For this week’s newsletter, we examine the state of geopolitical conflicts around the world, as well as economic and financial factors that exemplify our changing times. First, we look at the humanitarian cost of Israel’s war against Hamas so far, and how the future of Israel/Palestine hangs in the balance. Then, we examine the war in Ukraine and the importance of its outcome to the fate of the Western-led order. We then shift to three developments that are shaping our new world: artificial intelligence, semiconductors, and the race for critical minerals. To end this week, we look at the possibility of a market downturn, as well as advice from experts on the wisest path for investors in such an environment.

The Israel-Hamas Conflict and Its Rising Humanitarian Toll

Famine looms in Gaza due to aid restrictions

Tania Krämer and Hazem Balousha, DW

The U.N. Says Gaza Is Close to Famine. What Does That Mean?

Gaya Gupta, The New York Times

Only a Trickle of Aid Reaches Northern Gaza, as Hunger Worsens

Aaron Boxerman and Adam Rasgon, The New York Times

Time for Two States

Rachel Lu, Law & Liberty

The Israel-Hamas conflict may be nearing its conclusion, with the Israeli Defense Forces (IDF) poised to secure victory at a significant human cost. This potentially imminent defeat of Hamas, while a milestone, brings into focus the question of the future political landscape. Both Israelis and Palestinians have entrenched their positions, with rising support for Hamas among Palestinians and a growing rejection of the two-state solution among Israelis. Optimism from previous peace efforts has waned, dampening prospects for renewed negotiations. Despite these challenges, some argue that the only viable resolution to the conflict is a two-state solution, requiring cooperation from multiple Arab states and a sincere commitment from Israel. Establishing a Palestinian state would be arduous but arguably imperative for upholding human dignity and achieving lasting peace. Alternatives such as mass expulsions or massacres are morally untenable, leading many analysts to believe that the two-state solution is the only ethically-sound option left.

With this in mind, what many see as the bare minimum to easing human tragedy (a ceasefire) cannot come fast enough for many in Gaza where food insecurity has reached critical levels. Families are struggling to find enough to eat, often relying on basic vegetable stews for sustenance. Aid drops from the Jordanian Air Force and the US are providing some relief, but the situation remains dire. Israel’s onslaught has exacerbated the crisis, with disputes over limited supplies leading to neglect and suffering among the population. Calls for increased aid delivery and independent investigations into incidents, such as the recent deadly stampede during a convoy of aid trucks, are growing. The conflict has resulted in significant civilian casualties and displacement, with many families forced to flee their homes and live in makeshift shelters. The destruction of food production facilities has further worsened the food security situation, leaving many dependent on humanitarian aid for survival. Despite these challenges, aid workers stress the urgent need for assistance to prevent a famine, as Gaza’s entire population is experiencing food insecurity at crisis levels.

Ukraine: Avoiding a Geopolitical Hard Landing

The War for the West

Ivan Krestev interviewed by Slawomir Sierakowski, Project Syndicate

As US Stalls on Ukraine Aid, Europe Leads Worldwide Hunt for Critically Needed Artillery Shells

Stefan Korshak, Kyiv Post

Europe and the World Need Ukraine to Prevail

Dmytro Kuleba and Josep Borrell, Project Syndicate

A Geopolitical Hard Landing Is All Too Possible

Jared Cohen, Foreign Policy

While economists are cautiously optimistic about 2024, anticipating lower inflation, job growth, and improved economic conditions, there are growing concerns about a potential hard landing in the geopolitical realm. The current international landscape is bleak, marked by conflicts in the Middle East and Europe, and tensions in the Indo-Pacific among a historic reorientation of geopolitical influence. A potential hard landing could overwhelm the US-led international system, shifting power balances, and disrupting global markets. The many upcoming global elections this year also carry significant geopolitical implications. Given these complexities, prudent actions must be taken to prevent such a shock in 2024. The war in Ukraine is a crucial piece of this geopolitical puzzle, with Russia’s invasion representing a major shift and a classic example of 19th-century imperial aggression. Putin’s strategic miscalculation regarding Ukraine’s resilience has mired Russia into a drawn-out conflict. Despite this, Putin has convinced many Russians of an endless war against the West, aiming to wait out Western support for Ukraine. Putin’s ultimate goal appears to be the annihilation of Ukrainian independence and sovereignty, as he seeks to retain occupied territories.

Meanwhile, Ukraine faces challenges including waning Western support and manpower issues. Major elections in 2024, including the European Parliament elections and the US presidential election will play an important role in determining what Ukraine can achieve. Europe is spearheading efforts to supply Ukraine with artillery shells, involving Germany, Denmark, the Czech Republic, and Canada. President Zelenskyy has highlighted the urgency, as prices have skyrocketed since the invasion, depleting European ammunition reserves. The European Union (EU) has committed to providing a million artillery shells by 2024, but production delays and disagreements among member states have hindered delivery. Adding to the problem, the US halted military support in December 2023. Overall, many analysts believe that in order to defend the liberal, Western-led order that has persisted since the second world war, a Ukrainian victory against Russian aggression is crucial.

How AI, Chips, and Critical Minerals are Changing the World

How businesses are actually using generative AI

The Economist

Japan’s chip reboot: TSMC, Samsung, Micron pave way for silicon revival

Ryohtaroh Satoh & Cheng Ting-fang, Nikkei Asia

Cobalt market stung by record oversupply

Harry Dempsey, Financial Times

Several recent developments in artificial intelligence (AI), semiconductors, and critical minerals are good representations of the era of transitions in which we live.While AI hype has made headlines and supercharged tech stock prices, actual sales of AI software are still low. While companies are hesitant to fully adopt this technology, it has the potential to significantly change white-collar work. Similar to past innovations, widespread productivity gains from AI will likely take time to materialize. Though some fear job losses, AI seems to be creating new opportunities, for now. While generative AI is still evolving, it has the potential to improve how businesses operate and what employees do. Meanwhile, evolving geoeconomic landscapes are changing other, more established technologies like semiconductors. For example, Japan – which was once a major producer of chips but had fallen behind – has begun attracting investment from foreign chip giants like Taiwan Semiconductor Manufacturing Co. (TSMC) by way of generous subsidies. This shift, driven by concerns over supply chain security, rising geopolitical tensions, and a global chip shortage, marks a potential comeback for Japanese semiconductors. The massive investment by TSMC is a sign of this new era, aiming to re-establish Japan as a major player in the global chip market.

The dynamics of certain critical mineral commodities also play a role in our era of rapid realignment. For example, the cobalt market is facing a period of oversupply, with a projected glut lasting until 2028. This situation stems from a surge in production by Chinese companies, exceeding the slower growth in demand from the electric vehicle industry. In 2023, cobalt production jumped 17% year-on-year, flooding the market while global electric vehicle demand growth decelerated significantly. Analysts predict the market will remain oversupplied due to factors like increased volumes from Chinese producers in the Democratic Republic of Congo. This surge in output is expected to solidify China’s control over both the production and pricing of cobalt, a metal crucial for the global green energy transition. This oversupply has halved the average annual price of cobalt in 2023 compared to 2022, marking the lowest price since 2016. As a result of aggressive Chinese investment, China is projected to control up to 60% of the global cobalt supply by 2025, compared to 54% currently. This situation in the cobalt market mirrors the challenges faced by other key battery metals like lithium and nickel, where aggressive Chinese production has left Western producers struggling to compete.

What To Do in a Market Downturn

A golden age for stockmarkets is drawing to a close

The Economist

JPMorgan Sees ‘Froth’ in US Stocks, While Goldman Says Rally Justified

Alexandra Semenova, Bloomberg

What to Remember If the Stock Market Takes a Dive

Suzanne Woolley, Bloomberg

Stock markets have been soaring recently despite numerous challenges including trade disputes, high interest rates, and ongoing wars. This has led some, including JP Morgan’s top analysts, to believe a bubble is about to burst, pointing to factors like high valuations and concentration of the market in the hands of a few tech giants; markets under similar conditions preceded the dot-com bubble’s burst. However, many analysts, including those at Goldman Sachs, still believe the exuberance is rational. Many companies, including retailers and carmakers, are reporting strong earnings. The global economy also continues to defy expectations, with the International Monetary Fund (IMF) revising its growth forecasts upwards. One of the main drivers of the market rally is optimism about artificial intelligence, particularly following Nvidia’s strong earnings report. The excitement about AI extends beyond Nvidia to other tech companies whose AI strategies are still unclear. Additionally, even if AI is transformative, it may take time for companies to figure out how to profit from it. Furthermore, valuations may not climb much further and the trend of rising profits may be spent. This means that even with modest real equity returns, American firms would need to significantly increase their underlying profits to justify their current valuations. In the end, the future of the stock market is uncertain: A bubble could burst, another crisis could occur, or prices may stagnate. However, one thing is for sure; the golden age for stock investors, especially in America, is unlikely to last forever.

So what do experts recommend when investors face these potential disruptions? Veteran investment analysts say that, on average, a market decline of 10% to 20% only takes about four months to recoup. They argue that investors shouldn’t try to time the market and instead focus on staying invested for the long term based on their individual goals and the time horizons based on those goals. A diversified portfolio that includes a mix of asset classes can help weather downturns, and knowing how one’s investments are diversified across index funds, geographies, and styles can help reassure against big-news market volatility. Regularly rebalancing your portfolio around once a year, and having a separate bucket of cash for short-term needs, can also help you stay disciplined during market dips, experts recommend. While the stock market’s future remains uncertain due to potential bubbles, stagnation, or unforeseen crises, there’s wisdom to be gleaned from past market cycles. Experts advise that investors prioritize a long-term perspective informed by their individual goals and risk tolerance, rather than succumbing to fear or chasing fleeting trends.