The projected market trajectory (in both equity and debt markets), given the current geopolitical landscape, could be described as the process of etiolation where developments take place in the absence of light and all kinds of seeds are cultivated in darkness, a process known as skotomorphogenesis. In our previous commentary, we discussed opposing viewpoints regarding the market outlook from a historical standpoint. In today’s commentary, we will discuss the subject from a statecraft perspective. Market fundamentals are important for investments. Corporate fundamentals are essential in making investment decisions. Geopolitical foresight is vital too.
When Herodotus completed his history of the Persian Wars around 420 BC, his main thesis had a dual purpose: First, to account for an accurate story of major events – and the reasons behind them –that had shaken up the then-known world. Second, and equally important, was the need to warn the Athenians that tragedy could be around the corner despite military triumphs and despite pursuits of glory and excellence (arete). Herodotus’ message was clear: When a democratic republic seeks the fruits of an empire while drinking from the glass of hubris, power becomes elusive and blinds the vision of leaders. Skotomorphogensis is at work, and etiolation prevails. Herodotus’ warning was overlooked by the Athenians. The Peloponnesian War would end up devastating them.
When the Treasury plans to issue an extraordinary amount of debt in order to finance spending, naturally bond prices are pressured downward and, consequently, yields rise, as shown below.
However, the market trajectory cannot be separated from the geopolitical unfolding, and the latter is not getting any shinier. On the contrary, it remains dark, and we cannot exclude the possibility of it becoming darker given two fundamental things: First, the deteriorating geopolitical position of Russia, and second, the shaky economic numbers in China. When these two developments are viewed in relation to the exponential increase in the amount that the US government pays for interest on the debt (close to $1 trillion in 2023, as seen below), then the picture becomes troubling and worrisome. The rising interest rates on Treasuries could possibly derail the much-needed fiscal discipline, which is vital for economic and national security, and which, in turn, – from a portfolio standpoint – may imply caution and possibly greater diversification with some potential preference toward value stocks and international exposure.
The failure of the Athenians to listen to the warnings of Herodotus will force tears on Thucydides who will write: “Such was the effect on the Athenians of their present good fortune that they thought that nothing could go wrong with them; that the possible and the difficult are alike attainable, whether the forces employed were large or wholly inadequate. It was their surprising success in most directions which caused this state of mind and suggested to them that their strength was equal with their hopes.”
It was like Herodotus telling the Athenians: “Hi, listen, don’t you recall King Croesus of the Lydian empire who in his hubris attacked King Cyrus of Persia and lost everything? And if you don’t recall Croesus, how about Xerxes and his attack on you Athenians? Xerxes is still running for his life. Recall Athenians, recall and think twice before you endeavor into Sicily.”
Could it be then that we are headed for a yield of 4.5-4.6% on the 10-year Treasury, implying an environment of even higher yields that are not necessarily conducive for equity exposure, especially when banks are tightening lending standards as shown below?
Source: Capital Economics
In the 2017 edition of the National Security Strategy document, we read: “China seeks to displace the United States in the Indo-Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favor…”The question then arises naturally: Could and should the Indo-Pacific region be treated as a single strategic theater, or should it be viewed as part of the overall theater that includes the Yellow Sea, the East China Sea, and the South China Sea, given that China is treating all three seas as its own coastal waters? Could the US afford to allow China to contest control of marginal seas and Asian skies?
George F. Kennan’s long-telegram from the US Embassy in Moscow in late February 1946 has been correctly credited with the idea of a containment strategy which aimed to face the threat that the Soviet Union posed to stability, order, peace, and prosperity. A couple of years later, he would box-in General MacArthur in another deployment of his brilliant containment strategy while on a diplomatic mission to Asia. But could a strategy of containment work in the Chinese case, especially now that the west has allowed China’s entry into the WTO? Is containment a strategy pronounced dead on arrival given the current facts? The current circumstances do not permit a lot of light to permeate the needed analysis, especially when we consider that China is facing significant economic issues from debt to youth unemployment, slowing growth, declining exports, and a real estate sector (which contributes as much as 30% to Chinese GDP growth) that is in a state of panic.
As the credit cycle unfolds, it will require repricing for government, corporate, and some household debt. Is repricing affordable if rates remain elevated for the foreseeable future, especially if lowering inflation to the level of 2% becomes unachievable? And what about the alliance of Russia, China, and North Korea, especially with the latter’s nuclear arsenal and the need for proper maintenance and vigilance against accidents and miscalculations? It’s getting darker and nurturing seeds in such an etiolated environment becomes harder and harder.
During his days in exile around 1305 AD, Dante Alighieri seems to have had a change of mind as reflected in his thesis found in “De Monarchia”. While prior to his exile he was a supporter of the Papacy (Guelphs) in its internal war with the Ghibellines/the supporters of the Holy Roman Empire (which according to Voltaire was neither Holy nor Roman and nor an Empire), during his exile years he came to the conclusion that imperial forms of authority like the Papacy undermine stability, order, and prosperity while serving a few at the expense of the grand majority of people. So, in his epiphany, Dante rediscovered Aristotle and Saint Thomas Aquinas and concluded that the best chance for freedom and prosperity to flourish is by avoiding tyranny and the chances of having a tyrannical regime. When arbitrary decision-making takes place in the absence of institutional structures (supposedly approved by the people), then a “hall of pain” prevails where a system of cruel power crashes people’s hopes and dreams
But where does this discussion leave us? Let’s listen to the warnings of Herodotus about hubris and over-extension. It can certainly apply to portfolio theory under dark clouds. Let’s also pay attention to Dante and his change of heart from a hypothetical order found in authoritarian regimes to the advancement of the common good when value-oriented strategies grounded on intrinsic principles are nurtured and followed in such a way that bubbles are contained.
Finally, let’s listen to the man who authored the diplomatic doctrine of the 20th century: Let the Soviet Union defeat itself. Like in the days of Kennan, the world and portfolios are not safe from collapse. The world is not safe from World War III. The world is not safe from human and economic rights abuses. Portfolio appeasement could be counter productive. All that is required is “a long-term, patient but firm and vigilant containment of Russian expansive tendencies.”
|
Statecraft, Geopolitics, and Market Outlook, Part I: Etiolation and the Lessons from Herodotus, Dante, and George Kennan
Author : John E. Charalambakis
Date : August 8, 2023
John E. Charalambakis
When Herodotus completed his history of the Persian Wars around 420 BC, his main thesis had a dual purpose: First, to account for an accurate story of major events – and the reasons behind them –that had shaken up the then-known world. Second, and equally important, was the need to warn the Athenians that tragedy could be around the corner despite military triumphs and despite pursuits of glory and excellence (arete). Herodotus’ message was clear: When a democratic republic seeks the fruits of an empire while drinking from the glass of hubris, power becomes elusive and blinds the vision of leaders. Skotomorphogensis is at work, and etiolation prevails. Herodotus’ warning was overlooked by the Athenians. The Peloponnesian War would end up devastating them.
When the Treasury plans to issue an extraordinary amount of debt in order to finance spending, naturally bond prices are pressured downward and, consequently, yields rise, as shown below.
However, the market trajectory cannot be separated from the geopolitical unfolding, and the latter is not getting any shinier. On the contrary, it remains dark, and we cannot exclude the possibility of it becoming darker given two fundamental things: First, the deteriorating geopolitical position of Russia, and second, the shaky economic numbers in China. When these two developments are viewed in relation to the exponential increase in the amount that the US government pays for interest on the debt (close to $1 trillion in 2023, as seen below), then the picture becomes troubling and worrisome. The rising interest rates on Treasuries could possibly derail the much-needed fiscal discipline, which is vital for economic and national security, and which, in turn, – from a portfolio standpoint – may imply caution and possibly greater diversification with some potential preference toward value stocks and international exposure.
The failure of the Athenians to listen to the warnings of Herodotus will force tears on Thucydides who will write: “Such was the effect on the Athenians of their present good fortune that they thought that nothing could go wrong with them; that the possible and the difficult are alike attainable, whether the forces employed were large or wholly inadequate. It was their surprising success in most directions which caused this state of mind and suggested to them that their strength was equal with their hopes.”
It was like Herodotus telling the Athenians: “Hi, listen, don’t you recall King Croesus of the Lydian empire who in his hubris attacked King Cyrus of Persia and lost everything? And if you don’t recall Croesus, how about Xerxes and his attack on you Athenians? Xerxes is still running for his life. Recall Athenians, recall and think twice before you endeavor into Sicily.”
Could it be then that we are headed for a yield of 4.5-4.6% on the 10-year Treasury, implying an environment of even higher yields that are not necessarily conducive for equity exposure, especially when banks are tightening lending standards as shown below?
Source: Capital Economics
In the 2017 edition of the National Security Strategy document, we read: “China seeks to displace the United States in the Indo-Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favor…”The question then arises naturally: Could and should the Indo-Pacific region be treated as a single strategic theater, or should it be viewed as part of the overall theater that includes the Yellow Sea, the East China Sea, and the South China Sea, given that China is treating all three seas as its own coastal waters? Could the US afford to allow China to contest control of marginal seas and Asian skies?
George F. Kennan’s long-telegram from the US Embassy in Moscow in late February 1946 has been correctly credited with the idea of a containment strategy which aimed to face the threat that the Soviet Union posed to stability, order, peace, and prosperity. A couple of years later, he would box-in General MacArthur in another deployment of his brilliant containment strategy while on a diplomatic mission to Asia. But could a strategy of containment work in the Chinese case, especially now that the west has allowed China’s entry into the WTO? Is containment a strategy pronounced dead on arrival given the current facts? The current circumstances do not permit a lot of light to permeate the needed analysis, especially when we consider that China is facing significant economic issues from debt to youth unemployment, slowing growth, declining exports, and a real estate sector (which contributes as much as 30% to Chinese GDP growth) that is in a state of panic.
As the credit cycle unfolds, it will require repricing for government, corporate, and some household debt. Is repricing affordable if rates remain elevated for the foreseeable future, especially if lowering inflation to the level of 2% becomes unachievable? And what about the alliance of Russia, China, and North Korea, especially with the latter’s nuclear arsenal and the need for proper maintenance and vigilance against accidents and miscalculations? It’s getting darker and nurturing seeds in such an etiolated environment becomes harder and harder.
During his days in exile around 1305 AD, Dante Alighieri seems to have had a change of mind as reflected in his thesis found in “De Monarchia”. While prior to his exile he was a supporter of the Papacy (Guelphs) in its internal war with the Ghibellines/the supporters of the Holy Roman Empire (which according to Voltaire was neither Holy nor Roman and nor an Empire), during his exile years he came to the conclusion that imperial forms of authority like the Papacy undermine stability, order, and prosperity while serving a few at the expense of the grand majority of people. So, in his epiphany, Dante rediscovered Aristotle and Saint Thomas Aquinas and concluded that the best chance for freedom and prosperity to flourish is by avoiding tyranny and the chances of having a tyrannical regime. When arbitrary decision-making takes place in the absence of institutional structures (supposedly approved by the people), then a “hall of pain” prevails where a system of cruel power crashes people’s hopes and dreams
But where does this discussion leave us? Let’s listen to the warnings of Herodotus about hubris and over-extension. It can certainly apply to portfolio theory under dark clouds. Let’s also pay attention to Dante and his change of heart from a hypothetical order found in authoritarian regimes to the advancement of the common good when value-oriented strategies grounded on intrinsic principles are nurtured and followed in such a way that bubbles are contained.
Finally, let’s listen to the man who authored the diplomatic doctrine of the 20th century: Let the Soviet Union defeat itself. Like in the days of Kennan, the world and portfolios are not safe from collapse. The world is not safe from World War III. The world is not safe from human and economic rights abuses. Portfolio appeasement could be counter productive. All that is required is “a long-term, patient but firm and vigilant containment of Russian expansive tendencies.”