  • 80% of solar panels.

  • largest car exporter since 2022.

  • etc.

And soon the country is already or looking to become the leader in semiconductors, nuclear power (4th generation, thorium), robotics, automation, space technology, EVs, supraconductors, AI, quantum computing, etc.

Considering the millions of engineers and scientists the country trains every year, this is actually a realistic goal. Especially with the bulk of the “Global South” ready to absorb this production by ditching more costly Western alternatives.

(see for example what is quickly happening in the car industry and BYD’s expansion in SE-Asia and South America)

By focusing on production, this is also a society that is progress oriented, but with a focus on material conditions instead of increasingly weird social progress ideology of thalassocracies.

But it is also more optimistic and potentially more pacifist than the militaristic and religious tellurocracies.

I also truly believe such society is incredibly good at scientific advancement. Simply because once in position of power, engineer-types tend to favor big projects, fancy engineering and interesting technical concepts.

Imagine instead trying to convince a religious person or a banker to finance a space station, a particle accelerator or a nuclear power plant.

The Negative Sides of Paragocracy

Social Imbalances

One problem of the obsession with production is that it can quickly become something for its own sake.

This results in borderline inhumane work conditions, with a good example being the dreadful 996 work culture in coastal China (9am to 9pm, 6 days a week).

It also results in terrible social pressure to “succeed”, with long hours of study for children and students causing poor social skills and mental health problems.

Working all the time, social isolation, an ultra-competitive society, cause a plumetting demography.

IF this problem can be solved will be a key part of deciding if paragocracy is a viable civilizational model. The jury is still out here.

Ecological damages

Another problem is that rising production for its own sake comes at a price. You can only have so many megaprojects and mass manufacturing before pollution catches up with you.

This is something that was becoming a serious problem for China 10 years ago.

I think it is solvable however, as the same systemic engineering thinking can be applied to ecosystem restauration.

Last year, I also predicted that a millenia-old philosophy, Taoism, would be needed to balance out the other current pillar of Chinese civilizational model.

The focus of Taoism is on the individual within the natural realm, rather than the individual within society. Accordingly, the goal of life for each individual is seeking to adjust oneself and adapting to the rhythm of nature (and the Fundamental) world, to follow the Way (tao) of the universe, and to live in harmony.

In many ways the opposite of Confucian morality, Taoism was for many of its adherents a complement to their ordered daily lives. A scholar serving as an official could usually follow Confucian teachings, but in retirement might seek harmony with nature as a Taoist recluse. Politically, Taoism advocates for rule through inaction, and avoiding excessive interference.

This concept is now being kicked in high gears under the label of “ecological civilization“.

The concept is described in further details in this interesting paper titled “Ecological Civilization in the making: the ‘construction’ of China’s climate-forestry nexus“.

Overall, this is starting to paying off, with China leading in reforestation, restauration of wetlands and having radically improved its air quality in just a decade.

Excess Production?

The last question standing before considering paragocracy a successful system is the debate around “excess production capacity”.

Be ready to hear A LOT about it in the next 10 years.

Especially as China will “flood markets with its excess capacity” according to the US press, for example in some headlines just in March 2024:

Washigton Post: Flood of Chinese imports could renew trade tensions, threaten U.S. jobs

CNN:A glut of cheap Chinese goods is flooding the world and stoking trade tensions

CNBC: China could flood U.S. electric-vehicle market with its offerings, Energy Secretary Jennifer Granholm warns

Wall Street Journal: The World Is in for Another China Shock China is flooding foreign markets with cheap goods again. This time it isn’t buying much in return.

U.S. nervous about 'flood' of older-generation chips from China

China flooding foreign markets with cheap goods is ‘a situation structurally primed for war’

The last one included a quote from warmonger Elbridge Colby, that is rather worrying about the US’ mindset:

“Excess production” is absurd!

This is a pet peeve of mine that stem from a complete inability of Keynesians to understand how the economy works.

What matters to grow an economy is production, not consumption. If you produce something useful at least.

The same way that “deflationary spiral” is a dishonest concept we are yet to see in action in real life (and no, the Great Depression does not count, but this a topic large enough for a full article).

Contrary to the opinions pushed by mainstream economists, it is hard to find such a thing as “excess savings”, something the Chinese population is often accused of.

These savings are going to be used in the future. Likely when people retire (like Chinese women at only 55 years os age) or for their children. I doubt there are many people wanting to save money until the end of times, with their descendants doing the same, like dragons on a pile of gold.

Human nature is such that their is no limit to demand. The history of the last century is that if you give people enough money and productivity, and they will want more.

More housing space, more cars, more plane travel, more luxury bags, more powerful gaming computers, more meat, MORE!

In addition, such “excess saving” can be called under another name: capital.

We are at the point where most capitalist nations despise the steady and cautious accumulation of capital, preferring mounting piles of debt instead.

You can read the response to the “dumping shock” discussion published in Chinese media here: “China’s economy creates development opportunities, not ‘dumping shock,’ to world”.

Ressource Limitations

One hard limit that paragocracy could struggle with is ressource limitation.

Energy is not that hard a limit, as we master nuclear power and have enough thorium & uranium for tens of thousands of years, if not millions of years. Space-based solar or geothermal could be another option for a en even longer-lasting supply of energy.

Metals are a bigger limit as well as other natural ressources. At some point, all these cars and high-speed trains need more iron, copper, etc.

One way for a production-obsessed society to deal with it is to become more efficient. Produce more, but with less. This is a solid direction for R&D efforts.

Expansion At All Costs?

Another obvious venue for directing the “excess production” (authors in the 19th century would have called it vitality) is expansion.

Historically, such expansion driven by excess vitality of a young or rejuvenated nation have been directed in 2 direction:

1. conquest

2. settling wilderness.

And this is certainly a potential dark side of the paragocracy, which was expressed in an extreme form in the first prototype of this civilizational model, early 20th century Germany.

Constrained by its geographical limits, the newly unified German empire looked to use it industrial might to acquire its own colonial empire (WW1) and then Lebensraum (”living space”), both at the detriment of other nations and people.

When the target is unlimited production from unlimited resources, unlimited and amoral expansion can be a logical conclusion.

It did not go well for anybody involved…

Looking Up

Luckily, we are not anymore in 1900 and limited to the confinement of Earth.

I think in the long term, the passion for mega projects and “MORE!!” of the paragocracy can be directed toward an expansion outward into space.

This also answers the dilemma at the core of such a philosophy. If the goal is not conquest, wealth concentration, comfort or religion, but just MAKING MORE, why doing it past a certain point?

I imagine that turning desolate rocks or empty voids into verdant worlds, brand new “ecological civilizations“ forever expanding in an Universe that is infinite for all practical purposes (just our galaxy is 400 BILLION stars) could be the answer.

And it would give meaning to industrial societies increasingly struggling with finding a reasons to keep going, individually and collectively.

(on a somewhat related note, I will probably give a speech next summer about the potential future Martian economy, and will share it with my readers later on)

Unfortunately, the Western leaders have been on a streak of rather unhinged declarations lately that made the prospect of WW3 an actual possibility.

And this is despite that it is obvious that the Western alliance is barely able to handle Russia alone, much less manage a confrontation with an industrial juggernaut like China.

And so while I am aware that geopolitical analyses are somewhat detrimental to my subscriber count (I remember an unsubscribe message mentioning “it will not help me retire early”), I am also ready to take the hit to honestly assess what is a bigger black swan for every portfolio than any change in interest rates or recession.

Of course, living approximately 200km from the Russian border also makes me very invested in the topic…

(this article was written before the despicable terrorist attack on concertgoers in Russia. With the blame being put by Russian authorities on Ukraine, the USA and the UK, this is another escalation step that I was hoping to not see on the radar)

Ukrainian Collapse & Western Panic

A New Type Of Bombing

The most important news has been the progressive breaching of the Ukrainian frontline and defense capacity.

This is the result of a mix of massive human losses and weapon shortages. The war was from the beginning characterized by a Ukrainian army with more men, less equipment, less ammo, and more tolerance for losses than the Russian army.

As long as more “meat” could be fed into the grinder, this could pass for an illusion of winning.

The failure of the summer offensive is now combined with the progressive wearing out of air defenses to cause a definitive weakness of the Ukrainian forces.

Now unconcerned with air defense, the Russian air force can casually carry out tens of bombing raids per day, dropping “dumb bombs” (the same you saw in WW2 movies) upgraded into 70km-range gliders with cheap & mass produced GPS/GLONASS + inertial guidance system.

These bombs are between 500-1,500kg and literally obliterate any trench or building they hit. Making the Ukrainian strategy of sitting in trenches or apartment buildings pointless.

And with a massive Cold War inventory + massive chemical industry + massive gas supply, Ukraine will run out of men before Russia runs out of explosives.

To make matters worse, the US parliament chambers are unable to pass new Ukrainian funding bills over political disputes stemming from the entry of millions of migrants through its southern border.

The Republicans cannot let go of the issue without their party collapsing.

The Democrats cannot stop importing voters.

Western Reaction

How do we know this accurately assesses the military situation despite the fog of war?

Because in a matter of a month, a lot of (over)reactions occurred:

• Complete reshuffling of the Ukrainian military leadership, to replace generals with unthreatening yes-men.

• Cancellation of the upcoming Ukrainian presidential election.

• Multiple countries openly talk of moving their troops to Ukraine, not as “freelance/mercenary” as was done until now, but in an official capacity.

At the forefront of irresponsible saber rattling are the UK and France, apparently eager for a Crimean War 2.0, as the first one went so well (spoiler, it was an unmitigated disaster).

As a French citizen, I can tell you how happy I am that Macron is ready to kill us for his petty ambitions…

For that matter, most of the transnational un-elected EU apparatus got the memo as well.

The French Army “is ready” and is preparing for the “hardest engagments”

"We cannot rule out the possibility that British soldiers will go to Ukraine to confront Putin's regime," – former British Defense Minister Ben Wallace.

If we want peace, we must prepare for war Charles Michel - president of the European Council 

“Putin's friends are trying to rewrite our history and hijack our future. They are spreading hate from behind their keyboards.”

"The European Union must launch the production of a new generation of weapons to win on the battlefield,"

— Von Der Leyen - gynecologist President of the European Commission

French media is wargaming an incursion into Ukraine.

Besides this media blitz, actual preparations are in the making, with seemingly Romania picked as the staging ground for an operation to secure the Western coast of Ukraine.

When the military builds logistical hubs and air bases, this is not good news.

Other Things Going As Poorly As Expected (By Me)

Gaza

It is not like the US and its allies are not busy elsewhere.

The Gaza war is now reaching a point where “Blinken says 100 percent of Gaza population facing unprecedented food insecurity“, a fancy way to say starving to death.

Military, the picture is bleak as well.

'A Huge Mess': In Gaza, IDF Used 70-year-old Munitions and Shells Intended for Training

Israel reevaluates its ammunition requirements as shortage looms

There seems to be no winning scenario for Israel, even with tremendous money being poured into Egypt ($8B from the EU + $6B from the World Bank + $5B from Qatar, and $15B From Saudi Arabia + $35B from the UAE, or a nice total of $69B) to make it turn a blind eye about, or maybe even take in, 2 million Palestinians at the risk of its own internal instability.

Potentially, all this money is also to avoid a complete collapse of the country with a massive dependent and unproductive population as the Suez Canal is not bringing much money these days.

Yemen

The war with the Houthis in Yemen over reopening the Red Sea and Suez “poses the greatest challenge to the US Navy in modern history, coming under fire every day“ & “it’s hard to say if it is possible to stop every Houthis attack“.

…Almost as if the era of overseas engagement was coming to a close in the face of progress in missile and drone technology…

Kosovo

But that’s actually not the only flashpoint, and I have the feeling everybody is starting to lose track of the multiple conflicts starting all over the globe.

For example, the 1990s bombing into the Stone Age of Yugoslavia is coming back to haunt NATO at the worst moment 25 years later. The Serbian president warned a few weeks ago “If you want Kosovo, you won't have Serbia“.

Africa

Meanwhile, in Sub-Saharan Africa, things are also evolving:

And Niger Orders American Troops to Leave Its Territory, a place where the USA has its largest African operation based (1,000 troops).

I agree with Labrador Skeptic:

Troubles in Niger, Sudan, and Yemen, the expulsion of French troops from Mali and Chad + the entry into the BRICS of Egypt + Ethiopia makes for a massive chunk of the world falling out of Western control.

I guess there is just Algeria, Lybia, and Saudi Arabia to add to the mix to lose a big chunk of the tropical latitudes…

And the “U.S. Accuses Niger of Iran Uranium Deal“ is the cherry on the cake.

Upcoming Red Flags

I think the most important thing to set up for investors, and Europeans like me, is a set of warning signs of an escalation of the conflict into a full-blown war of Europe/NATO vs Russia.

No matter how scary or unthinkable a global war can be, we can think rationally and anticipate a few milestones that our enlightened leaders will cross or not.

Europe

Milestone 1: Asset Seizing

With the freezing of the Russian central bank assets, a previously unthinkable step has been taken by the Western financial system. One that has been a clear trigger in the shifting alliance of Saudi Arabia the USA to China.

But some level of realism settled in, and actually seizing that money has been postponed. There are ever louder voices of using these $300B+ to finance Ukraine.

This would be a major step toward total war and giving up on keeping the eurodollar system held by anything but sheer brute force and threats.

Milestone 2: Belarus And Offensives

On Russia’s side, getting Belarus and/or recently formed new armies to open a new front would be another escalation, likely telegraphing the intent for a total annexation of Ukraine (maybe minus a small piece of land at the Polish border), by far the most likely outcome.

(for reference, I consider the likely ultimate Russian goal is to never let Ukraine be a threat again in the future AND to build a land bridge to friendly Slovakia and Hungary, and through these countries, to Serbia).

Milestone 3: Oil Blockage

But if there is one signal that should indicate a major European war and direct confrontation it will be moving from sanctions on Russian oil to an actual blockade.

No matter if China and India want to buy Russian oil, the Western navies are likely able to block Russian oil from getting out of the Arctic, the Bosphorus Strait, Denmark’s waters, and the Far East.

This would in turn strangle the Russian war economy, and force it to desperate measures. It would make it very similar to how stopping oil supply to Japan essentially made Pearl Harbor a guarantee.

Milestone 4: Deployment In Ukraine

In Europe, an important milestone will be the deployment of NATO troops inside Ukraine. That’s one I honestly felt like dismissing even when Macron started talking about it. I am not so sure anymore.

Mass deployment (in the tens of thousands of soldiers) of NATO forces would be another way for the conflict to escalate out of control, with Russia likely to consider from this point onward that it is fully at war with NATO anyway.

From that point, it is hard to imagine the conflict to NOT devolving into WW3, with Russia fully supported by China, hence the irresponsibility of Macron’s recent declarations.

Middle East

An escalating global conflict is brewing in the Middle East as well, with Israel vs Iran as the focal point.

Milestone 1: Lebanon

Would Israel engage its army in Lebanon, it would most likely be in desperate need of Western support, not only in weapon supply and air attacks, but maybe even in actual feet on the ground.

The success or failure of such an operation could spell doom for Israel, and by extension a dramatic blow to the West military prestige. Especially if in parallel with Russia's progress in Ukraine.

Milestone 2: Yemen

Another area of potential prestige losses is the incapacity of reopening the Red Sea sea lanes.

I already described how the response is inadequate short of an Afghanistan-style invasion.

A more rational response would be to step back and admit defeat while pushing Israel to retreat from Gaza. What is sure is that the longer the US fleet stays off the Yemeni shore, the more their anti-air systems will become depleted on a countdown to zero.

Milestone 3: Middle East & Iran

Should the Israeli wars in Gaza and maybe Lebanon spread out of control, a direct intervention by Iran against Israel is not unlikely. This could have a large array of out-of-control consequences, from closing the Hormuz Strait (21% of global oil) to setting the whole region on fire.

Contrary to anti-Israel rhetoric, I expect Turkey will stay on the NATO/USA side here, or else risk seeing Iran become the regional hegemon instead of Erdogan’s neo-Ottoman ambitions.

Especially as Turkey will also be able to bargain from a strong position with its potential closing of the Bosphorus Strait to Russian oil.

Asia

Milestone 1: North Korea

Asia is overall calmer than the expanding conflict zones in West Eurasia, but North Korea stays a wild card with a reputation of being a loose cannon.

South Korea seems to be the only “arsenal of democracy” left when it comes to the all-important artillery. Crucial semiconductors and civilian shipyard capacity could be destroyed as well.

So it could make sense for Russia and/or China to use it as a distraction for the US from the wars in Eastern Europe and the Middle East.

And considering how it would cripple the possibility of supplying artillery systems and spare shipbuilding capacity, it would be a major blow for the Western Alliance.

Milestone 2: India’s neighborhood

India’s long-standing border issues with Pakistan and China could flare up as well.

This is a much more dangerous escalation as all potential participants are nuclear powers. At the same time, they have a long history of limited conflicts and wars that did not escalate beyond a certain point.

It could occur both from China supporting Pakistan in taking aggressive actions or from the USA supporting India in doing the same.

Unrelated to India itself, but in the area, a proxy war through factions of increasingly unstable Myanmar could be another step in the destabilization of most of Eurasia's borders.

Milestone 3: Taiwan, Philippines, Japan & Australia

And of course, the major escalation in Asia could be over the South China Sea and Taiwan.

Especially if the strategy is to try to starve China by blocking imports passing by the Strait of Malacca.

Anything happening here like a blockade of Taiwan by China would likely escalate directly into WW3 and without much possibility of an off-ramp. This would directly involve all Asian US allies of Japan, South Korea, the Philippines, and Australia.

Forecasts & Milestones Conclusion

There is still time to step back from the brink, but for that we need the great powers’ leaders to actually talk to each other.

Most likely, by the end of 2025, we will have a clear view of where we are going.

If too many of the milestones I mentioned are hit, we should duck for cover, and so should our portfolios.

I consider the few major alarm bells to be the following, in no particular order:

1. A DIRECT attack/invasion by the US on Iran or by Iran on Israel.

2. A direct presence of tens of thousands of NATO troops in Ukraine.

This would likely be forewarned by a blockade on Russian oil exports, putting a maximum of a 6-month timer before a global conflict initiated by NATO.

3. A North Korea attack, signaling it got the green light and support from China and Russia to do so.

The 6-month timer starting would likely be similar, but this time initiated by Russia+China

And obviously, an invasion of Taiwan

This would a trigger with barely a few weeks before a global confrontation.

Alternatives to a global conflict are few but not unrealistic yet and likely include:

• Demilitarization, regime change, and partial occupation of Ukraine (at least Crimea + eastern part).

• Integration of Taiwan into China through a multi-decade political process.

Unfortunately for the involved parties, both the neutralization of Ukraine and the long-term re-integration of Taiwan are likely to be viewed as existential by Russia and China respectively.

If we want to correctly anticipate if a global conflict will occur, we need to consider that a neutral Ukraine and a China-friendly Taiwan are likely the only options where the Eurasian powers do not trigger a conflict at the time of their choosing.

Are these objectives compatible with the US’s own red lines? Maybe not.

Certain US/ANTO red lines will need to not be crossed either for peace to have a chance, like:

• NATO integrity (no Baltic States or Poland invasion).

• Free navigation in the South China Sea (no Taiwan blockade).

• Getting time to relocalize the chip supply chain out of Taiwan and into the US.

Only time will tell.

The Funny

I am aware this made for a depressing read.

But at least, I hope my readers have now a better view of what could happen, and how to judge if we are progressing on the “wrong” timeline.

After all that serious military and geopolitical talk, let’s conclude with a rather absurd and amusing piece of news.

May the world’s militaries be more concerned with such matters:

Some of them close to home and some far away.

The goal is not to make for a depressing article, but to keep track of what is happening and to NOT become numb to the madness.

Instead, we need to call out war hysteria loud and clear.

Baltics & Nordics

Small countries with absolute dependency on foreign assistance to survive militarily should try to be on as good terms as possible with their neighbors. This does not mean they should not join alliances able to protect them, but any unnecessary provocation should be avoided.

Unfortunately, the Baltic states (where I live) do not seem to realize that. Instead, a strategy of maximum provocation to “look tough” and a self-serving internal politics move by the local elite are trying to anger the big Russian bear next door.

Or for that matter, aggressive position toward China, for no clear reason at all.

And for no strategic purpose at all…

• Vilnius to remove Soviet monument despite UN objection.

• Lithuania defies China over Taiwan ties in new Asia strategy (we are speaking of a country without a real Navy to begin with, located on the other side of the planet regarding the Indo-Pacific region).

• Latvia to deport nearly a thousand Russians who failed to meet immigration law requirements.

• Ministry: Russian citizens' right to vote in Estonia a threat to security.

• Estonian Lutheran clerics protest expulsion of Russian Orthodox bishop

• Finnish defense minister wants a complete ban on Russian real estate transactions.

From deporting 80-year-olds deemed “security risks” to moving almost 1-century memorial to dead soldiers or expelling cleric and interfering in religious matters, none of these actions are helping anyone.

Real history is complicated, and populist narratives should not be used to make people hate each other.

And religion should NEVER be weaponized.

Warmongering & Draft

For that matter, the last few weeks/months have seen a concerning and VERY coordinated media blitz to prepare the population for conscription, draft, and a major war.

I however have suspicions that this wave of push for conscription has as much to do with Israel’s war as with Russia, considering the timing.

• UK

  • ‘Why it may already be too late to avoid a war’ (The Telegraph)

  • ‘Is conscription coming back? How it's been used in previous wars - and what a UK 'citizen army' would involve in the future’ ( Sky News Explainer)

  • And a ridiculous video from Boris Johnson.

• Australia

  • ‘Australia must consider bringing back conscription as ‘all-out war’ with Russia looms, expert says’ (Australia, News.com.au)

  • ‘Are we ready for an all-out war with Russia? Australia must consider mandating national service to build our trained reserve ‘while we still have time’ (Sky News)

• Germany

  • ‘NATO should ‘prepare for Russian missile strikes in Europe’ (German officials - The Times)

  • ‘NATO in 'Race Against Time' to Prepare for Russia War: Report’ (German Council on Foreign Relations (DGAP) - Newsweek)

  • ‘It is not so much a question of preparing for an attack, as a question of waiting for it. This is to be expected.’ (German Defense Minister Boris Pistorius)

• Eastern & Northern Europe

  • ‘Polish security chief: NATO Eastern Flank states have 3 years to prepare for Russia attack’ (ERR)

  • ‘Finland has quietly filled its wartime stockpiles and is activating some of the so-called “production reservation agreements” which means that companies produce at the armed forces’ request what is needed for logistics - basically wartime economy light’ (Helsingin Sanomat)

• NATO

  • 'Largest Ever' NATO Exercise To Rehearse Russian Attack On Europe’

• USA

  • ‘U. S. Congress Moves Closer to Making Women Register for the Draft’

  • ‘US Navy to allow those without high school diploma or GED to enlist’

  • ‘US must be ready for simultaneous wars with China, and Russia, report says’

  • ‘U.S. four-star general warns of war with China in 2025’

Attacking Iran?

While Russia is the “official” reason, a draft would be equally useful for dragging Europe into helping Israel and the USA in the Middle East.

And the amount of unhinged takes by US leaders keep rolling.

Nancy Pelosi: Protesters calling for a ceasefire in Gaza "is Mr. Putin's message... Make no mistake, this is directly connected to what he would like to see... "I think some of these protesters are spontaneous and organic and sincere. Some I think are connected to Russia."

And while I was editing this article, more news kept piling up.

3 US soldiers got killed in either Jordan (official version) or illegally occupied Syria (according to Jordan’s own government).

In response, the US bombed 85 targets in Syria and Iraq.

US declines to rule out hitting targets in Iran, Jake Sullivan says (Politico)

Iran-backed Iraqi militia vows revenge to US strikes

As a reminder of times with more competent leadership that knew when to call it quits, Ronald Reagan set a different example. He withdrew from Lebanon after Iranian proxies killed 241 marines in the 1983 Beirut barracks bombings. He understood that emotions aside, US Presidents must weigh the national interest higher than foreign interests.

I am afraid we do not have people like that at the helm anymore.

All these occurred with rather ineffective strikes on Yemen, and the Red Sea is still mostly closed except to Chinese, Russian, Saudi, and non-Western ships. Nor can the overall readiness of the Western fleet be called impressive.

British warships lack firepower to attack Houthi land targets

The UK's flagship aircraft carrier suffers new misfortune and won't lead major NATO exercise

But don’t worry, we are told it does not matter…

The impact of Houthi rebel attacks on commercial ships in the Red Sea is limited, says President Joe Biden’s energy security adviser (Bloomberg)

Israel

Speaking of Israel, the country seems stuck in a death spiral of escalation, with so much blood already spilled that only more conflict and total victory or even genocide seems to become the only acceptable outcome for all parties involved.

Escalations included not only an attack on Lebanon but also on Iran.

Iran is now a ‘legitimate target’ for Israeli missile strikes, senior minister says

Nir Barkat tells the Telegraph that Israel can afford to keep fighting and as ‘big as the crisis is, it is also a really big opportunity’ (emphasis is mine)

Common Israeli or pro-Israel takes are turning rather hysterical and openly calling for genocide, including high-profile influencers or ministers in power:

“They’re from all different sides of the Israeli political spectrum… they say they are from the right, from the left, they’re religious, they’re secular, some of them are families of hostages… but all coming out for the simple aim of trying to stop humanitarian aid”

“We are fighting against human animals”. This is how Israeli Defence Minister Yoav Gallant announced what he called a “complete siege” on Gaza, following a surprise attack by Hamas on Israel. Israeli Defense Minister Yoav Gallant has ordered a “complete siege” on Gaza, saying authorities would cut electricity and block the entry of food and fuel.

From Human Rights Watch “Israel: Starvation Used as Weapon of War in Gaza“ & Mass Peace Action":

Energy Minister Israel Katz, who reported that he ordered the cuts to electricity and water, said on October 11:

“For years, we have given Gaza electricity, water, and fuel. Instead of a thank you, they sent thousands of human animals to butcher, murder, rape and kidnap babies, women and elderly people. This is why we have decided to cut off the supply of water, electricity and fuel, and now, the local power plant has collapsed, and there is no electricity in Gaza. We will keep holding a tight siege until the Hamas threat is lifted from Israel and the world. What has been will be no more.”

Katz said on October 12:

“Humanitarian aid to Gaza? Not a switch will be flicked on, not a valve will be opened, not a fuel truck will enter until the Israeli hostages come home. Humanitarian for humanitarian. Let no one lecture us about morality.”

On November 4, Finance Minister Bezalel Smotrich declared that no fuel must enter Gaza “under any circumstances.”

Yogev Bar-Shesht, deputy head of the Civil Administration, said in an interview from inside Gaza, “Whoever returns here, if they return here after, will find scorched earth. No houses, no agriculture, no nothing. They have no future.”

Mark Regev, senior adviser to Israeli Prime Minister Benjamin Netanyahu, said that Israel had been depriving Gaza of fuel since October 7 to strengthen Israel’s position when it came to negotiating with Hamas on the release of hostages. “Had we done so [allowed the fuel in] … we would never have gotten our hostages out,” he said.

The core of the problem is that Israel is indeed in mortal danger, both as a state and as a population.

And let’s remember that genocidal rethoric from the Palestinian side have been going on for decades as well, nothing is black and white here.

At this point, both Israeli and Palestinian populations seem to see their conflict as existential, with a large majority agreeing to this idea, and the first side to committing genocide “winning”. This draws gruesome parallels to the Yugoslavian civil war or Rwanda.

Hard to visualize how to de-escalate from that point. Here more than anywhere else, the madness of war seems to have gotten a strong hold on the population and not just the politicians.

Internal divisions

Texas

The stand-off between the federal government and Texas (and half of the US States and most of the Republican Party) over illegal immigration seems to have mostly had for consequence the cancellation of LNG projects. Which will screw up Europe's energy supplies, but it is better than outright hostilities.

Still, bad optics to see the US so divided by internal issues while engaging directly or indirectly in multiple wars in Ukraine, Yemen, Israel, Syria, and Iraq.

Hungary

Let’s not be accused of anti-Americanism, and look at European disfunctions too.

Brussels threatens to hit Hungary’s economy if Viktor Orbán vetoes Ukraine aid.

Brussels has devised a confidential plan to escalate tensions with Budapest, indicating that the EU could harm Hungary's economy if it obstructs new aid to Ukraine at this week's summit. The strategy, revealed in a document obtained by the Financial Times, outlines explicit measures to target Hungary's economic vulnerabilities, jeopardize its currency, and undermine investor confidence, aiming to impact "jobs and growth" unless Budapest lifts its veto on aid to Kiev.

Farmers

Meanwhile, the access to Paris was locked by an almost complete blockade by farmers and other “peasant class” people.

The union of French farmers wages a 5-day siege of Paris starting on Monday, January 29 by blocking all highways into Paris. Taxis are also demonstrating throughout France with blockades. The A13 motorway towards Paris is blocked at Rocquencourt.

While Bruxelles looked remarkably similar to the Maidan Square in Kyiv. And similar protest are flaring in Germany, Romania, Poland, etc.

Rise Of New Politics

Meanwhile, ascendent far-right parties in Hungary and Romania are openly discussing getting back Ukrainian territories populated by ethnic Hungarians and Romanians.

And the AFD in Germany, with 25% of voters, is under the threat of a total ban and is officially discussing a “Dexit” to see Germany leaving the EU.

Trade Wars & economics

Almost forgotten in the background, all EU economies are sliding into a recession triggered by inflation, rising rates, and high energy costs.

The US hit on January 3rd the 34 trillion debt mark, only 3 months after the $33T, 2 years after the $30T, and 4 years after the $24T mark.

Not quite a full exponential yet, but nothing that multiple wars could not solve I guess.

And the trade war with China is going as many expected (unfortunately, no competent forecaster was present in the US government):

Western nations need a plan for when China floods the chip market.

Trump threatens tariffs exceeding 60% against Chinese goods

EU to investigate 'flood' of Chinese electric cars, weigh tariffs

What US-China trade war means for electric vehicles

Conclusion

First, let’s clear the air a little. I still think that a full-blown WW3 is not yet certain. For a few reasons:

• No matter how delusional, the US/West/NATO/EU leadership is starting to realize how limited their actual hard power is. The more Yemen or Syria prove an almost untractable problem, the less likely they are to pursue a larger war in Europe or in Taiwan.

• Russia is in full mobilization, but also shows signs of economic issues slowly building up. While possible, it is not desirable for Putin to engage in many more years of warfare AND at a higher level of engagement.

  • The ideal situation for Russia is a full capitulation from Ukraine, followed by a tense Cold War with the West. Which is also why further provocations bringing no strategic advantages is so unwelcome.

• China is basically winning by not doing anything and can keep building up strategic industries, secure supplies, and increase its military power slowly, but steadily.

  • It can navigate the Red Sea by just not getting involved.

  • It gets discounted oil & gas from Russia just by doing business as usual.

  • It sees the US get entangled in the Middle East at no cost.

    • “Never interrupt your enemy when he is making a mistake.“ Napoleon Bonaparte

So, short of a horrible miscalculation by the USA, Russia, Or China, we should not see a Great Power conflict.

And as long as propaganda doesn’t take the best of people…

However, in my opinion, there are 2 large-scale military events we might witness soon.

1. A collapse of Ukraine frontlines, driven by running out of men & ammunition, internal dissension (Zelensky vs Zaluzhnyi especially), and weakening support (partly due to internal infighting both in the EU and the USA, partly by redirection of military power to Israel).

2. An expansion of the conflict in the Middle East, as Iran is clearly WANTING a war:

   1. The USA is wholly unequipped mentally to imagine that Iran actually wants war, and cannot be threatened away. But it has been preparing actively for it for at least 4 years since general Qasem Soleimani’s assassination.

   2. The very wide theatre of operation, including Israel, Lebanon, Syria, Iraq, and Yemen makes for a perfect space for Iranian-backed forces to harass the US forces.

      1. Strikes on Iran would have a limited impact and would cement the political control by the Iranian theocracy.

      2. The evolution of missile and drone technologies gives an advantage to the defender stronger than at any time in decades, if not a few centuries.

      3. The age of expeditionary military campaigns is coming to a close, with Anti-Access/Area Denial (or A2/AD) a revolution in military strategy still not integrated by the Western generals, too used to total domination since 1989.

Investment Takeaways

This is bullish for US defense stocks, irrelevant to how the US economy can actually support it. It is likely that short of a sudden isolationist turn (unlikely), the defense industry will be the last one to see the money faucet dry out.

This is also highly inflationary, with massive risk over the Straight of Hormuz and the Persian Gulf oil exports (30% of the world’s supply). Which in turn is highly bullish for neutral energy producers, from Indonesian coal mines to South American oil companies.

This is also negative for international consumer firms, with plenty of Muslim consumers likely to boycott American companies as far as Malaysia or Indonesia: e.g. McDonald’s revenue misses estimates as the Middle East conflict weighs on quarterly sales.

It might even be bullish for Chinese stocks, as ultimately, no war over Taiwan would mean the current undervaluation of Chinese equities is not warranted.

And the more war against Iran by the USA, the less needed a war in Taiwan becomes for the Chinese leadership. Especially if Ukraine gets conquered as well, giving a poor image to Western military abilities and encouraging “peaceful reunification“.

US equities, especially the “magnificent 7” tech stocks, are displaying now a fully 1929-style bubble behavior, with Meta up 20% in one day on news of a dividend yield of 0.1% and some share buybacks.

So if anything, on a 1-3 year horizon, I feel that ANYTHING but popular US equities will outperform the S&P500 index.

I expect this to be highly relevant to most portfolios, so it should not be ignored.

As a shameless plug for my recently opened YouTube channel, I will first reference to my video that looks at the 3 trading chokepoints of the Middle East.

Context

More precisely, what is happening is that Yemen rebels (which are in practice a stronger force than the “official” government) are firing at ships passing nearby, both civilian and military.

This is made very easy by how narrow the Bad-al Mandeb strait is:

The place is also known as the Gate of Grief or the Gate of Tears, due to how narrow and difficult to navigate it is.

And that without anyone firing missiles at ships.

The broader context is a little complex, but can be summarized roughly as such:

1. Yemen was in a civil war that lasted a decade and was mostly a proxy war between Saudi Arabia / UAE and Iran. Terrible death toll on civilians as a result.

2. The Yemeni rebels, the Houthis, essentially emerge victorious by surviving a brutal bombing campaign and inflicting serious loss on advanced equipment from their enemies.

3. The military failure was partly behind the Saudi decision to bury the hatchet with Iran, and stop proxy wars in Yemen and Syria, under the diplomatic tutelage of China.

   1. Iran, Saudi Arabia, UAE, and Egypt are all joining the BRICS. So is Ethiopia, on the other side of the Bad-Al Mandeb strait.

   2. This had the effect of freeing the hands of Iran to support Hamas, Hezbollah, and the Houthis to fight Israel instead of the Saudis.

4. The Houthis are VERY well equipped with a massive stockpile of missiles and drones, most of them domestically manufactured by Iran (which retro-engineered Western, Chinese, and Russian designs).

5. The West has a few military bases directly in the region in Djibouti, especially the US and France.

Recent Events

Many ships, at first Israeli and now Western in general, have been targeted successfully by the Houthis. No military target got damaged yet, but many had to activate their anti-missile systems to survive the attacks.

Overall, the existing defense presence seems to have been inadequate to protect the sea lanes, a central tenet of the Pax Americana and American international position:

Most notably, at least one of the hits was done on a moving target with a ballistic missile, making it a world first as far as I understand it.

I emphasize this fact to give you the right mindset about the Houthis. Think less of them as rebels in sandals and Kalashnikovs, and more very sophisticated and well-supplied Vietkong-type of opponents.

In response, virtually all large shipping companies are now avoiding the area and will need to go around Africa instead.

In response, the US is essentially going to war with the Houthis, in a new operation dubbed “Operation Prosperity Guardian“.

The coalition carrying it is rather revealing.

It is basically any country in Western Europe with a half-decent Navy (aka forget Germany) + Bahrain and the Seychelles that got dragged into it for some pretense of international support.

This means only ONE Middle Eastern country, and a very small and irrelevant one at that, Bahrain. And no Red Sea nation at all.

For that matter, no Asian country at all, even US allies like Japan or the Philippines using extensively the Red Sea trade lanes either did not get invited or refused to not risk getting involved in a Middle East war.

A Historical Moment?

On paper, Yemen is no match for the mighty US Navy.

In practice, it can get a little more complicated.

The original post on X detailing this topic is more detailed, but here is the rough math:

• Anti-missile and drone defense is handled by support vessels attached to a carrier group, mostly cruisers and destroyers.

• With 8 of them attached to the Ford and Eisenhower carrier strike groups, that makes for 800 missiles. European allies will bring extra support, but not that much either.

• From the Ukraine war, we can learn that a successful interception usually consumes 2-3x more defense than the incoming projectile.

• Each of these ships cannot reload ammunition at sea but needs to go back to a safe harbor to do so.

• Point defenses are more flexible, but less reliable against missiles (design or shells and drones) and really a last resort as a result.

So there are 3 distinct risks for the US Navy here:

1. Saturation attack, risking overwhelming the defense briefly, letting some missiles fly through and hit a high-value target. If very unlucky, a $500,000 missile can severely damage a $10B+ aircraft carrier.

2. Attrition tactics, where continuous attacks deplete the air defense until it runs out of ammo.

3. Economic attrition: roughly what the Houthis have been doing to the Saudis in 10 years of conflict. Take bombing and human losses, but keep fighting with a very tight budget while inflicting expensive losses on the enemy.

   1. Here the risk is a durable blockade of the Red Sea, costing the European (and Asian) economies tens of billions in extra shipping costs and slower supply chains for a few tens of millions in missiles.

Each of the risks is to be handled differently.

Saturation

The saturation attack is a possibility but would be a big gamble by the Houthis. Because if it fails, they will be durably weakened, might expose their stockpile to retaliatory strikes, and might even endanger their political position domestically.

But if it works, it would be an absolutely devastating blow to the US image to lose a ship to a poor country like Yemen.

Attrition

The attrition tactics are more likely. The idea is to stretch even thinner the already depleting US/NATO supply chain. This also plays in favor of Russia & China, so it is likely that they will push Iran/Houthis in that direction if they can.

Economic Damages

Economic attrition is VERY likely. This is because removing 100% of the threat of attacks will be very difficult. It might require a land invasion. And we know from Iraq and Afghanistan how costly and difficult these could be.

With the US already under regular mortar and missile attacks in Syria and Iraq, this could force the US to essentially abandon the Pacific theater. Which might be a given anyway if Israel goes to war in Lebanon.

And of course, the West’s strategy in Ukraine and now with Yemen is to shoot down a target worth $25,000 with missiles costing $2,000,000 to protect a $100,000,000 ship…

Investing Takeaways

Regional Danger

The first investing takeaway is to be VERY careful with any company doing significant business in the Middle East. This includes jack-up drillers.

The area is heating up and might get a lot worse.
The absence of the Saudis or the UAE from a coalition defending navigation in the Red Sea is also a dramatic shift.

They will be ready to let America be on its own rather than risk missiles at their tankers. Any investment thesis assuming that Riyadh, Doha, or Dubai is “safe for investing” should be reconsidered.

Egypt Collapse?

30% of Egypt’s budget is derived from the Suez Canal fees. No exiting the Red Sea, no Suez Canal fees.

The country has been tethering on the brink of economic disaster for a while now. Corruption, low productivity of its workforce, and massive explosion in population beyond the land carry capacity, all contribute to a ticking time bomb.

Add the war in Gaza and the prospect of 1-2 million Palestinian refugees, and Egypt might become a new failed state right next to Post-Gaddafi Lybia and its slave market.

Besides the recent conflicts in the area, Egypt is also a prime candidate for an Emerging Market debt crisis due to rising interest rates, together with Tunisia, Bolivia, Argentina, Ethiopia, etc...

I am not sure there are easy ways to short Egypt, but this is a promising trade if you can find how to execute it.

The VanEck Egypt Index ETF EGPT might be a good target for this, even if I worry a little about liquidity.

Take note I have no idea whatsoever why this ETF has been rallying in the last 6 months, so be careful with a naked short. Out-of-the-money options might be less profitable but with fewer risks of open-ended losses.

The Trade Of The Year?

The shipping industry has been a disaster for investors in 2023.

The poster child of this is ZIM Integrated Shipping Services Ltd. (ZIM), with a 90% loss from the top in 2022 to the bottom hit a month ago. It has since rebounded from $6.59/share to $9.77/share.

A key effect of avoiding the Red Sea is extending sea travel time by 9 days and 7,000 km.

If considering the same supply of cargo ships, this is the equivalent of taking out a significant percentage of the shipping world’s capacity. It could boost the shipping dayrate dramatically.

I am not sure what the price for the global economy will be. But considering the Suez Canal fees the industry was happily paying was almost $10B last year, this means that the extra fuel and time cost will be higher than that.

Some out-of-the-money options on major shippers like Maersk or ZIM might be a way to play this with serious leverage while committing little capital to the idea.

Air Defense Manufacturers

Raytheon (RTX Corporation - RTX) is the provider of the SM-2 and SM-6 missiles for US Navy air defense.

It currently produces only 50x/year SM-2 and 150-200x /year SM-6. Plans to double that production by 2028 are ongoing, and might or might not happen.

Still, even if horribly inefficient in the long run, every SM-6 fired is an extra $5M in Raytheon’s pocket. Fire a few hundred of them and we are soon talking real money. And the Navy will not change its defense systems overnight.

A cheaper option and one likely to be used a lot these next months is the Phalanx produced by General Dynamics (GD) (the land version of the Phalanx, the C-RAM, is also very useful in Syria and Iraq).

The Leonardo Group (LDO.MI / FINMY) is a provider of electronic warfare and short-range point defense that could help as well.

And then, the more aerial threats against the US Navy grow, the more upgrades and extra need for the Aegis System by Lockheed Martin Corporation (LMT).

My best pick would go to General Dynamics, for a variety of reasons:

• A new land war in Yemen would be a bounty for its armored vehicles business.

• The damaged ships will need to be repaired in GD shipyards.

• The Phalanx is becoming increasingly THE relevant and available technology against abundant and cheap threats like the Iranian Shahed drones, but also easily hidden “dumb” rockets and mortar that cannot be countered by Electronic warfare.

For the reasons outlined in the corresponding reports below, Leonardo is second best, but more relevant to the overall threat of drones than the Yemen escalation specifically, where General Dynamics is more relevant.

Electronic Warfare Made In EU (part 1)

Electronic Warfare Made In EU (part 2)

Ukraine

Reality starts to set in for the West and Ukraine. There has been an onslaught of admissions and realization from Ukrainian and Western officials.

Losses

For example, the losses (death + out of combat) for Ukraine are now admitted to stand anywhere between 300,000 (official-ish number) to 1.1 million (leak/”mistake” in Ukrainian TV and other media).

The narrative is of course that Russia has suffered at least similar casualties. Considering Russia never had to do a second mobilization, this is highly dubious.

Considering the already abysmal demographic of Ukraine, it is not unlikely that short of the refugees going back home at the end of the war, the country is essentially done no matter who “wins” the war.

Supplies

Another fact that emerges is how little artillery shells the West can/wants to supply to Ukraine.

The EU was supposed to provide 1 million shells, which is by the way still a lot less than what’s needed. Only 300,000 shells were actually delivered. The price of these shells has also tripled (because why would the defense industry not gauge prices, right?), making a German artillery shell 10x more expensive than a Russian one.

In that context, it starts to make sense why with a much smaller budget, Russia managed to keep up with the giant defense budgets of the West.

Meanwhile, it appeared that Ukrainian demands have risen to 17 MILLION shells, which is probably more than there is in the entire world for now.

This massive advantage in artillery, but also air bombing, drones, loitering ammunition, and other attack capabilities make the claims of Ukraine inflicting a 1:7 ratio on the Russian force utterly absurd.

As Arestovich, a prominent former advisor to Zelensky put it:

Mobilization

Demonstrating the growing shortage of manpower for Ukraine is the talk of starting to change laws so they can mobilize EVERYONE. Women, students, and even 17-year-olds or younger.

What’s the point of “saving” the country, if its people are gone?

Russia seems to handle its recruiting needs only through hiring the military for now. Its larger army size overall also allows for regular rotation of units away from the front lines, something apparently almost never done by Ukrainian forces, except after heavy losses making a unit unable to fight.

Funding

Overseas, funding is lagging.

Partly it’s due to bureaucratic and political dysfunctions. Either in the US Congress, where the democrats and republicans are too busy trying to tie Ukrainian funding to closing the southern border.

Or in the EU, where the veto rights of Hungary and Slovakia can block the whole process.

It is also partly because ammunition and funding are needed to support Israel, which also grabs all the political attention.

Israel

After a brief cease-fire, the bombings of Gaza resumed. The Israeli army seems to be struggling with guerrilla tactics and urban environment + drones & an extensive tunnel network. Which any army would struggle with, but even more so an army made mostly made of volunteers, conscripts, and reserve personnel.

Tactical Assessment

It is increasingly clear that the ONLY winning tactic for Israel is the expulsion and displacement of all the 2 million Palestinians in Gaza. This would allow it to advance methodically and exterminate anything that moves.

Even then, this would make for very expensive fighting, with destroyed urban areas the hardest to conquer.

Frankly, a better option is, once the civilian population is expelled, to perform an actual siege, blocking any entry of food or water to the area. It could be enough to literally starve out any Hamas guerrilla fighters if given enough months.

Strategic assessment

The problem is that what makes sense militarily and tactically might not be strategic/diplomatic.

Israel’s image, and the West’s with it, will not look good in the Muslim World, but also the public opinion in Russia, China, Africa, etc. will see it as a genocide. Especially with the civilian casualties in Gaza probably already higher after 2 months than in Ukraine after 2 years.

The more successful the “thining of population” (not my words…) in Gaza, the worse the position and image of the West in the Middle East will be.

Frankly, this is partly because mass population displacement is rather … distasteful, anywhere, anytime.

But also out of Islam's conquering spirit, as the 100,000s dead Yemeni children failed to trigger 1% of the outrage for dead Palestinian children.

Iran-backed Yemeni rebels are now shooting missiles at US warships and seizing Israeli cargo ships. It is unclear how the US could succeed in pacifying Yemen when 10 years of war with Saudi Arabia, which just stopped a few months ago, failed.

What Then?

I see two possible outcomes of the Israel-Hamas war.

Scenario 1 is that Israel has to backtrack its target of conquest and mass expulsion of Gaza. The problem is that this might not be an option with Israel’s public opinion and internal politics.

In that scenario, we could potentially get back to the status quo, and even maybe in the long run a 2 state solution. This could nevertheless make Israel look weak and exposed to endless terrorist attacks.

Scenario 2 is continuous escalation. The problem is that this likely closes the Red Sea for Western trade. This could be from Egypt closing Suez, but more likely from continuous fire from the Yemeni coast. In that scenario, escalation with the Lebanese Hezbollah, US feet on the ground in Yemen (Afghanistan-redux vibes), or even outright war with Iran is possible.

In scenario 2, an oil embargo repeating the 1970s would also be likely, if anything because the Arab leaders will need to placate the angry mob of the Arab street.

The visit and royal welcoming of Putin in the Middle East, and Iran’s President's trip to Moscow had to the likelihood of further coordination against the West.

Waning Support

At the end of the day, Israel will need to face the issue of being hated (like in “wishing genocide”) by neighbors with 100x Israel’s population. The current trajectory is unsustainable, and it is hard to see a positive way out for the country.

To compound the issue, any military tactics will ultimately destroy the image of Israel as a jewish state victim of genocide to be supported by the West, as the turning opinion against the country of younger generations in the US and EU illustrate.

only 32% of respondents aged 18-34 approved of Israel’s response, as opposed to about 58% of those aged 50 and older.

for those aged 18-29, 25% sympathized more with Israel, 19% with the Palestinians, and 25% “about equal.”

Times of Israel.

Ruthless application of hard power can work but is incompatible with the durable type of support Israel inherited from the events of the Holocaust.

Guyana

If that was not enough, Venezuela has announced that it now considers legally 2/3rds of Guyana to be Venezuela territory.

This fanciful interpretation of international law comes with an even more fanciful interpretation of how territorial water borders are drawn:

Venezuela is even claiming it will start drilling for oil resources immediately.

I have covered previously how Guyana's low population and massive oil reserve make it a new Qatar/Saudi Arabia. I did NOT expect Venezuela to make such a crazy move.

Overall, I doubt the US military, already present in Guyana since oil was found, will let it happen.

The annexed region is essentially unpopulated and does not have any road or infrastructure through the jungle and mountains. Bombing the supply of Venezuela should be enough to cause the invasion to fail miserably.

Furthermore, Brazil’s own armed forces are also looking with concern to this move, as Venezuela also claimed some Brazilian territory as its own for a long time.

I suspect this might be the last straw forcing Brazil+US, and maybe even Colombia to intervene against the Venezuelan regime.

It is clear that Maduro thinks he can get away with it, while the US is distracted with internal politics, Ukraine, and Israel.

Considering this is in the US’s backyard, I doubt Washington will let it happen. If it did, it could lose ALL its empire at once, and the Monroe Doctrine is the firmest part of the American Empire.

My suspicion is that Maduro is a dim-witted pawn to be sacrificed in order to distract and spread thinner the American forces. Dim-witted, because he apparently thinks he can pull it off.

Venezuela's dysfunctional management of its oil resources has made it a worthless “ally” and more of a burden for the Russia-Iran-China alliance. This is probably the last usefulness it can bring to its overseas “friends”.

While concerning in the short term, I suspect this will open the space for further opportunities in Guyana. And maybe re-open Venezuela for foreign investment, which would be a golden opportunity for Western money.

Other

Caucasus

For now, the conflict between Armenia and Azerbaijan seems frozen. Armenia’s inept geopolitical positioning might be its doom, with the US or EU unlikely to actually care, but Russia also antagonized.

South China Sea

A new flare of tensions in the South China Sea between the Chinese and Filipino fishing fleets illustrates the difficulty for China in handling the area.

China needs it fully controlled to secure sea trade lanes. But by doing so, it put it on a collision course with American local power relays.

Korea

South Korea’s demographic is experiencing a total collapse. If this trend persists for another 5-10 years, the country will likely be unable to keep itself protected from North Korea in the long run.

The saying goes that demography is destiny. South Korea's TFR (Total Fertility Rate) went from 1.24 in 2015 to 0.72 this year.

At current fertility rates, 200 South Koreans give birth to 70, who give birth to less than 25. Hence in 2 generations, you would have 8x LESS INHABITANTS.

North Korea is below the replacement rate as well, but still 2.5x higher than its Southern neighbor. And never shy of providing bizarre scenes, we had this:

Overall, it seems that modernity, and its cyberpunk dystopian version of South Korea, where Samsung alone makes up 22.4% of the nation’s GDP, can be more deadly than even the most insane version of communism for a nation and its people.

I can see a long-term future (10-20 years) where South Korea turns into a de facto Chinese protectorate, under the understanding that the alternative is letting the North invade the country and even helping it a little.

Considering how being supported by the US turned out for Ukraine's demographic, I doubt South Korea can afford to do the same.

So it is not only that drones are endangering much more expensive weapon systems. It is also that in industrial warfare, mass production is king.

Simple and small also evades the most advanced detection systems.

For example, North Korea apparently has a massive fleet of biplane cropdusters.

The same can be seen in a massive redesign of military build-up all over Eurasia.

For example, Russia seems to have essentially given up the production of its most advanced tank, the Armata, in favor of simpler, more reliable older designs that can be scaled to several hundreds per year of new build (and maybe up to 1,000 of upgrade/repair/refurbished as well).

Russia has also brought home the production of the Shahed, under the umbrella of the Kalashnikov group, famous for its cheap, rugged gun design.

Russia has also mostly stopped the production of tanks using a turbine engine, which consumes too much fuel and is too tricky to maintain. A little concerning as this design choice dominates the US Army with the Abrams tank.

But I suspect the real innovation of this decade is still to come.

Getting Weirder

A key feature of successful armies in times of military revolution is that they experiment with weird ideas AND have the political will to implement them at scale too.

Mass tank divisions for the Germans in WW2. A new division of the army battalion by Napoleon.

China is a good example with the very official push for the mass use of gyrocopters:

A gyrocopter apparently costs as little as $5,500; you don’t even get a Dacia car for that price! They are also requiring just 10 hours of training to be used proficiently. The engine is rather basic, and so are the controls and electronics. Instead, a Black Hawk costs $6-10M.

On a side note, this also means we already have flying cars, we civilians are just not authorized to have them I guess…

I can see such tools potentially replacing some infantry fighting vehicles to quickly move at once a few thousand men up, with a range of 250 miles and speed of 60-100 miles per hour.

These could work wonders in mountainous terrain (Himalayas) or have the range to bridge the gap to Taiwan. While providing them with low survivability, but high firepower capacity of flying rocket launchers and some spare gear like ammo.

They also cost x1,000 less than the obviously more capable, but also larger target combat helicopters.

So the question is not so much if this is better than a Black Hawk. The question is if x1,000 of those slightly ridiculously looking weapons are better than ONE Black Hawk?

It is x10,000-12,000 cheaper than an F35.

Can a 10,000-unit swarm of gyrocopters do the job of one fighter jet?

Frankly, I think so.

Meanwhile, Iran is looking at turning simple trucks, looking like basic trucks, into drone/missile launchers:

I do not know what the next 10 years of war will look like. But I am under the impression it might be as weird to us as the veterans of WW1 felt about Panzer divisions, mass airpower, and the effect of omnipresent radios.

A mix of high and low tech is equally possible, as long as it is small and nimble.

Trenches stormed by a pack of flamethrower robodogs is a distinct (and horrifying) possibility.

For all I know, maybe jetpack troops + gyrocopters are the new mechanized infantry.

Electronic warfare (EW)

Because drones, cheap guided munition, and other weapons are proliferating on the battlefield, a new domain is becoming increasingly vital.

Electronic warfare is the idea of using electromagnetic waves to cause damage to the enemy. This covers jamming radio or GPS signals, frying drones with directed microwaves, and so on.

This is NOT cyber warfare, which is the business of hacking or defending IT systems.

Russia is apparently a pioneer in this field according to NATO defense reports.

In the last few months, we have seen the standardized deployment of EW systems in new tanks and vehicles by Russia.

As the technology is not really that complex, I expect everybody to play catch up and use EW massively as well.

I suspect that as EW becomes ubiquitous on the modern battlefield, with both sides jamming the other like mad, it will become quickly very hard to have any advanced guidance systems functioning.

I expect the multiplication of these systems to seriously limit the capacity of remote-controlled drones and GPS-guided systems.

Directed energy beams of electronic-destroying microwaves might also make flying drones hard to use in contested areas and frontlines.

Human First?

Now remember the cheap equipment we talked about? They are also rather unsophisticated in their targeting.

Artillery shells fall according to the laws of physics, not GPS guidance. Gyrocopters are mostly mechanical beasts, not relying on advanced electronics for stabilization, guidance, etc.

Hence it is not JUST about cost. It is also about keeping things working when the enemy jams you.

So we could see a return to not only mass production of basic cheap weapons, the equivalent of the Sherman tank and Liberty ships, simple designs of which 2,711 were built by the US during WW2.

We might also have to rely on human presence and unguided & unjammable ammunition for targeting, because electronics, especially flying ones like drones, get fried in a 5-10km radius along the frontlines.

Naval Battles?

We have no idea how the same type of change could affect naval warfare. Mostly because Russia’s navy is mostly garbage, and the Black Sea is rather irrelevant in the war in Ukraine.

Judging from the few “cheap” hits Ukraine scored against the Russian Navy, I would not give much to too big and complex ships.

But the jury is still out on drones becoming the new game changer.

In WW2, “Big Gun” cruisers like the Bismark and the Yamato had become slow, short-range, too expensive, and too big a target, after dominating the seas for a century.

They would be outclassed by the newer, more flexible, and reactive aircraft carriers.

Could long-range drone swarms do the same?

In any case, shipbuilders are likely going to be in high demand, although maybe more the ones focused on smaller ships like Austal, which I covered in a previous report.

Industrial structure

The capacity to innovate is alive and well in the West. For example, the flamethrower robodog above is from an American company.

So why does it seem so hard to fix the ammo problem?

A big part is that the defense industry in the West is essentially so corrupt and focused on skimming the army, that it works less and less.

Consolidation, “efficiency” removing spare capacity, and monopolies are the driving forces here.

A few excerpts from BIG, a great Substack about monopolies:

Investing Takeaway

The giant conglomerate has made a specialty of designing weapons that are increasingly complex, expensive, and in low numbers.

Lockheed, Raytheon, Boeing, they all developed this strategy of removing competition with acquisitions, and then scamming the Pentagon with monopoly power.

Of course, the Pentagon could do something about it easily. But it just happens that the top general always ends up on the board of Lockheed, Raytheon, Boeing, etc…

Don’t bite the hand that feeds you.

I suspect that situation can only end up one way or another.

1. Nothing changes, and the US suffers a military defeat as groundbreaking as Russia losing to Japan in 1905.

2. Monopoly power gets broken apart, which can be done in various ways:

   1. breaking each mega-defense company into 5-20 smaller ones, finally applying anti-trust laws.

   2. nationalization by a populist president.

   3. every defense procurement must go to at least a smaller firm, non-affiliated to the big guys.

What I am sure of, is that it will take some time to clean up the Pentagon.

In the meantime, while a sense of urgency slowly sets in, they will look for alternative suppliers with the big defense firms become increasingly unable to deliver.

A key supplier will be non-US firms, but from NATO countries.

One option is Reinhmetall (RHM.DE), which seems a little less bloated and incompetent than the large US firms, especially in 155mm shell production.

But the stock is already up more than 3x, so I am a little concerned the boat has partially sailed on this one. At 25 P/E ratio, it is not horribly overpriced, but not great either.

So I prefer another European defense company, one often left out of the list of top defense contractors, mostly due to the pro-USA bias of most analysts and publications.

And that has various products in electronics, electronic warfare, cyberdefense, and most importantly simple and cheap anti-drone systems, which have already been validated and installed by the US Army in test capacities.

This will be the focus of my next report for subscribers.

WW1 was envisioned as a repeat of the maneuver warfare of the 19th century, started by the Napoleonic wars. Only to turn into gruesome immobile trench warfare.

WW2 French war planners made the giant Maginot line fortification for a static war, only to be out-maneuvered by Panzers and Blitzkrieg through Belgium.

More recently, the US & NATO armies were designed for small-scale expeditionary war in third-world countries and found their ammunition stockpile, as well as industrial capacities, to be wholly inadequate for attritional warfare in Ukraine.

The same can be said for the US Navy, with China having 200x or more the shipbuilding capacity of the USA.

It will take several years for the US to rebuild its ammo stockpile (5 to 8 years), and that without any further consumption by Ukraine, or lately Israel.

But this article will not go back to the topic of military & industrial capacity I have already addressed occasionally.

The Previous Paradigm

The current and quickly becoming obsolete idea of modern warfare (at least in the West) was based on a few tenets:

1. Conflict between Great Powers is unlikely, and would probably turn nuclear quickly.

2. Air dominance is the key to winning a war.

3. Combined arms movement, as defined by the coordination of armor, artillery, and air power is the way to break through enemy lines.

4. Aircraft carriers are the kings of the seas, complemented by submarines and support vessels.

5. Large, for-profit industrial conglomerates produce the best weapons.

For the military personnel or aficionados among my readers, I am intentionally simplifying these ideas. Please forgive me for the oversimplification.

It must be said that these assumptions have always been on slightly shaky ground.

For example, Soviet and later Russian forces have always considered artillery to be of equal if not larger importance than air power.

And China has always put a larger emphasis on large infantry and a massive missile corps, structured as an independent force alongside the land army, navy, and air force.

As we will see, many of these assumptions are now increasingly challenged by technological innovation.

New Tools

The first thing that Ukraine has taught us is that the idea of maneuver warfare might be wholly outdated.

Of course, a lot of analysts still cling to the idea that every combined operation having failed in Ukraine is somehow only due to unique circumstances:

• Russians are incompetent

• Ukrainians are poorly trained

• Equipment was inadequate

• Not enough material was given to Ukraine

• The lack of NATO air power is the problem

The interesting thing is that none of these address the ACTUAL causes for the failure of both Russian or NATO-trained and controlled Ukrainians.

ISR Dominance

The first reason is the incredible power of Modern ISR (Intelligence - Surveillance - Reconnaissance). Satellites, drones, AWACS planes, and other tools have made the battlefield essentially “transparent” for maybe the first time in history.

Each side knows roughly where the other side’s forces are. What they are made of. What they can do. And so on.

So the idea of launching a surprise attack to break through is just completely outdated. Any position of force accumulation more than 24 hours old is likely to be identified, analyzed, and accounted for.

Short of bringing a world war into space and destroying most satellites in orbit, this will not change.

For the record, this is a horrific prospect, as it could trigger a Kessler syndrome, and lock humanity out of space for eons, maybe permanently.

Remote Minefield

Little attention has been given to modern mining tactics. Mostly because little is less glamorous than mines in warfare. No fancy specs of tanks or planes to debate.

And frankly, this is a rather gruesome and inglorious way of fighting.

Modern mines can literally be “sprayed” onto the battlefield at will, from several kilometers away. Essentially, artillery shells spread mines in a given area.

So it has become a usual thing for any assaulting force in Ukraine to see the road it just drove being mined in their back, cutting all possible retreat.

Add to this the very poor performance of demining tanks previously assumed to work, and you get a completely frozen battlefield, where moving out of trenches is pretty much suicide.

Drones

The drone revolution is only getting started in Ukraine. I will explore the full consequences later in this article.

What we saw is an exponential use of drones from truly amateurish ideas to mass use.

At first, the Ukrainian army had an advantage, leveraging cheap DJI Chinese drones, the type you use for aerial photography.

Since then, the Russian army has introduced a series of innovations of its own.

And while conceptually interesting, I do not mean the type of tinkering that we saw at the beginning of the war which looked like this:

First, the Iranian design Shahed, repurposed and with improved guiding systems to attack fixed positions, from logistical nodes to power plants to training centers.

Essentially a moped engine fit for a Vespa scooter, cheap electronics, cheap wings, and you get a cheap ($5,000 to $20,000/drone depending on who you ask) way to wreck a target worth millions or even billions.

And then the more sophisticated Lancet kamikaze drone (or “loitering ammunition”). It can be remotely controlled and hit moving targets.

This drone has been responsible for taking out plenty of US-made tanks and vehicles, and its small size and cheap cost have made it very hard to counter with conventional air defense.

Guided explosives

While these weapons have been praised excessively, man-held guided missiles like the famous Javelin also had an impact. And if the war in Israel is any indication, even unguided rockets are excessively dangerous to armored vehicles.

In itself, this is nothing new since the bazooka and panzerfaust. But when combined with the other evolutions, it becomes a much bigger problem.

Drones force you to stay under the cover of air defense, limiting mobility.

Strong ISR means that the enemy has time to bring such Javelins to the right spot in advance.

And mines force armored vehicles onto narrow paths, with little to no maneuvering possible.

Failure Of Prediction

Why do military planners seem to always fail to innovate? Partly it is the inability of most military to process different paradigms, and a LOT of confirmation bias.

A great example in this excellent X thread on the Russo-Japanese War of 1905, a true strategic precursor of WW1.

Indeed, it seems very few observers are really taking notice that the first major conflict between 2 industrial armies since the Korean War in the 1950s is very different from the expectations.

Instead, they just assume it is a bug, not a feature of 70 years of technological evolution.

New Paradigms

Cheap Is Better Than Expensive

I think the first important change is that cheap beats expensive.

For a very long time, the idea was that technology wins wars.

Quicker fighter jets, better radars, more precise missiles, more satellites, stealth, etc… you get the picture.

What we see in Ukraine is that the most important weapons for both sides all share the same characteristic of cheap mass production:

• Artillery shells costing $500-$800/unit for Russia and $8,000 for NATO

  • versus precision-guided shells at $68,000/round.

• Small and light drone, at the largest a person's size loitering ammunition,

  • versus giant plane-size Predator style drone.

• Cheap mass-produced tanks like the T-72

  • versus “better” but much harder to build and maintain NATO main battle tanks.

• Shahed bombing campaign using $5,000 9 (or $20,000?) drones.

  • versus $2,000,000 Tomahawk cruise missiles.

Quantity Has A Quality Of Its Own

A cheap price allows for larger quantities.

But this is not all such design provides.

Very advanced war machines require equally advanced components.

Top-level computer chips, esoteric stealth paints, ultra complex software, titanium hull, sophisticated jet engines, etc.

What happens if the ONE factory producing some key component of F-35 or Predator drones is bombed into oblivion?

Or if the supply of titanium and rare earth minerals, mostly coming from Russia and China, dry up?

On the other side, Shahed drones are for the most part mechanical parts from a 1950s moped bike, and electronics from the 1980s.

Which one has a more resilient supply chain, and can see production scaling up quickly?

Now let’s move to part 2 and the new paradigms in warfare.

A Few Caveats

To start, I will explain what I will NOT cover.

First, I will not try to pick a side. Even if frankly, I have seen more haunting footage in the last 48 hours than in the entirety of the Ukraine War. I highly recommend my readers to NOT look for it themselves. Just trust me on this…

Let’s just agree that targeting civilians is never okay, no matter what grudge or previous atrocities have been committed by the “other side”.

Even less parading their corpses…

Indiscriminate retaliations will not be good either.

“Well the other did X too, you know, did you care about THAT” is an unacceptable rhetoric. If you think so, please unsubscribe. Works for both sides.

If I had to pick a side, it would be one of the ordinary people, as well as the Holy Land’s Christian communities (as an Orthodox Christian myself), that will likely suffer even if not a belligerent in this conflict, while also being despised by both Jewish and Muslim radicals.

There were Patriarchates of Jerusalem, Antioch, and Alexandria, way before there was a prophet Mahomet or the modern state of Israel…

What I also do NOT cover is what should be done.

This is a nasty situation getting nastier with time. There is likely no good outcome of this. I will however describe what is likely to happen and then possible scenarios moving onward.

Many people seem compelled to pick a side and flatten complex situations into simple narratives: oppressed innocent Palestinians against colonial oppression or civilized innocent Israelis against barbarians.

Calls for genocide seem also pretty okay on social media these days. From “exterminating” Israel to “flatten Gaza”, it is safe to say that rational minds are not really what dominate our collective thinking.

Quick Recap

After a sudden and surprise attack, Hamas managed to strike Israel in what can be described as a 9/11 or Pearl Harbor moment. Israel’s army has obviously been caught flat-footed and took several hours to react.

This is now responded to by mass mobilization and an official declaration of war.

The Lebanese Hezbollah is also likely to enter the conflict, opening a northern front.

Meanwhile, US aircraft carriers and military assets are likely going to provide help to Israel.

This is a stunning turn of events. And it seems at first glance that the Hamas was extremely well prepared, and have upgraded drastically its capacity, including in drone warfare, successfully replicating tactics seen in the Ukraine war.

Iran’s Role & The Muslim World

It is very likely that Iran is a key actor behind the attack. While it might not participate directly (hard to tell), it is for sure financing, training, equipping, and providing diplomatic and intelligence support to Hezbollah. Likely to Hamas as well.

This comes in the backdrop of several seismic changes in the Middle East diplomatic balance:

• The acceptance of Iran into the BRICS, breaking a long-standing isolation due to US pressure.

• The progress of Iran's nuclear program, which might or might not have already delivered the material needed for a nuclear weapon.

• The normalization of relations with Saudia Arabia and the signing of a de facto peace treaty between the two, freeing Iran’s resources from costly proxy wars in Syria and Yemen.

• The tentative of bringing back Saudia Arabia in the Western camp, in exchange for nuclear power plants and a normalization of relations with Israel. This idea is now dead in the water.

• The return of Syria (an Iranian vassal state by this point) into the diplomatic arena, including the recent visit of Bashar-al-Assad to China and his very warm reception.

• The greater proximity of Iran with Russia in decades, if not centuries, notably with the provision of Shahed cheap drones to Russia, as well as the template for Russia to mass produce them itself.

  • Russia also provided scientific and military technology to Iran and is working hard to open the North-South trade corridor.

• The Armenia-Azerbaidjan War, resulting in mass displacement and murder of Armenians, a relative humiliation and loss of influence of Russia, and the displeasure of Iran.

  • Israel has been a key supplier of modern weapons to Azerbaijan, together with Turkey (Middle East geopolitics are never simple).

Meanwhile, the rest of the Muslim world has already condemned Israel and blamed it for the war.

China and some world powers preferred a natural stance and called for peace and a stop to hostilities.

Ukraine & US Loss Of Prestige

The war in Ukraine can be seen as a key reason for the explosion of violence, or at least its timing.

First, a lot of ammunition supplies, especially artillery shells, stockpiled by the US in Israel have been sent to Ukraine. This might significantly weaken the Israeli defense forces, especially against Hezbollah, or worse, Iran. This is very likely to have been a factor in the calculus for the timing of this attack.

To compensate, depleting the US army reserves might be needed.

Obviously, the idea of a distracted and overstretched America probably also played a large role. Exploding deficits and debt, and interest rates rising sort of out of control did not help either.

Political division, including over-providing financing to Ukraine, equally gave the image of a “window of opportunity” to be seized to settle long-standing grudges.

The successive US failures of the Iraq occupation, the debacle of the Afghanistan retreat (a rout really), the inability to topple Syria’s government, and the inability to support Ukraine enough to win, especially after the recently failed counter-offensive, have all created an image of military weakness that keeps getting worse over time.

The overstretched supply chain for weapons, generalized de-industrialization, and mainstream media admitting there are not enough missiles, ammo, and shells in stock OR in production compounded this image.

Several reports claim Hamas acquired Western-made weapons from the Talibans, or even through corruption in Ukraine, but this is yet to be confirmed.

What’s Next?

Considering the human losses, it is politically impossible for Israel to back down, or even negotiate. This is true even with hundreds of hostages taken prisoners.

For that matter, Hamas is publicly aiming for “final victory” and is not interested in negotiation either.

"I ordered a complete siege on the Gaza Strip. There will be no electricity, no food, no fuel, everything is closed. We are fighting human animals and we act accordingly,"

Israeli Defense Minister Yoav Gallant

Force Imbalance

The initial success of the Hamas is mostly due to surprise and preparation. But even with upgraded capabilities and improved drone warfare, it is still a fundamentally weaker force.

The same can be true to a lesser extent for the Hezbollah.

And this is true for existing Israeli military capability, not even counting the guaranteed support by Western countries, especially the US. Where the US is cautious to not be a direct participant in Ukraine, it has little reason to do so here, and there is a lot of political tendency in the US to support Israel unconditionally.

So in that context, the military outcome is rather predictable if all things stay equal.

The problem is that the only path forward for Israel is likely the partial or total destruction of Gaza, as well as its full occupation and/or deportation of its population.

(to where? is a good and unanswered question, Egypt might be forced to reluctantly accept these 2 millions refugees).

This in turn will enrage the Muslim world like nothing we have seen for these past 50 years.

I am not sure Iran can afford not to get directly involved without losing its control over its vassals in the Shia crescent.

Iran has the population and capacity to potentially crush Israel, which would force a US intervention MUCH more massive than a few aircraft carriers conducting air strikes.

Something more in line with the Korea or Vietnam Wars than the invasion of Iraq. No wonder there has been a coordinated call in the last few months for a return of the military draft and admitting the insufficiency of the all-volunteer army model.

A Way Out?

The Israeli-Palestinian conflict has been an unsolvable issue for decades, so do not expect magical solutions here.

What I can say is that ethno-religious conflicts of this kind tend to be extra nasty historically.

This is because a conflict over territory can be settled by redrawing borders (think France versus Germany).

A conflict over political ideology can be done by changing said ideology (Nazi Germany versus modern Germany as an example, or Imperial Japan).

People will not change religions easily, and cannot change their ethnicity. So there is no reasonable way out, nor possibilities to change the fundamental parameters behind ethno-religious conflicts.

Many such conflicts end with one party durably exterminating the other, totally or from a determined area. This is a pattern most common in the Middle East, the Balkans, and the Caucasus. Such actions also can create conflicts that will simmer for not decades, but centuries.

So two possible outcomes are either the permanent expulsion of non-Jews from Israel, or a complete conquest and mass explusion/genocide by Muslims powers.

Another possible outcome is an organized separation without too many human losses. Think of Croatia and Serbia. Or Pakistan and India. They might still not be friendly with each other, but overall, there has been enough mass relocation to stabilize a border between the two and luckily avoid major wars in the future.

In the Levant, who gets to keep Jerusalem makes it extra difficult. A Holy City for 3 religions, and no one is ready to give it up or accept a neutral status/free city agreement.

As long as this is true, peace will be elusive.

Financial Aftermath

Now I will actually discuss the repercussions beyond military and geopolitics, but let’s not forget the goal here is not to profit from this and ignore what really matters.

Real people will die and are dying, and I am not even going to dwell too deeply on other atrocities.

Simply, this is an investing newsletter and I would do a disservice to my readers to not tackle this topic.

So let’s look at what it might mean for the broader world.

The First Yum Kippur War

A solid template is obviously the Yum Kippur War / Ramadan War which started exactly (to the day of the attack) 50 years ago.

After an initial successful surprise attack, Israel managed to defeat the combined armies from almost the whole Arab world. This might as well be considered somewhat of a defeat for Israel, which was later forced to recognize Egypt's control over the Sinai region.

In retaliation to Western support to Israel, the OPEC would restrain supply to the West, close the Suez Canal, and overall trigger the 1970 stagflation.

Despite controlling only 56% of the world’s production, OPEC could have an outsized effect on global oil prices.

Oil Prices

Oil went from $2.75/barrel to $32/barrel in less than 10 years.

Here is how it played out:

The subsequent Iranian Revolution in 1979 would create a second energy crisis.

But this was hitting a rather prosperous and stable global economy. In fact, that period is still remembered in France as “The Glorious Thirties” (1945-1975) with the oil shocks essentially putting an end to it.

I doubt x11.6 on oil prices could be doable, or at least not without a terrible crash in dollar value. But a doubling from here, yes, not impossible at all.

It’s not like the West is also deeply in conflict with Russia and Venezuela (the other largest oil reserves on Earth).

A global recession would come with it as well.

From that perspective, if you have not hedged this risk with a double-digit exposure to the oil & gas sector yet, hurry up.

Hormuz

A black swan discussing a potential Israel/USA vs Iran/Islam conflict is the straight of Hormuz. This is from where most of the Middle East oil flows out to the world. Would the USA feel the need to collapse Iran’s economy, look no further.

This would also cause dramatic damage to Western economies, while exceptionally boosting Russia’s income.

This would be cataclysmic for Europe, whose supplies are direly reliant on Middle Eastern oil, and even Qatari LNG to keep the lights on and vehicles moving. The US would be forced to choose between supporting its allies or keeping prices at home lower, but could not do both.

So really it's a double-edged sword that cuts everyone.

Of course, Saudi Arabia’s oil is also passing by there. So we should expect such a radical move only as a desperate measure, or as a punishment to Saudi Arabia would it turn openly hostile to the West.

Oil Prediction

Besides a sudden temporary spike, I do not see oil prices exploding yet from this.

This would change if the straight of Hormuz was getting in danger, or if Iranian and even Iraqi oil facilities (oil wells, refineries, pipelines, and export terminals) would be attacked.

A more durable danger is the OPEC+ or even the whole BRICS-11 retaliating with lower oil sales to the West, extra fees or closing the Suez Canal, export tariffs on non-energy commodities, etc…

So we should watch out for a repeat of the 1973 oil shock, more than for more flashy direct damage to oil production and exports, even if those are not completely impossible.

Defense sector

I saw passing that a bunch of US senators are already buying a lot of shares in defense and oil stocks. Not surprising, is it?

Once again, this will stretch the US’s capabilities thin, with a need to maintain deterrence in the Pacific while also acting in the Middle East.

Contrary to Ukraine, Israel does not have such a deep manpower pool that the US can just send weapons. So I guess missiles and ground forces equipment manufacturers will “benefit” from the situation as well.

But let’s not lie to ourselves, making money directly from war, death, and destruction can be a little ghoulish at times.

Muslim Capital Flow

A second-order effect could be a flow of capital out of the Middle East. Israeli capital will likely find its way to NY, London, or Singapore.

A more interesting question is where the Qatari, Saudi, and UAE capital would go “for safety” if they feel their home market is not so safe anymore.

I would not be surprised to see the Chinese and Indonesian markets benefit from it. Especially if exploding oil price means a lot of capital to recycle abroad.

Inflation

Inflation is likely to reignite or stay elevated from pumped-up oil prices. And generally, military spending, combined with an intense deficit tends to increase inflation.

It will also force the global central bank to keep interests high, or even higher.

That’s very negative for bonds.

This will hurt most companies and benefit some, so invest accordingly.

Tech breaking?

Could this be the moment inflated big tech stock breaks? So far nothing has managed to pop the “everything bubble” with a high concentration in tech stocks.

Volatility is likely going to be high, so I would not see a short-tech, long-energy trading strategy as wise.

But overall, avoiding pricey stock as measured by P/E, price to free cash flow or EV is probably best. The 1970s were not kind to overpriced stocks.

Refugees

Another consequence of this is likely a large flow of refugees heading for Turkey and then Europe.

Palestinians, but also Lebanese, Syrians, and others joining the flow on the occasion. I am really not sure how much Western Europe can accept more before some serious unrest unfolds, it’s not like Italy was not flooded with tens of thousands of African immigrants already.

One more thing to add to the pile of “bearish for EU/Europe”…

Conspiracy Theories

Lastly, I also want to address some of the wilder theories out there.

One idea is that Israel knew about the attack, but let it happen so they have an excuse to flatten Gaza.

If this was true, this has so spectacularly backfired and damaged the army image that I think they still did not know about how it would unroll.

A variant is that it was allowed to happen so Israel unified, after months when it seemed on the brink of civil war. Once again, a little outlandish for my taste.

Another theory is that it is some nefarious plan of the US to:

• Go to war with Iran.

• Have a reason to abandon Ukraine after its recent failures.

• Justify more money printing and a financial reset.

Similarly, all of those could be true, I mean we know for a fact that the CIA and the Pentagon were pushing for Americans to be killed in fake Cuban terrorist attacks to justify an invasion under Kennedy, Operation Northwood.

But really, this seems very far-fetched.

A more likely scenario is Iran seeing a window of opportunity and seizing it.

Seriously, not everything is a CIA/Mossad/Illuminati conspiracy…

This denies that other people in the world have actual agencies and can decide something by themselves.

Lastly, others want to blame Russia or China as the mastermind behind it all. And for sure, Iran has been emboldened by Chinese money and Russian tech. Hammas also seems to use only Huawei phones, as these have no NSA backdoor.

Once again, Occam’s razor would push for the simpler explanation, that the Iranian theocracy, which has promised to destroy Israel for decades, has finally decided this was as good a shot as it would ever get.

Not that Russia and China will really mind seeing the US bogged down in a new war abroad, and at most, they might have been told in advance and chose to let it happen, greenlighted it, or could not stop it, depending on who you ask.

As for Israeli intelligence failure?

Well, a very divided and on the brink of civil war nation was probably distracted enough by internal matters that it missed the external threat. Such things happened a lot in history, not sure what would make Israel special and immune to it.

Conclusion

We can hope this will blow over with minimal damage, but this seems rather unlikely at this stage.

Israeli reaction will trigger more attacks, which will trigger more reactions.

So is the logic of escalation and war.

The need for the USA to appear strong after a series of military failures will also contribute to escalation.

The burning desire of Muslim masses and leaders for revenge against “colonists/crusaders” will also play a big role, especially with the perception of the weakness of the West that has been now firmly installed in the collective mind of the Global South, from military failures, political divisions, and wokeness.

At the end of the day, the winner (or maybe just not the loser) will probably be Asia as a whole, and China in particular.

We might even skip entirely a Taiwan crisis if seeing the situation from Israel to Ukraine, the island decides for a slow rapprochement with China. That would be a defeat for US diplomacy, but probably a win for world peace. Not sure how Taiwanese people would feel about it, but it is really not for me to say.

Of course, all these ideas are valid if we are not already in World War 3 and we are just in 1939 unknowingly. Until then, we can only hope it is not the case…

In this part, we will look at India’s goals and possible moves in a quickly changing 21st Eurasian century.

India’s International Position

Read more

India is a country with a lot of pride and ambition on the international stage. It is clearly aiming to become the “next China”, and markets itself accordingly.

On paper, it has a lot going for it that could justify such a claim.

It is also something that it has repeatedly failed to achieve for decades now. We will examine why and if it can change.

Read more

Previous reports included:

• Poland: “The New Polish Commonwealth“

• Persia/Iran: “The Persi-stant Empire (part 1)”

• Saudia Arabia: “Kingdom of the Sand: Saudi Arabia Turns to the East“

I thought that with India increasingly torn between West and East, it would be interesting to analyze this country more deeply. Inclunding in the coutext of the BRICS association.

I am also intending to soon cover Sri Lanka's investment potential, so a better understanding of its big neighbors will be useful.

I will gloss over a lot of Indian history, simply because 4,000 years of a complex civilization (and not just a nation) cannot be summarized properly. I will however mention and discuss elements that are relevant to understanding modern India.

A Complex Sub-Continent

Geography

The region is defined by its isolation from the rest of Asia. On the North, the almost unpassable Himalayan mountains. On the East and West, more mountain chains isolate it from West Asia and South-East Asia. The southern part of India is also rather hilly/mountainous, with multiple plateaus.

Another key feature is a few very important rivers, especially the Indus River in modern-day Pakistan and the Gange River in the northern plain, between the Himalayas and the southern plateau. The Indus River civilization or Harappan, is one of the earliest centers of civilization and agriculture.

These river basins are where most of the population is living, thanks to very intensive farming using irrigation from these massive bodies of water.

Culture

Culturally, India is unique in having what historians have described as “a very weak state and a very strong culture”, sometimes describing it as the exact opposite of China.

In practice, this translated into the domination of the priest class instead of the aristocratic class like in China or Europe.

This both made India a very rich center of cultural and religious ideas, while a durably weak nation, both politically and militarily. Except under foreign rulers and invaders, India has almost always been divided and did not form into a unified state.

Another unique feature of Indian society was the caste system. While most civilizations had somewhat rigid social classes, India was peculiar in enforcing the separation between castes to a much greater extent.

It seems that 1,500 years ago, this system solidified and led to very little intermarriage between castes, with often people of different castes in the same village displaying very different genetic haplotypes, as different from each other as Germans from Italians or Russians in Europe, to give a rough analogy.

And this despite living side by side for centuries.

Religion

Religion plays a major role in the history of India, as well as its modern politics.

India is the cradle of several major religions, including Hinduism & Buddhism, but also the homeland of Sikhism, Jainism, and others, making “Indian Religions” the religion of almost a quarter of the world and having influence in many others.

It is no exaggeration to call India the religious center of South and East Asia, the way Middle Easterner monotheisms shaped the rest of Eurasia.

And if this was not complex enough, the arrival of Islam following invasions from the West added another major component to the religious tapestry of India.

Muslims are currently around 14-15% of India’s population, but the religious divide was the main reason for the split with Pakistan and Bangladesh, historically in the Indian culture sphere of influence in pre-Islamic eras.

Nation Building

As mentioned, the unification of India has historically mostly been done by invaders, first the Muslim empires (Delhi sultanate and Mughal empire), then the British Empire which progressively subdued India through control of the local elites first by the East India Company, and then by the British Raj. (Once again, this is an accelerated and simplified version, glossing over details, as well as the role of Portuguese India)

Immediately after winning its independence, British-controlled India split into India and Pakistan along religious lines, for Pakistan to later see Bangladesh (then East Pakistan) splitting away.

This period was a highly traumatic one for Indian culture, with mass expulsions, death, and conflicts. Around one million people are estimated to have died from the partition of India, with many more left destitute among the 14-18 million forcibly moved, almost 5% of the country’s population at the time.

Following the separation from its Muslim regions, India would be mostly under the control of the Congress Party, which would control the country for most of the 1952-2009 period.

(I will here point out that Indian politics seem remarkably fractious and aggressive from an outsider's point of view (even if Western politicians are working hard at catching up on this…), and I will not discuss too deeply the merit of each party and policy).

During the Cold War, India embraced a position of moderate socialism and state control, wisely rejecting alignment with either the Soviet or Western blocs.

It was a diplomatic success with the non-aligned countries (or Third World, initially not a derogative term, but to distinguish from the First World (West) And Second World (Communist States). The socialist policies were a more dubious economic achievement, with India lagging behind while East Asia was modernizing quickly.

It however entered into a series of conflicts with Pakistan, with no less than 4 wars in 1947, 1965, 1971, and 1999, with stand-offs and skirmishes in 2001, 2008, 2016, 2019, and 2020. Both countries are nuclear powers, with an estimated arsenal of 325 total nuclear bombs.

(The Pakistani-Indian relation is another minefield of impassionated aggressive opinions, which I will treat only superficially, and will stick to only relevant aspects to investors and foreigners).

Economy

India is to this day a rather poor country, at least on a per capita basis. In nominal GDP per capita, it is ranked at the level of Congo, Ivory Coast, and Uzbekistan. If looking at PPP, India is still ranked in the vicinity of Venezuela, Nicaragua, and Honduras.

This can be deceiving, due to India's massive population, which allows India to be the world’s 3nd biggest GDP if measured by PPP.

So somewhat paradoxically, India is too poor to really provide for its population, but can also mobilize massive resources into limited projects, as illustrated by the recent Moon landing, making India one of the only 4 countries on Earth to have explored the surface of the Moon.

I think this dichotomy is a major driver of the schizophrenic public opinion about India, usually falling either to “INDIA SUPERPOWER !!!!!!” or “undeveloped dysfunctional economy“.

Both opinions can be placated by cherry-picking either the GDPper capita or the total PPP GDP of the nation.

Economy structure

As a whole, India;s economy is mostly driven by the primary (agriculture - 16.4%) and tertiary (services- 54.3%) sector, with low levels of industrialization.

This is due to a deliberate strategy to “skip” over industrialization, and focus on high-value jobs, notably in IT.

Among the few Indian industries that have succeeded at becoming large exporters is the pharmaceutical industry, mostly contract manufacturing of other companies IP.

As a rule, India is famous for byzantine bureaucratic process, leaving plenty of room for unfair treatment and corruption (85th out of 180). Abudance of permits, obscure rules, and other obstacles to economic activity keep the country poor and the rich protected from competition.

India has also often been singled out for unfair treatment of foreign corporations, notably by China, even if it seems to me Chinese corporations might be facing unfair rules, but in the same way that ALL foreign businesses do.

The relative poverty of India is not a fatality, as India and China had an almost identical GDP 35 years ago.

Education & Demography

India has a very young population (average 28.2) and still growing, now the most populous country on Earth and adding 10+M people per year.

This demography should be conductive to economic growth, if not for poor utilization of this human resource.

Only 40% of people aged 15 years and above offer themselves for work. The rest 60% are dependents. This data might miss a lot of undeclared work, but it is hard to tell the real level of unemployment and under-employement. Youth unemployment is also at 40%.

Written contracts, benefits and other “high quality” employment perks are also missing for 90%+ of the population.

Chronic poverty and poor employment creates a situation where 74% of the population cannot afford a healthy diet.

Education is rather good considering the country’s GDP per capita, but suffers from a massive brain drain. A clear symbol of it is the abundance of Indian CEOs of foreign tech companies, but virtually no national champion beyond conglomerates like Tata and Reliance.

The previously quick and now slowing down population growth has been a major driver of India’s growing GDP, more than a rise of productivity. This fact in itself puts into question the ability of the country to truly become more prosperous, making India’s GDP growth more akin to Nigeria’s than China’s.

Coming Next

With that background out of the way, let’s discuss India's geopolitical position and opportunities.

In part 2, I intend to analyze India’s internal issues, especially economical, and how it could fix them. And why it might work or not.

In part 3, I will look further at India geopolitical position, its opportunity and risks, and possible scenarii for the future.

The BRICS meeting came and went, with 6 new countries invited to the organization. Let’s see what’s up in this emerging alternative to the G7/G20 and nascent “OPEC on steroids”.

Here is the list of countries invited to join the BRICS by next year:

Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. In a more visual form from Visual Capitalist:

Let’s look at the logic behind each addition:

Iran

The 3 components of what I have called 2 years ago the “Eurasian Tripod” are now fully re-integrated in Eurasia via the SCO, and in the world via the BRICS+6.

Iran is a crucial supplier of energy to India and China. It is also the dominant player over factions in Iraq, Syria, Lebanon, and Yemen, controlling the so-called Shiia Crescent.

As an eternal target of the USA and Israeli sanctions, Iran's integration into the BRICS is a slap in the face of the West. This is of course the logical conclusion of the pacification between Iran and Saudia Arabia negotiated by China not long ago.

If it was open to me as an investable market, I would look into consumer goods sellers in the country.

And Iran is likely to now help Venezuela reboot its oil industry.

Saudia Arabia

A US ally since 1945, the outrage in the US intelligence apparatus should not be over Iran, a logical ally of China and Russia, but over “Who the Hell Lost Saudi Arabia?”.

The massive oil producer is now selling most of its oil to China, and Asia. Soon it will also buy weapons from Russia and China instead of the US.

And Saudia is also getting rid of its US treasuries.

While planning to keep oil production up for until the end of the year AT LEAST, pushing oil prices in the $90/barrel range.

I would look out for my security and for a colored revolution if I was the Crown Prince…

UAE

Of course, bringing in the Saudis is not enough, the rest of the oil-producing Arab countries are a must, and they could not have been snubbed.

This also brings in Qatar’s massive LNG capacities.

And Dubai's financial center capacities were boosted by the exodus of Russian and Asian money out of London, NY, and Frankfurt.

I previously argued that Dubai makes for a great “neutral” place for a clearing house and exchange for a new BRICS currency, and it is likely part of the deal discussed behind curtains and put together by next year.

Premium Dubai real estate is likely to stay at a good price for the time being.

Egypt & Ethiopia

Interesting choice and somewhat surprising, especially with Ethiopia.

None are oil or resource-rich. At least for now, even if Egypt might actually have a lot of gas resources yet to be developed.

But together Egypt + Ethiopia can control the Red Sea and therefore the Asia-Europe trade. Extra pressure on the EU if needed.

The 2 have also almost gone to war over the Nile River water usage and Ethiopia’s mega dam risking to cut the supply to Sudan and Egypt. So let’s hope their integration in the BRICS foreshadows a peace & economic deal similar to the Iranian-Saudi one.

IF it manages to stay stable internally and has no war with Egypt, Ethiopia is likely to become a major African power, thanks to a large population and now a boon of cheap power, in addition to easy sea access to Chinese and Asian markets.

The symbolism of Ethiopia being essentially the only non-colonized African country is not lost either for an alliance of the “Global South”.

Ethiopia also makes a great entry point into a wide East-West corridor for Chinese infrastructure projects.

Especially as the grip of the West over sub-Saharan Africa seems to be weakening very quickly, especially French influence, with Niger as the focal point.

Maybe at one point, I should check for cement companies in Ethiopia.

Argentina

The country is a major food producer, as well as a major lithium power, among other minerals.

It is also the home of the largest non-US shale oil&gas deposit, the Vaca Muerte.

Vaca Muerte has permanently been limited by infrastructure constrain of poor access to pipelines. Nothing that a consortium of Russian/Iranian/Chinese companies could not build in exchange for a percentage of production.

Chinese companies are also getting pretty decent at shale drilling from learning how to exploit their own ultra-deep shale deposits.

The issue here is that Argentina is in the middle of a presidential campaign. A favorite is ultra-libertarian Milei.

I am split about the man. Some of his economic ideas are the anti-communist shock Argentina needs to get back to its early XXth century performance when per capita GDP was higher than France’s.

But he also seems to want to cut all ties with China and become a total vassal of the US, something rarely benefitting Latin America, which would be only second worst after going fully communist.

As usual, Argentina is its own worst enemy and dearly needs to become a sovereign nation with some economic common sense.

So it might be possible for Argentina to leave the BRICS before even entering it.

Others

Rumors are that Algeria was supposed to make the list, closing in as the last major energy supplier to Europe. The same rumors go that France’s Macron convinced India to refuse that addition in exchange for unknown promises.

I am not sure if I believe this.

What is more clear however is that increasingly India is the odd man out of the BRICS. The only one looking to:

• Increasing engagement with the West, and not the opposite.

• From skeptical to hostile to China

• Not a country with a strategic position or resource, but no indigenous advanced tech or large industrial base either.

This puts India's interests and strategy at odds with the rest of the BRICS, and in an organization looking for consensus and soft rules, this might quickly become an issue.

I reiterate my argument that the BRICS will in the long run drop India and maybe South Africa (looking more likely by the day to become a failed state).

I will discuss this further in an upcoming “India Geopolitics” premium report.

Tech Wars

A new episode in the tech war is Huawei's release of a fully domestically produced smartphone, 5 years after being hit by the truck of US sanctions.

As a rule, it seems that the US can impose costs or delays to Chinese tech, but no definitive defeat, a totally new thing considering even Russia or the USSR could never fully do without Western technology.

This has become a pattern, where China is forced to develop its own capabilities and might never have had to without sanctions: See this video for a few examples.

Some people pointed out that Chinese tech companies are putting a ton of money into R&D, while Western companies a putting money into stock buybacks.

While this is not a straightforward effect, I do think that tech companies in the West have somewhat lost the plot with a very scattered focus, between share buybacks (at any price, when dividend would be better), ESG mandate, diversity hires, political activism, etc…

I mean, let’s look at Apple's latest ad:

Does that look like a company focused on technology?

Or their most important growth market either, as increasing rumors of banning Chinese officials from owning Apple products or even a ban on “cybersecurity concerns” loomed over Apple’s stock price.

And Western companies are likely to be seen as increasingly unreliable, with the latest move from BMW and Mercedes to disconnect Russian garages from their software. This can make any maintenance much harder or even impossible.

The same issue with SAP and Oracle dropping their Russian business, a dramatic move considering how ERP SaaS disruption can impact a company. Cloud service might be better, but only if you can trust them.

Chinese companies and individuals are likely to take notice, and question the wisdom of relying on Western cars, SaaS, operating systems, tools, phones, etc…

Let’s keep that in mind when reading about lofty plans to expand international sales in quarterly reports, especially in China.

Expansion Of Conflicts

The last events of note this summer were expansions of Eurasia vs. West conflicts to new regions, with no less than 2 major regional wars almost boiling to an explosion.

Africa

Sub-Saharan Africa seems in an open state of revolt against French influence, with the last straw that broke the camel’s back being a coup in Niger. While not directly doing it, it is likely that Russia/Wagner's support helped.

To the map below now can be added Gabon south of Nigeria.

As a result, a looming “African World War” is hanging above the whole region, with Mali, Burkina Faso, and Niger potentially at war with what’s left of ECOWAS, a West-aligned group of countries in West Africa, with Nigeria the main army involved.

Since Nigeria’s army was “ready for war” on August 15th, not much has happened.

Remember in case you got confused about all the Western press calling for an attack on Niger:

• Revolution & coup in Ukraine = Good.

  • Invasion to restore influence by a former colonial overlord = Bad

• Revolution/coup in Niger = Bad

  • Invasion to restore influence by a former colonial overlord = Good

Glad we sorted that out.

But would such a conflict occur with Russia supporting the “rebels” countries, this would make another area of what increasingly might be remembered as WW3, even without a direct NATO-Russia conflict.

To keep this news stream from being totally depressing, just watch this video of the failed smuggling of CROISSANTS to the French embassy in Niger, now without water and food after the ambassador refused to leave, despite the demands by the putschists.

Glad to see the French still get their priorities straight.

Caucasus

The other potential hotspot is the Caucasus, with the Azerbaidjan-Armenia Second Nagorno-Karabakh War barely interrupted in 2020 and might be flaring up again, with reports of massive troops at the contested border.

While it mostly stayed between the two back then, it might expand with Iran unwilling to see Azerbaijan, and through it, Turkey, becoming too powerful in the Caucasus.

Meanwhile, a long and gruesome history of genocide against the Armenian people makes any action of Turkey in the region worrying.

In such a conflict, it is likely that Israeli-armed Azerbaidjan could get help from Turkey, which itself could trigger an Iranian reaction.

Meanwhile, Russia, the traditional guarantor of Christian Armenia against its Muslim enemies seems to sit on the fence, as Armenia has of late courted more the US & EU than its neighbor.

In the background, Turkey and the US are still occupying part of Syria’s territory, so Syria might get dragged into the conflict as well, expanding the conflict to Israel’s borders.

Could this degenerate into a Russia+Iran+Armenia vs. Turkey+Azerbaidjan+Israel?

For now probably not.

But here too, would this turn into an expansion of the Eurasia vs. West-aligned powers conflict, it would represent a significant escalation and degradation of the international situation.

One that could threaten the last non-Arab source of oil to the EU, with Central Asian and Azerbaijani oil supposed to help replace Russian oil.

Korea?

Just as I am writing this article, news about the North Korean dictator visiting Russia on its own train came out.

That included a visit to Russia’s new space center.

While North Korea could be asked to supply weapons to Russia, I suspect Russia is good enough on weapon manufacturing volume on its own.

It however seems to have a chokepoint on the production of barrels for its tanks and artillery guns. Especially as intense firing cadency like in Ukraine will not destroy a gun, but wear out the barrel.

We can easily imagine that anything from technology to grain and energy could be provided by Russia in exchange for North Korea's spare capacity or inventory of missing components like barrels.

Among the things discussed and officially admitted were rockets and satellites.

Maybe extra shells are an option as well, especially if Russia supplies the steel and gas to manufacture them.

And while the USA is threatening sanctions on North Korea if it provides military support to Russia, this sounds more like empty/impotent threats than anything else.

I would argue this is the problem with learning that sanctions were “efficient” against North Korea, Venezuela, Iran, or Iraq. These were small, isolated, and backward nations, often hindered by inefficient ideologies.

Then they expand to China, Russia, and overall a few BILLION people, when you add other regions, what happens when they start working together? Especially when they are no longer dependent on Western tech, but can find alternatives in China…

List of countries sanctioned by the US:

• Afghanistan

• The Balkans

• Belarus

• Burma

• Central African Republic

• China

• Cuba

• Democratic Republic of Congo

• Ethiopia

• Hong Kong

• Iran

• Iraq

• Lebanon

• Libya

• Mali

• Nicaragua

• North Korea

• Russia

• Somalia

• Sudan

• South Sudan

• Syria

• Ukraine

• Venezuela

• Yemen

• Zimbabwe

Conclusion

With the fading of Ukraine's chance to recapture territories, Russia seems now on the offensive, with the African coups likely to be somewhat helped or encouraged by Wagner.

Meanwhile, China is VERY quickly closing its last strategic vulnerability, chip making. This might turn into a more aggressive move like more open support of Russia, or investments in Iran, etc.

Instability seems to accumulate in the international system, with a background of stagflation likely to persist due to rising oil prices.

As a rule, I think investors should look twice at global companies with a lot of business in rival jurisdictions. They are at risk of getting caught in the crossfire as Apple is discovering.

I am also starting to develop a theory of an investing methodology looking to take this risk into account, while also not neglecting the potential gain in, for example, high-growth Chinese tech at low prices.

I will probably publish it after the report on India and before the report about investing in Sri Lanka's recovery and the report on Turkey's geopolitics.

Read more

To understand how commodities can be weaponized, we need to look no further than the 1970s and OPEC. Highly displeased by the West's support of Israel, Arab nations decided to limit oil exports to the West and "unfriendly" nations.

Repeating this process could be enough in itself. If all the BRICS and associated countries would hold on to raw materials, as well as food, steel, chemicals, fertilizers etc… Western economies would suffer greatly.

The problem is that we also know what happened in response to the OPEC gambit.

The West suffered, but ultimately so did the Arab countries.

It highly rewarded energy producers NOT part of OPEC, free to make tons of money and to seize market shares.

This is a classical prisoner dilemma problem, where breaking rank first is highly beneficial. So holding such a coalition together is hard in the long term. Even worse if not everyone is on board from the beginning.  

It also encourages Western countries to solve their deficiencies. France (and the US) built nuclear power plants massively. Oil production from the US and the North Sea went into overdrive.

OPEC's victory was a Pyrrhic one. If kept long enough, the embargo would have made Middle East oil completely irrelevant.

Asking For A Fair Price

Another option is to ask for a “fair” price. The core of the shared hostility to the dollar system is how unfair it is to non-Western countries. If they could become richer from commodities sales, they might ignore wokeism, Chinese influence, and so on.

So a simple thing is just to refuse to give away real things for paper. This would move international trade settlement from a currency system (exchanging goods for money) to a barter system (exchanging goods for goods).

This way, you cannot anymore have the West/USA giving you printed dollars for your labor and sacred resources. Oil versus chips. Iron for airplanes. Beef for oil rigs, etc…

An Unstably Balanced Basket

For a while, this was apparently the intended direction of the BRICS currency. It was supposed to be based on a “basket of commodities”.

We can imagine it was supposed to reflect the BRICS economies. A "bric" coin would have been something like 15% oil, 10% grain, 5% beef, 20% gas, etc…

The first issue is obviously that each party would try to push for HIS commodity to be over-weighted in the final basket.

The second issue is that commodities are notoriously going through cycles of boom and bust. A barrel of oil might be worth 3 bushels of grain one day, but 7 bushels a year later.

If negotiating the initial balancing was a diplomat's nightmare and a dead end, imagine repeating this process several times per year…

In any case, China is okay to trade these commodities for its manufactured goods and infrastructure investments, being the largest trade partner of the entire non-Western world. As long as it sells more than it buys, it will not suffer from it. So this is more of an issue of getting everyone else happy with the new system.

Barter Disorder

Ironically, it seems humans never learn. The complexity of multi-goods trading is what makes a barter economy not scalable. You might have a cow to sell, but the potential buyer only has beans. But you wanted a sword for that cow. And the sword seller does not want beans but iron ore and coal.

This is why any economy evolving beyond the stone age and subsistence economy invented a currency.

This allows market forces to determine the price of things and makes exchanges smoother.

Short-sighted individuals and institutions claim this is why the dollar is impossible to dethrone. A currency will always rule, and the dollar is king of them all.

But what is needed is a widely accepted currency or commodity, not dollars specifically.

Basket vs Coins

The key characteristics of a good currency are to be impossible to fake, hard to produce, and easy to exchange.

Over time, gold and/or silver usually took this role.

Paradoxically, the relative uselessness of these metals made them a perfect currency. Removing iron or grain from the economy to store it could be devastating. But gold suffered not such limitation. It was nevertheless rare, very hard to produce, and easy to trade with. The fact that it does not tarnish or damage over time was an extra bonus.

As a side note, this also might mean that silver, now a VERY useful industrial metal, might never make a good monetary metal ever again. Make of that what you will.

For the same reason ancient Egyptians and Sumerians needed a currency, the BRICS need a common physical metric by which to measure each of their production, from oil barrels to soybean bags to SMIC computer chips and Sukhoi fighter jets.

And the conclusion is the same as every other hundred of times in history the question arose to pick a solid currency that every party could trust to be rare, precious, hard to produce and easy to test.

A golden barbarous relic.

A ”useless” yellow brick (BRICS?).

Proof Of This Direction

Culture

The first element is simply that for most cultures of the BRICS, gold never stopped being a currency. Chinese citizens store their wealth in gold. So do even more Indians. And South Africans. And Brazilians or even worse, Argentinians, surely have no trust in their own paper currency, and for good reason.

So really, the discussion should be more about why the BRICS would not consider gold as a currency. As they never stopped to do so.

Logic

I already explained the reasoning. A basket of commodities would be even more disagreement causing than the SDR “basket of currency”. But a purely fiat currency could never work either.

To replace the dollar, something better needs to be offered.

Another fiat currency does not cut it, or the rouble and even more the yuan would have already done so. Trusting Beijing is certainly not more appealing than trusting Washington and London.

So by relying on gold as the new basis of exchange, you can handle the low trust between the BRICS countries. While still moving away from dollars that can be seized in an instant.

Diplomatic Positioning

This is a little more contentious, as there are a lot of conflicting signals.

Russian media are pushing hard this narrative of a new BRICS currency anytime now, for obvious reasons. Same for Iranian sources. Overall, this is more war propaganda than reality, and a pretty crude one, as explained very well in this article from the Gold Observer:

The Gold Observer

Will BRICS Implement a Gold Backed Currency in August?

Written by Jan Nieuwenhuijs, originally published at Gainesville Coins. Aside from speculation there hasn’t been official confirmation by any BRICS nations that they will either issue a new currency backed by gold or peg their currencies to gold anytime soon. Although it’s likely discussions are going on among BRICS nations to create a new currency, no …

Read more

3 years ago · 15 likes · 7 comments · Jan Nieuwenhuijs

Chinese media is also harshly criticizing the dollar, but makes it clear this is still a work in progress.

India is apparently not interested, and probably the biggest obstacle to any formal agreement from the BRICS. How this could still happen if India sits it out, we will discuss later in part 4. Interestingly, India is happy to turn to local currency for regional trades, like India-Indonesia.

Newly entered players are Arab countries. It seems the Saudis are keen to run away from the dollar ASAP, probably because they have been regularly threatened by Americans since the Trump presidency. And took a major step away by normalizing relations with Iran, under China's hospices.

Dubai could be a perfect "neutral ground" for a trade clearing house between banks using the brics coin. Military impotent, but a pre-existing global trade hub and finance center, culturally non-western and becoming the center of Islamic finance, which bans usury, and already a large gold trading hub looking to rival Switzerland.

Actions

Central banks all over the world, but especially in the BRICS and the Global South have been net buyers of gold. Chinese and Russian gold miners’ production essentially never leaves the country.

Why would they so actively and stealthily accumulate gold?

No one knows how much gold is stored in the BRICS countries, especially China, with estimates ranging from 3,000 to 25,000 tons. With the personal holdings of citizens, it could be possible that (way more than?) half of the world's gold has already moved out of the West.

I am a firm believer that in the long run, the BRICS countries will go back to a form of gold standard for international trade. Simply because it gives them more power and weakens the West. So why should they not do it?

For a while, the reason was "the time has not yet come". With Russia and increasingly China, butting heads with the USA, the time seems to have come. In the same way time has come for the Saudis to look for a new sponsor and protector.

The last part to be published soon will detail the plumbing and method by which such results can be achieved. And its chances of success.

I have for a while now argued that the BRICS, thanks to their expanding membership, were turning into a sort of super OPEC. While the OPEC, now OPEC+ with Russia, is centered around fossil fuels, the expanded BRICS are every commodity exports all at once.

Food: Russia + Brazil + Argentina

Oil: Russia + Iran + Saudia Arabia + Brazil

Gas: Russia + Qatar + Iran

Base metals: Russia + Brazil (iron) + Argentina (lithium)

You can add to the list above a few other countries that might be less formally integrated, but friendly to the overall BRICS goals as well: Algeria, Egypt, Indonesia, Venezuela, Mongolia, Kazakhstan, Azerbaijan. The last missing piece would be Chile and Peru, to tighten control over copper and lithium.

We are already in macroeconomic terms repeating the 1970s. What is (was?) missing is the oil shock triggered back then by OPEC.

We are getting there with the BRICS, except it will not be energy but every raw material.

Real Stuff For Nothing

One consequence of the dollar’s total control over world trade is that the US has been able to exchange printed currency for real stuff. Since the last time the USA had a trade surplus, the main US export has been paper dollars.

IF said dollar had proven a superior and stable means of exchange, it is likely the world would be okay with it. Grumbling a bit, but certainly not taking the risk of challenging it.

But if you are a Brazilian, Vietnamese, Argentinian, Russian, etc… this has proven a terrible system that can destroy the lives of entire generations.

So why keep giving away real and scarce resources for mere paper?

Especially when your main trading partner and a major military and technological power, is now actively saying it will help you change the status quo.

A few people start to understand it, as shown by this speech mentioning a global rebellion of “the rest” against the West:

Blood In The Water

Another key factor is that the global anti-American rebellion unfolding is a perception of weakness. When the US invaded Iraq and Afghanistan, to occupy then them for decades, a lot of people in the world hated it. But there was a global consensus "We cannot do anything about it”. The same thing Russia admitted during the dismantlement of Yugoslavia. Or for that matter, for Taiwan to become independent and out of the CCP’s reach at the end of the Chinese civil war.

Since 1945 only the Soviet Union had challenged the US power, and it ultimately broke its back.

The first move away from this consensus was Syria. Fated to be destroyed the same way Iraq and recently Lybia had, Syria survived. Barely and with still some of its territory occupied, but still, Bashar Al Assad stayed in power.

Then it was to be followed by the gradual fall out of US control of Iraq, increasingly under Iranian influence even when occupied by US troops.

Then came the failure of a key US ally, Saudia Arabia to win a bloody war in Yemen.

Then came the collapse of the Afghan government in mere days, with the disastrous optics of American troops seemingly fleeing and leaving most of their weapons behind.

Of course, the larger blow is the war in Ukraine, with the entirety of NATO running out of ammunition against Russia alone, with token help from Iranian drones or Chinese trucks, not a major contributor.

If NATO cannot produce enough weapons against Russia, so often described as a weak regional player, previously derided as “a gas station disguising as a country”, how could it even hope to challenge China, the factory of the world?

Soft Power Disappearing

Weakening Wokening Power

Lastly, another key factor is powering the rebellion outside of any economic, military, or strategic consideration. And this is a part that will maybe be exceedingly controversial for some readers.

This is of course the quick acceleration of so-called “woke ideology” in the West.

You might fully disagree that “woke” is even a thing. Or instead, maybe it is anything but the most basic and moral position one can have.

What one cannot honestly disagree with however, is that most of the world rejects woke ideas and very much believes it is a real thing.

Ask any Muslim in the world if men can transition to become women, and tell me how it works out. You already lost soft power on a billion people there.

Ask a Chinese if waking up early or maths is white supremacy and look at him not even computing the question. Another billion and a half people lost there.

Ask a Japanese if massive immigration of tens of million refugees would be a good thing for the Japanese people.

Ask a Russian if Christianity is white supremacy

And so on and so on.

The World Used To Look Up To Us

For the longest time, the West and then the USA were the place everyone wanted to imitate/move to/catch up with.

The Russian aristocracy spoke French to each other, the Japanese hired Europeans and Americans to teach them modernity and reform their country, the Indians modeled their democracy on the European enlightenment, China learned business from America, etc...

Everyone watched Disney and Hollywood movies, brought their dates to McDonald's and Starbucks, drank Coca-cola, equipped factories with Deutsche qualität tools, drove Audi, drank French and Italian wines, and used GPS.

A diploma from a Western elite university was almost a must to be a member of a developing country elite.

In the last 10 years not so much.

And this decline in soft power is accelerating.  

Frankly, this is not just a left vs right question.

Trump's style of diplomacy did as much to damage America's image as Biden's wokeisms.

Riots in France are destroying the country’s image quicker than any enemy propaganda ever could.

The truth is that most of the world does not want their children to look or live or think like San Francisco liberals. And for the most militants of them, leaving the West culturally is a matter of absolute survival, of body, mind and more importantly, soul.

This is a great gift to the West’s opponents, as their propaganda can just be a simple as “Look, they have gone insane, we need to protect ourselves”.

So if they have to risk WW3 or an economic collapse challenging the dollar, so be it…

In some circles of the financial social media, a LOT of speculation is going on regarding the possibility of an “offensive” move of the BRICS group against the dollar.

It all started with regular mention by BRICS’s officials of a potential “commodities backed trade currency”, with Russia, followed by China, the most insistent on such eventuality.

What this would look like has been the topic of intense speculation. With the incoming extension of the BRICS and other China dominated association like the SCO (Shanghai Cooperation Organization), the BRICS are turning into a model of commodities powerhouses (Russia, Brazil, South Africa, Iran, Saudi Arabia, Argentina) + China + India.

I previously commented how India often turns out to be the odd man out in the BRICS alliance: not industrialized enough to take over the role of China nor a resource exporter. This is a topic I discussed in deeper detail in a previous article:

From BRICS to BRICA

With the coming BRICS meeting in early August, I think it is a good time to discuss this possibility, broken down in a few parts.

In the last part, paid subscribers will learn about the potential for success or failure of a new global trade currency and system and the golden brick road leading to it.

De-dollarization? What De-dollarization?

De-dollarization is happening, but it’s a process, not an event. This is why you can read polarized opinions that manage to be BOTH wrong.

Yes it is happening, following the seizing of Russia’s foreign reserves, making everyone in Asia, South America and the Middle East ask the uneasy question, “Am I next?”.

But it is also a slow moving thing, so most readers and commentators not seeing it happening 3 months later can claim it was overblown and will never happen.

While Russia losing most of its international reserves was the trigger, the root of the “Global South’s” disaffection with the dollar runs much deeper. It is due to how the dollar system works in cycles of dollar undervaluation followed by overvaluation.

The Dollar Crisis Cycle

I’ll explain the process briefly and in simplified terms.

1. The US manages its dollar with artificially low interest rates, which triggers a credit boom not only at home but worldwide, especially in countries with poorly managed currency.

   1. This is because financing is hard to get for companies in Brazil, Indonesia, etc…, and they more often than not need dollars to acquire machinery, pay suppliers, acquisitions, etc… Cheap dollars are easier to access and reduce their cost on this capital.

2. After a while, the world is awashed in dollar denominated debt.

   1. But this is especially true for “third world countries”, which need foreign capital.

3. And then the US decides unilaterally to rise its interest rates, usually in order to cool off a too hot domestic job market or inflation.

   1. This is done to reach local goals, but has far reaching consequences.

   2. The decision making process only looks at US metrics, and pretends that any effects happening to foreign partners are not the Fed’s or the US government’s problems. This mindset has been immortalized by the tactless but at least honest words of Richard Nixon's Treasury secretary John Connally Jr.: “The dollar is our currency but your problem”.

   3. Suddenly, the flow of foreign investments and dollars debt stops for the companies and governments of the Global South.

4. Many emerging markets corporations have now a lot of dollar debt. But with the dollar strengthening, they see their debt increasing rapidly, at least in local currency terms. And with rates rising, the interests on that debt rises even quicker.

   1. In parallel, the sudden drying up of foreign capital inflow causes a recession, reducing corporations’ earnings.

   2. The combination of quickly rising debt, both principal and even more quickly interest payments, AND recession can push many companies into bankruptcy.

5. A falling national currency + recession + waves of bankruptcy means there are no local buyers for distressed assets, not even the state.

   1. However, US corporations, and to some measure European corporations, with still good access to capital + earnings in USD + a strong dollar can buy foreign assets easily.

   2. So what initially was looking like a good deal: “look, cheap capital to develop your economy” more often than not turns into a trap: “you’re now bankrupt, and we will buy your stuff at 30% of its value”.

It is worth mentioning that the last “side effect” is viewed by a majority of decision makers and economists in the Global South as anything BUT a side effect. To them this is the real goal of the dollar policy. It is often referred to as “harvesting”.

Pay attention that for the purpose of the South’s perception of the dollar system, it does not matter if this opinion is true or not.

This pattern caused repeated international debt crisis, sometimes turning into full blown security crisis or national collapses, including the 1970s Latin American debt crisis, the 1994 Mexican peso crisis, the 1997 Asian financial crisis, the 1998 Russian financial crisis and the 2011 Arab Spring.

More recently, the collapse of Sri Lanka and maybe soon Pakistan can be blamed on the same phenomenon.

Impossible To Break?

Now with that dollar cycle having wrecked in turn most of the world, is it really a surprise that a lot of resentment has built up against the Dollar system?

And from the South’s point of view, each time they complained about it, they received the response a bully would give: “So what? What are you gonna do about it? Pay up!”

And truly, this was THE question.

South American governments that turn anti-American tend to not fare well, just look at the long list of coups or the fate of Cuba and Venezuela.

Asian countries could not forgo the first destination for their export driven economies.

And both Saddam Hussein and Qaddafi tried to sell their oil in euros or turn to gold for trade, which, it turns out, is very, very bad for your personal health if you are a Middle East dictator.

And anyway, at the end of the day, these countries are really dependent on foreign capital to keep running smoothly. To stop this dependence, they would need to quit the dollar system. But to survive quitting it, they would need to not be dependent, a true egg and chicken problem.

A Dragon Challenges The Eagle

What changed is the emergence of serious challenger against the US. If push comes to shove, it is dubious that Brazil, Iran or even the EU could challenge the US power. They are either too weak, too divided or their elite too connected to Washington to mount any organized rebellion.

And they would always fail from strategic weakness, like completely nonexistent industries for air defense, space access, chips, advanced tooling, etc…

But through a remarkably inept series of geopolitical blunders, US/NATO diplomacy have managed to make Russia do just that. And the problem is that through even larger ineptitude, they convinced the Chinese leadership they are next, as soon as Russia is crushed. The persistent hostility to Iran for a few decades added a third player with nothing to lose.

Together, the Eurasian Tripod of Russia + China + Iran has not much to lose against a US empire determined to make them kneel.

In theory, this could be the trigger for a new Cold War, with the Eurasian Tripod remarkable similar to the old Soviet Union + China. The problem is that from 1945 to 1990, what Eurasia had to export was communism. Not really the most efficient of successful ideologies. So understandably, a lot of foreign leaders preferred a broken dollar system to the wonders of real communism: bloody revolutions, massacre of the national elites, labor camps, and famine.

This time, the offer is a lot more attractive: infrastructures, education and technology. From a leader, China, which has demonstrated that it was possible to go from rural and poor to industrial world superpower in less than 50 years.

And which is communist only in name at this point, the “Chinese characteristics” having almost fully dissolved communism.

Now every one in the Global South wants to learn from and imitate the Chinese dragon.

In the following parts, I will first discuss how the BRICS could challenge the dollar and actively try to break it.

Why it will most likely take longer than just the next August BRICS meeting to do so.

While also being a possibly unstoppable event, with only the scale of its success to be debated.

And this is not meant either as praise or as a negative take on Ronald Reagan either.

I am a Frenchman living in Estonia, I really could not care less about 4 decade-old American politics.

Remind You Of Anything?

If I told you the new leader of a large and powerful country is:

• Increasing the military budget massively.

• Explicitly focusing this increase on a specific foreign adversary, with a somewhat Orwellian-style catchphrase to match.

• Leading to rising tensions with said adversary, worsening relations significantly.

• Cracking down on powerful interests in the country.

• Sticking to a hardline policy which disrupted logistics and supply chains and air traffic.

• Pushing for large stimulus to the economy.

  • Ignoring a rising level of debt resulting from this policy.

• Ignored or annulled laws and regulations inconvenient to his agenda.

• Tried to broker peace in the Middle East.

• Look to invade a nearby island to install a friendly government.

• Impose sanctions on foreign countries.

Who would you think I am talking about?

Of Course!

And yes, of course, I am not all referencing to Emperor General Secretary of the Chinese Communist Party Xi Jinping.

But back to the Reagan presidency according to the Britannica:

• He increased the already significant, Cold-war era, military budget by 35%

• This was called, somewhat paradoxally, “peace through strength.“

• He faced a massive strike from PATCO (Professional Air Traffic Controllers Organization). Then fired all of them.

  • Which for a little while severely disrupted air traffic and trade in the US.

• Reagan also cut taxes by 30%, both corporate and income taxes, while also still boosting military spending.

  • The US treasury deficit would rise as a response, even with cuts to social spending.

• He “relaxed or ignored the enforcement of laws and regulations administered by the Environmental Protection Agency (EPA), the Department of the Interior, the Department of Transportation, and the Civil Rights Division of the Department of Justice, among other agencies.“.

• Reagan sent marines to Libanon, actions that would lead to 241 marines dead in a suicide bombing.

• Reagan intervened in Granada after a coup by leftist insurrectionists.

• Reagan imposed sanctions against Lybia after a series of terrorist attacks.

A Dishonest Comparison?

Of course, this is not a one-to-one comparison. But the parallels are actually quite striking.

And yes I am aware I might irritate quite a few Republicans by comparing a political idol to a foreign “evil” dictator.

I also think it pays off to look beyond the anecdotical and look at the outlook on the world of both leaders.

Both are staunched nationalists seeing their role in history is to bring their country forward above all other nations.

They both care little about damages it might do previous diplomatic efforts.

They are both willing to upend the status quo and the establishment, in favor of a more focused power structure centered around themselves.

This allows both to push for reforms that had been so far impossible to achieve:

• reducing social spending and the entrenched power of unions for Reagan.

• take back control of the real estate and tech industries and their magnates for Xi.

They are also both very open about their opinion that national strength and diplomatic influence are first and foremost a result of military power. And are not shy of using if needed.

Now they are also both open to a dialogue once such a position of strength is asserted. Xi's friendly meeting with Macron or partial opening to US diplomats is not parallel to how the second Reagan presidency saw a restoration of dialogue with the USSR. You can be in a growingly unfriendly relationship with another nation or bloc, and still keep the diplomatic channels open.

Both men are not figures of unhinged nationalism and imperialism, even if their opponents, both domestic and abroad, often think they are.

While somewhat Machavielian, they are before anything pragmatic and realist and very ambitious. Reagan was not a career politician but an actor, and Xi still remembers his youth spent in exile in the rice fields. For such profiles to rise to such power indicates strong political skills and a certain ruthlessness.

The Retrospective Bias

Something coloring this comparison is recency bias. People tend to idealize the past, or see it through an ideological lens.

For example, Reagan is often presented as some sort of arch-republican, smashing unions and redressing the country’s finances.

But really, are exploding deficits sound finance? Was a military program called Star Wars really pragmatic?

And is his policy with the USSR just praised with the hindsight the USSR would collapse in 1989? Instead of carelessly risking nuclear war?

In the same way, opinions on Xi Jinping tend to be very short-term focused. But in the long run, will he really be remembered for the petty details in Communist Party conventions?

Or as the leader that made China autonomous in high techs like chips and commercial airplanes, reined in the real estate bubble, broke the tech monopolies, secured new vital supply lines for energy and food, while being lionized for pushing back against an increasingly less influential America, at least among BRICS countries and the "Global South”.

A Dangerous Foreign Policy

Which brings me to the limitations of the Xi/Reagan method.

Increasing tensions with another superpower is a … daring proposal. And I am being charitable by saying that. Other terms could come to mind and be equally fair.

Like unhinged, dangerous, irresponsible, amateurish, crazy.

Criticisms that were leveraged against Reagan at the time, as well as currently against Xi’s Policy.

And the worst is that we know it is somewhat of a fair criticism.

Declassified Soviet documents show that a big part of the USSR leadership was convinced by Reagan’s agressivity that the USA was planning a first-strike attack, and wanted to do it themselves first.

Increasing tensions are the fast track to a nuclear Armaggedon.

The thing is, China is interested in avoiding a miscalculation by the USA, so why would they take the chance?

They know as well as us how the Soviet leadership feared a first strike at the time. In that context, imitating Reagan seems rather unwise. Why take such a risk?

Is it just the case of a single man taking decisions without considering the risks, and being too powerful to be stopped?

Maybe.

But I would at least consider an alternative view.

The Chinese Obsession For The USSR

The CCP is notorious for having been “traumatized” by the collapse of the Soviet Union. As the first and most prominent communist country, the USSR collapse was a VERY concerning event for the CCP.

“What if it happens to us?” is a question that has been lingering since 1989.

Standard Of Living

The first part to avoid this fate has been a focus on economic growth. The USSR collapse from its inability to provide its citizens with a decent amount of milk, meat, eggs, etc…. And even less “luxuries” like continuous power, fuel, heating, TV, roads, warm water, soda, chocolate, exotic fruits, etc…

The lifestyle difference between East and West Germany had become too dramatic for even the politburo to pretend things were okay.

This is why you see the Chinese government so proudly bring forth the (indeed amazing) growth of Shanghai, Shenzen, high-speed railroads, etc…

“What we have works, why risk it?” is the overall message.

Controlled Reforms

Another part has been to tightly control ideological discussion. And to be sure to never let a reform or localized protests turn into a free-for-all contestation like the Perestroika did.

This is why reforms always have to come FROM the CCP. By being less inflexible than the old Soviet ideologues, the CCP can coopt talent and solve problems, as well as get praised for it.

And that’s also why there was a need to crack down on billionaires/oligarchs like Jack Ma when they get too uppity.

And avoid tech monopolies and large conglomerates (Alibaba, Tencent, etc…) from taking control of the state, something I must say the US could learn a little from (Amazon, Google, Lockheed Martin, Boeing, Pfizer, Chevron, etc…)

“You can be a billionaire in communist China, but only if you are a CCP billionaire” is the message.

The Arms Race

But there is another less discussed topic. It is that the USSR's inability to provide its citizens with a first-world level of comfort was only partially due to communist inefficiency and failure to motivate workers.

Another was the terrible weight of military expenditures.

I read some estimates that put military spending at 30% of USSR's GDP. Even if this grossly overstates it, this would still be enormous even with 10% of GDP.

Military spending is unique in economics in that they are uniquely wasteful. A man learning to walk in step is not learning any transferable skills. A fighter jet cannot be used to deliver packages. A tank cannot be converted in something economically useful.

You need some military power to not get conquered, invaded, and pillaged. But too much and you would be better off digging a hole and refilling it, it would waste fewer resources.

And the USSR had A LOT of such “economic” activity burning more capital than the country could hope to generate, hollowing out its productive apparatus.

Why It Matters

If I am making this argument of Xi=Reagan, it is not just that the idea is amusing. It is because I think this carry a fundamental effect on how the US-China rivalry could play out.

And that the USA are walking straight into a trap that might damage severely its economic prospects.

More about that below

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