Iron Dukes, Emperors and the power of money

The Emperor points the way forward for globalization

Geopolitics has much less of an effect than on broad markets than many people think. Perhaps only large wars and battles between strategic adversaries cause significant shifts in asset prices. Indeed, in the era of globalization, much has been made of the fact that no two democracies have gone to war. Yet, globalization is fading, and, in many countries, ‘managed’ democracy is preferred to the purer version. Geopolitics might be on the way back as a market force.

For the moment, quantitative easing (QE) will continue to dampen most geopolitical risks, though the ongoing geopolitical tussling between Iran and the US might test this and has already boosted commodity prices.

In addition, and we wrote on this last week, the coming G20 meeting will shine light on the diplomatic schism between the US and China. I expect very little to come from the summit in terms of the trade dispute, and that the G20 meeting will simply mark another milestone in the evolution of a multipolar world in that other countries will look on as the two largest geopolitical players become further estranged.

One geopolitical contest that had a significant market and economic impact was the Battle of Waterloo, the 204th anniversary of which occurred last week (June 18th). It was an epic contest between two of the most important leaders in European history, and adorned with anecdotes and quotes (my favourite is from Wellington, when during a pounding from French guns his officers asked for orders he replied ‘there are no orders, except to stand firm to the last man’).

More seriously, from the point of view of finance there are maybe three points worth mentioning. The first is information. Henry Percy, aide de camp to Wellington had, after the Battle, to row halfway across the Channel with the news of the Duke’s victory, as an absence of wind had halted his sloop. On arriving in England he found that many (in the City) already knew of the victory owing, allegedly, to a network of agents assembled by Nathaniel Rothschild who is said to have made a fortune on the event and thereby spawned the phrase ‘buy on the sound of cannons’. Today, social media has become an integral part of geopolitics, through ‘total war’ based approaches to conflict.

The second theme is debt. Wars generally strain finances. Some might recall that Larry Lindsey, an economic adviser to George W Bushes’ administration left his job after producing what at the time was considered to be a high estimate of the costs of the second Iraqi War (it turned out to be a conservative estimate).

Beyond that, I recommend that readers delve into David Graeber’s book “Debt: The First 5,000 years,” where he, for example, speaks of primordial debt. One theme that runs through his book is that periods of significant debt accumulation are historically associated with insurrection. In particular, the Napoleonic Wars saw an explosion in country debt.

It is sobering then that, along with the period around the Napoleonic Wars, the major peaks in world indebtedness (debt to GDP) have been the post-Second World War period, the run-up to the global financial crisis and now. US corporates, China and select developed countries like France and Italy are some of the leading culprits here.

One trend that is striking is the way in which debt cycles evolve. The sectors with the most leverage a decade ago – housing and banks – are, with some exceptions like Canada, Hong Kong and Australia, those with much lower leverage now. Equally, countries and companies that experienced debt crises two decades ago – I am thinking of the late 1990s EM debt crisis and the 2001-2002 corporate crisis in the USA – are now guilty of running high debt levels. Perhaps there is a generational aspect to this where lessons from economic history are quickly forgotten.

The third aspect of the Napoleonic Wars that is interesting is the way they conditioned the world economy – high debt pushed Britain to steady its finances and permitted its navy to secure trade routes across the globe.

In that light the geopolitical contest between China and the US will increasingly shape macro and market themes such as the strength of the dollar and the configuration of supply chains and the ways in which debt mountains are pared back. One might also argue that in a world that is more geopolitically and financially stressed (indebtedness), country risk may become a much more important factor in markets. The dinner between the Chinese and American Presidents at next week G20 meeting may just be the beginning of a new phase.

Have a great week ahead,