Geopolitics & the Day After
Geopolitics & the Day After
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Author : The BlackSummit Team
Date : July 12, 2024
To begin this week’s newsletter, we dive into the results of the recent elections in both France and the UK and what they mean for the continent’s future prospects. Then, we examine the surprising result of Iran’s presidential election following the death of President Ebrahim Raisi in May. We then move on to a discussion of risks that could threaten the American economy, and what the potential ramifications of those risks could be. We end this week’s newsletter by examining the recent weather events that have threatened China’s food production, as well as the challenges that the global food system faces overall.
UK & France Election Results
Who will govern France? Four questions to understand what happens after the election
Romain Geoffroy, Adrien Sénécat and Maxime Vaudano, Le Monde
Deeply Divided France Risks Unprecedented Deadlock After Election Shock
Matthew Dalton, Wall Street Journal
Phillip Stephens, Financial Times
Fintan O’Toole, Foreign Affairs
The recent French elections resulted in a highly fractured Parliament, with no single party securing a majority. As a result, Prime Minister Gabriel Attal offered his resignation on July 8, but President Emmanuel Macron has requested for him to remain until a successor is appointed, keeping in mind that France is set to host the Olympics in the coming weeks. The New Popular Front, an alliance of leftist parties, won the most seats (182), but with President Macron’s pro-business centrist bloc coming in second (168) and the far-right National Rally in third (143), forming a coalition government remains challenging. To hold a majority in the French Parliament 289 seats are needed. A technocratic government could be likely with such differences between the various blocks, and even within the leftist block, that could see ministers selected with no political affiliation to manage the government. Italy has utilized this configuration of government on several occasions, but it usually only lasts for a short period due to a lack of electoral legitimacy. Constitutionally, there cannot be another French parliamentarian election until the summer of 2025.
In the UK, Keir Starmer’s Labour Party secured a commanding 413 seats in the House of Commons, marking a significant shift from 14 years of Conservative rule. Labour can largely thank the lack of popularity of the Conservative Party and the first-past-the-post electoral system for its majority, as it only secured a 2% greater share of the vote than in the 2019 elections when it lost to the Conservative Party. Starmer now faces the monumental task of stabilizing the country post-Brexit, addressing economic challenges, and revitalizing public services. His approach aims to restore governmental integrity and competence, contrasting with past Conservative scandals and ineffectiveness. Success will hinge on delivering tangible improvements in economic conditions and public services, while also managing complex international relations, including improving the UK’s relationship with the EU and navigating regional independence aspirations in Scotland, Northern Ireland, and Wales.
Iran Presidential Election
Iran’s Voters Elect Their First Reformist President in Two Decades
Benoit Faucon and Aresu Eqbali, Wall Street Journal
Masoud Pezeshkian, Iran’s New President, Raises Hope for a Diplomatic Opening
Lara Jakes, New York Times
In Iran’s presidential election, reformist Masoud Pezeshkian won, marking the first reformist victory in two decades. Pezeshkian, a 69-year-old surgeon, won with over 53% of the vote and almost 50% voter participation in the second round of voting, promising to ease moral policing and re-engage with the West on nuclear talks. Despite his win, he will face challenges from conservative institutions that dominate Iran’s political landscape. His presidency aims to address economic issues and public discontent while navigating a system resistant to significant reforms.
Pezeshkian desire to reengage with the West will likely face major roadblocks as the President’s influence on foreign policy is limited by the powers of Supreme Leader Ayatollah Ali Khamenei and the Islamic Revolutionary Guard Corps, which will likely seek to maintain a confrontational stance against the US and support militants across the Middle East. In Iran, the President is primarily empowered to act on domestic issues like the economy as well as appoint cabinet members to important posts. However, even with these responsibilities the President can be limited by parliament and the Supreme Leader. If left unimpeded by these institutional powers, Pezeshkian aims to empower globalist diplomats and foster international engagement while cautioning against over-reliance on alliances with Russia and China. His reformist stance contrasts with his predecessor’s hard-line policies, but significant foreign policy decisions remain under the control of conservative institutions. The real test of Pezeshkian’s influence will be in whether he can revive the 2015 nuclear deal amid complex international dynamics to ease the burden of sanctions on Iran. Of course, this could be further complicated by U.S. presidential elections in the fall that could see the return of Donald Trump to the White House after he pulled the US out of the deal initially in his first term.
Risks Threatening the US Economy
The risk of a replay of the lost decade in US stocks
Richard Bernstein, Financial Times
The Real Reason to Worry About the Huge US Budget Deficit
Bill Dudley, Bloomberg
Wall Street’s upbeat earnings expectations set high bar for US companies
Jennifer Huges, Financial Times
Despite the Federal Reserve’s vigorous interest rate hikes since early 2022, financial markets are witnessing record-high stock prices and narrow credit spreads, indicating lingering excess liquidity. This environment fosters speculative investments, undermining the Fed’s inflation-fighting efforts and potentially inflating financial bubbles through misallocated capital into unproductive assets. US companies are facing high expectations for earnings growth as they prepare to report second-quarter results, with analysts predicting nearly 9% year-on-year profit increases for S&P 500 firms, the largest since early 2022. Large-cap tech stocks, notably dominated by giants like Nvidia, Apple, Microsoft, Amazon, and Meta, continue to outperform smaller companies, while fixed-income performance exhibits broader cyclical patterns. As a result, this situation poses three potential scenarios for the future: tech stocks’ dominance might be misplaced, a significant credit event could be looming, or excess liquidity is fueling speculation in both equity and fixed-income markets, recalling the misallocation of capital seen during the technology bubble of the early 2000s.
Meanwhile, the U.S. government faces worsening financial prospects, with projections indicating a fiscal 2024 deficit of $1.9 trillion and a decade-long deficit totaling $22.1 trillion. Despite these daunting figures, the immediate impact on money markets remains tempered, with mechanisms like higher-yielding Treasury bills attracting funds from the Federal Reserve’s reverse repo facility and the Fed maintaining ample bank reserves. However, the long-term risks of chronic fiscal deficits loom large, potentially triggering a cycle of escalating debt and interest rates. This scenario could increase pressure on the Fed to devalue the debt through inflation, especially under a potential second Trump presidency. Investors may reach a breaking point where they find these risks intolerable, leading to sudden and severe market reactions reminiscent of the bond vigilantes of the 1990s.
A Looming Food Crisis
Jenny Allison, The Cool Down
Climate change is pushing up food prices — and worrying central banks
Susannah Savage, Financial Times
China is struck by floods and drought—at the same time
The Economist
Severe droughts in northern and central China have devastated vital crops like rice, corn, and essential herbs, posing serious threats to both China’s food security for its population of over 1.4 billion and global food markets. In central China’s Queshan County, severe drought has parched maize fields and depleted local wells, marking one of the worst dry spells in recent memory across eight provinces. Meanwhile, in southern China, frequent floods and landslides caused by heavy rains have led to casualties and evacuations. The country, with just 6% of global freshwater resources serving 20% of the world’s population, faces mounting challenges exacerbated by climate change-induced weather extremes. As similar climate-related threats escalate worldwide, efforts to mitigate their impact include agricultural innovations to develop drought-resistant crops and controversial experiments with artificial rainfall systems. The urgency to address climate change and reduce individual carbon footprints is underscored as communities worldwide face escalating climate-related threats.
Globally, climate change-induced shifts in weather patterns are driving up food prices and posing sustained inflationary pressures. Economists warn that these disruptions are not short-term shocks but enduring challenges that could strain consumer budgets and economic stability. Central banks, traditionally cautious about including food prices in core inflation measures due to volatility, are now debating whether to adjust monetary policy in response to sustained food price increases. As these challenges persist, there is a growing call for innovative policy approaches, including fiscal interventions and tighter competition regulations, to mitigate the economic impacts of climate-driven food price volatility.
