The new investing paradigm - the shift to economic statecraft and national capitalism?
What are the implications for which assets and markets make the most sense in this environment?
Let’s explore what appears to be an emerging trend in the economy and in investing - some jurisdictions or governments fostering an inward focus on their own economies, entailing a funneling of investment assets into certain industries, sectors or even set of companies.
The Shift to Economic Statecraft
Economic statecraft uses economic means for foreign policy/national security goals, e.g., to force a state to cease hostilities with a third party, open its markets, or act in a certain manner.
Rabobank has developed a great report on what it sees as a shift to economic statecraft as a key trend in geopolitics and how especially heavily indebted governments like the U.S. intend to align their economic policies, industry strategy and directed investments. The below table summarizes the key policy tools in the toolkit and shows how each is a either a carrot, a stick or both depending on how it is used. As a heatmap, green shows a particular tool is utilized freely, and red shows it is not. Additional notes on how/why the policy is used, and its particular effects/risks are also included. As can be seen, there is a stark contrast between economics and statecraft, with many red/green clashes; and even in areas where all schools agree on the importance of a key tool, what they want to do with it, and why, varies dramatically. Table 1 also underlines the policy dynamics where one policy tool often leads to the use of another, either flowing downwards towards escalation (↓) or being mirrored back at the originating party (↔) in contagion.
“Today, one should start by asking what a state’s key interests are in a challenging geopolitical environment; so what its grand strategy is; then considering if this can be achieved best with economic policy, or idealist or realist economic statecraft; then how each policy tool may be used in combination to achieve it; and then what further steps may logically flow on within that economy, and in others interacting with it - this is a dynamic not static process. Finally, one asks what GDP and associated macro variables and market forecasts will be in that environment. Clearly, this approach differs from the output from static, purely economic models.” - source link
Here is a great podcast from last week between Rabobank’s Michael Every, Energy and Geopolitical Industry guru Art Berman and industry investment trading veteran Yra Harris - great insights into the shift to economic statecraft and how this is affecting the financial markets and investment landscape:
National Capitalism
Market strategist and historian Russell Napier outlines a future in which governments mandate where investors should deploy their capital. The global monetary system that has existed since 1994 is being radically restructured.
“I say we are headed towards a system of national capitalism. Interestingly, the term ‹national capitalism› has been used before, by a man who used to live in Zurich for a while: his name was Lenin. In a system of national capitalism, governments direct national savings towards national purposes. And our purposes today are investments, as outlined by Macron or Draghi and also by industrial policy initiatives in the US: Investments in energy infrastructure, in defense, in new productive capacity in order to de-risk from China. If we get into a bad Cold War with China, this will have a high national priority.” - source link
In this vision of national capitalism, Russell expands on his vision:
“The most important part is the idea that national savings shall be used for national purposes. There will be a big push to repatriate capital, back to Europe and back to Japan, for example … It has to be a system that permits everybody to inflate away their debt. It has to be a system that allows inflation and a suppression of domestic interest rates through the use of national savings. Which means there will have to be forms of capital controls. In today’s world, where most financial assets are held by institutions, capital controls can take the form of regulation. Think of your government regulator mandating all pension funds to buy a certain amount of government debt or other domestic financial assets. That’s what national capitalism will look like.” - source link
Russell explains what the implications are for investments and asset classes:
“Equities that won't be liquidated, because they are not overly represented in the portfolios of institutional investors. The unloved, underowned assets: mid and small caps, as well as value stocks. Also, I’d look out for equities that benefit from the global capex boom. Japan offers many of them. The typical fund manager today has 40% in bonds and 60% in equities, of which more than half is in the S&P 500. They're all crowded into the same assets. In order to do well in the big structural change that I see coming, you have to be radical in your portfolio. No bonds, no S&P 500. Buy equities that no one wants today, and own much more gold. Conventional wisdom will declare the quantities you own of these assets risky while accepting that the assets you own are not particularly risky. This is the position that has always rewarded investors when a major structural change has come along.” - source link
Let’s explore next how the U.S. plans to shift to economic statecraft and national capitalism through an emphasis and fostering of cryptocurrencies. Why? because it may be able to help the country put a bid for U.S. Treasury bonds to help finance the unsustainable debt from reckless spending and quantitative easing.
The U.S. Will Leverage Cryptocurrencies to Help Finance Its Unsustainable Debt
See our recent article where we explain how this will happen, referencing a report issued out of the U.S. Treasury Department.
Given falling demand for U.S. Treasuries by many foreign central banks, the U.S. appears to be planning to put a bid on U.S. Treasuries through promoting the rise and interest in cryptocurrencies, some of which require purchases of U.S. Treasuries as collateral backing.
The rise and interest in cryptocurrencies is funneling a considerable level of money into cryptocurrencies as an asset class, instead of into the real economy, commodities and hard assets - this is serving as an inflation “honey-pot” or “heat-sink”, thereby diverting money from excessive money printing in recent years away from commodities and hard assets.
Implications for Investments and Asset Classes
Let’s explore the implications for investments and asset classes .. what we think makes sense ..