Author: Mr. X
It’s the anniversary of the September 11, 2001 terrorist attacks. We are far from the national unity that bound the country together after that horrible day. However, reports of America’s death have been greatly overrated.
If you read the news, it seems like the United States of America is coming apart at the seams. A poll in late August found that 43% of Americans think civil war “is at least somewhat likely” within the next decade. President Joe Biden gave an extraordinary address that painted his predecessor Donald Trump and “MAGA” supporters as existential threats to democracy itself. As we commemorate the September 11, 2001 terrorist attacks, it’s hard not to forget that America’s longest war in Afghanistan ended in a humiliating failure, with servicemen dying during the pullout and the Taliban reclaiming power.
Not long afterward, China and Russia announced they had a “no limits” partnership and continued their plans to develop a new world reserve currency. Russia boosted ties with Central Asian states and helped Belarussian President Alexander Lukashenko fend off a democratic uprising (or foreign inspired coup, depending on whom you believe). A confident China buzzed Taiwanese air defenses relentlessly, setting new records seemingly every month. The collapse of the American led world order seemed at hand.
After the invasion of Ukraine, Russia managed to secure some of the most valuable territory in the country. This didn’t come without some black eyes, including the sinking of the Black Sea fleet’s flagship, the retreat from Kyiv, and the generally slow pace of the invasion. However, it was hard to argue Ukraine was “winning” given that Russia seemed to have secured considerable territory. If peace was to come, it would involve Ukraine giving up territory. A confident Vladimir Putin spoke about the coming multipolar world.
How absurd that all looks today.
Investors know markets are as much about faith as they are about rationality and numbers. This is especially true when it comes to currency. The value of a currency reflects the legitimacy of its government.
Currently, the dollar is at the strongest level it has been in years. It is outpacing the Euro, and with travel restrictions mostly lifted, it’s a great time to see the Continent. About half of international trade is in dollars, so countries are desperate for the greenback.
This doesn’t come without costs, especially for other countries. Collapsing currencies have hit Pakistan, Sri Lanka, and Turkey, and Egypt is being hit by rising food prices. American companies also pay a cost for a strong dollar. The strong dollar has also significantly limited American exports, something the Federal Reserve has mentioned within its own discussions. This isn’t stopping the Fed’s policy of consistent interest rate increases.
That said, while the strong dollar does not come without cost, Russia and China’s dream of an alternative world reserve currency looks far away. Europe’s willingness to take the hit on energy prices in order to help Ukraine has fortified the dollar over the medium term. It’s not that America doesn’t have serious problems with debt – it’s that everyone else’s situation is much worse. When it comes to the international economy, America is, once again, the indispensable nation.
Russia is suffering a major crisis of credibility. After a feint or failed counter-attack near Kherson, Ukraine stunned Russia and the world with a second offensive near Kharkiv. Russian forces have withdrawn in confusion in the face of this attack, and Ukrainians may have even crossed the border for a quick raid. Russia’s territory itself is threatened. None of this negates the reality that Russia still controls most of Luhansk and a significant chunk of Donetsk. However, Ukraine is winning the war now, not just staving off defeat. President Vladimir Putin will need to undertake radical action to salvage the situation.
China looks especially vulnerable as its supposed “no limit” ally has blundered into a confrontation with all of NATO. A year ago, China looked like a model when it came to how to handle the COVID-19 outbreak, with sophisticated disease tracking measures, a government determined to prevent any spread, and strict control over information. While authoritarian, some Americans mused that this was perhaps a form of government that might be more efficient in dire situations.
This has now been completely discredited. China’s “zero COVID” policy is, bluntly, one of the dumbest policy decisions ever made. The continuous shutdowns of entire cities after a case is identified have turned the country’s economic targets this year into a bad joke. These lockdowns are hardly efficient – they are simply dystopian. Drone robots fly between ugly apartment buildings screaming at residents to stay indoors. A case is identified in a store and hundreds rush for the exit. Chinese fight over food and other goods so they will have what they need during the lockdown. It is madness.
The lockdown of Chengdu, where Apple [AAPL] reportedly has some production facilities, is the final nail in the coffin of China meeting its GDP goal of 5.5%. Most economists are expecting something along 4.1%, and even that may be too generous.
President Xi Jinping is also facing opposition at home. A retired professor at the Party School of the Central Committee of the Chinese Communist Party recently said that a regulation limiting Chinese officials from serving in the same position for just two terms or 15 total years is still in effect. That would effectively ban Jinping from office. The fact it has even been aired suggests that some the CCP are unhappy with Jinping’s economic policies.
Move fast, keep winning
Presidents Putin and Jinping will meet soon. Much will depend on whether Russia will have stabilized the military situation in the northeast. He may be forced to do something drastic like declare war and fully mobilize the population. Russian artillery and airpower have been inflicting grievous losses on the Ukrainians, but Russia simply lacks the manpower to defend multiple fronts. President Putin’s gambit, clearly premised that Kyiv would simply collapse, has failed. The West is sending practically unlimited funds to Ukraine and Ukraine enjoys a vast manpower advantage as well as interior lines. It’s also defending its own territory, whereas the Kremlin has not prepared the Russian people for a war of conquest. He might be able to frame it as a war in the name of Russia’s national survival against NATO, as some unhelpful commentators are speaking about breaking up Russia. If those become the stakes, the Kremlin has no reason not to fight to the finish.
Europe, of course, is a disaster. Spiking energy prices will make this winter very difficult for the EU. It is also likely to face far right challenges in both Sweden and Italy, where populist leaders are close to winning power. In Italy, there is the very real possibility of an entirely right-wing government, with the most militant party (Brothers of Italy) leading the way. That could potentially jeopardize the Union’s singular purpose at a time when it needs it most.
In contrast, the United States is not facing serious structural problems. There is political division, rising crime, filth in cities, and inflation – but none of this really challenges the System as such. The Biden Administration has recovered from its public opinion lows. A victory against Russia would provide a massive boost to the Commander-in-Chief and wipe away the stain of Afghanistan. President Biden and his party have passed major infrastructure and climate legislation, as well as slashing the student loan debt of many young voters. They now have a good reason to vote Democratic out of material self-interest.
The jobs report from August just beat expectations – suggesting that the economy is not too “hot” and that inflation rate hikes are having the desired effect. The United States is moving manufacturing back home, including for semiconductors (which just received a massive boost from the feds in the CHIPS and Science Act, which contains $52 billion for chipmakers.
There is an election in the fall, but as of now, the “red wave” does not seem to be materializing. Republicans are blowing it in key Senate races. They still remain likely to take the House, which will stymie President Biden’s agenda. That said, in foreign policy, there’s not much of a difference between Republican and Democratic leadership. If anything, the GOP might be even more militant about sending aid overseas or even getting directly involved. Some still think we should have never left Afghanistan.
The United States has been portrayed as a weak, or even effeminate power. Russia was putting out “tough” military ads of grim faced men defending their country in harsh conditions. The United States was putting out recruitment aids that look like children’s cartoons. Yet is the latter military that is showing its superiority in weapons and doctrine in this proxy war.
All bets are off if President Putin decides to take the gloves off and wage a war, not a “Special Military Operation.” However, even there, he’d be reduced to relying on nuclear weapons to keep NATO from directly intervening. America’s foreign policy rivals look weak, almost flailing. We may be looking at yet another American century. That means a strong dollar – with all the benefits and costs it implies for companies dependent on exports.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.