To begin this week’s newsletter, we examine the tensions that threaten access to critical resources, touching on both advanced ones like South Korea’s $4 trillion semiconductor industry and basic ones such as water scarcity in Northern Africa. Then, we touch on the confluence of factors that have kept the US economy strong, as well as the signs of a potential bubble. We then move on to a discussion of rising Chinese EV dominance in Southeast Asian markets, highlighting the cases of Thailand and Vietnam. We end this week’s newsletter by looking the rising tensions in the Middle East, focusing on the possibility of a further expansion of conflict to much of the region.

Both Advanced and Basic Resources Threatened by Rising Tensions

Putin, Kim and the $4 Trillion Threat on Cold War’s Last Frontier 

Bloomberg

Water Scarcity Is About to Upend Politics Across North Africa 

Francisco Serrano, World Politics Review

The likelihood of an all-out war between North and South Korea is low, but the recent visit of Vladimir Putin to Pyongyang and the new defense pact between Russia and North Korea have heightened tensions. A full-scale conflict could cost the global economy $4 trillion, or 3.9% of GDP, far exceeding the economic impact of the Russia-Ukraine war. South Korea’s significance in the global semiconductor supply chain means that a war would cause severe disruptions to industries worldwide, potentially pushing the global economy into recession. The Seoul metropolitan area, home to about 26 million people and responsible for a major share of South Korea’s semiconductor production, is particularly vulnerable to North Korean artillery. The conflict could lead to a 37.5% reduction in South Korea’s GDP and significantly impact global trade, especially between the US, China, and other major economies, as projected by Bloomberg. Despite the low probability of war, the geopolitical dynamics and the strategic importance of South Korea’s semiconductor industry make the situation precarious.

Meanwhile, water issues in Northern Africa are creating political and socioeconomic challenges, hurting overall stability in the region. In June, residents of Tiaret in western Algeria protested prolonged water cuts caused by low levels in the Bakhedda dam, exacerbated by unfulfilled promises to resolve the issue before Ramadan. Similar water shortages have affected other parts of Algeria in recent years, with the capital Algiers experiencing interruptions in 2021 due to drought, prompting road blockages. Across North Africa, severe droughts and water scarcity have led to significant social unrest and economic decline. Morocco is facing a six-year drought, and Tunisia enacted nighttime water cuts in March 2023. The region’s water scarcity, near or below the UN’s absolute scarcity threshold of 500 cubic meters per capita annually, is leading to job losses, increased food imports, and deteriorating public services. Governments are investing in large-scale infrastructure projects like desalination plants and dams, with Algeria aiming for 60% of potable water from desalination by 2030 and Morocco launching an $11.7 billion water program.

Are the Markets in the Midst of a Bubble?

Why Are Stocks, Gold, and the Dollar Surging? 

Jeffrey Frankel, Project Syndicate

Navigating Today’s Frothy Financial Markets

Dambisa Moyo, Project Syndicate

The US financial landscape has been marked by an unusual combination of trends over the past two years. The stock market, led by tech giants charged by AI excitement, has soared, while gold prices have hit record highs, traditionally a hedge against economic uncertainty. Surprisingly, the US dollar has also strengthened, despite pressures from rising interest rates. While some attribute these anomalies to anticipated monetary policy shifts or geopolitical tensions, the most compelling explanation seems to be the resilience of the U. economy. Consistent economic growth, fueled in part by government spending, has bolstered investor confidence and driven demand for US assets. However, the sustainability of this trend remains a key question, particularly as the nation approaches a presidential election and as geopolitical and geoeconomic stressors evolve.

Some experts warn of a potential bubble, and that stocks’ valuations are inflated and defy historical norms. While not all bubbles pose systemic risks, the combination of unproductive assets and excessive leverage creates a particularly perilous scenario. The 2008 economic crisis serves as a stark reminder of the catastrophic consequences that can ensue when these bubbles burst. Today’s financial landscape is further complicated by the shadow banking sector, where opaque investment practices and a lack of regulatory oversight exacerbate the potential for instability. Many analysts urge for increased transparency and stricter regulations on highly leveraged, asset-backed investments, which would be paramount to mitigating the risk of another financial crisis.

Southeast Asian EV Producers Face Stiff Chinese Competition

Thai subsidies for Chinese EV makers wreak havoc on auto sector

Apornrath Phoonphongphiphat, Nikkei

Chinese EVs give VinFast a run for its money in Vietnam

Lien Hoang, Nikkei

China’s dominance in the electric vehicle (EV) sector has been causing issues for domestic EV producers in Southeast Asia. For example, Thailand’s well-intentioned push to promote electric vehicles (EVs) has inadvertently triggered a host of negative consequences for its automotive industry. Generous subsidies for Chinese EV manufacturers have led to a massive oversupply of electric cars, sparking a price war that has decimated sales of traditional combustion engine vehicles. This downturn has forced automakers like Honda and Subaru to scale back production or exit the Thai market entirely, leading to widespread job losses and economic strain. The ripple effects have extended to the automotive parts sector, where numerous suppliers have been forced to close due to plummeting demand. While the government remains steadfast in its support for EVs, the short-term economic pain endured by the automotive industry is undeniable.

Meanwhile, in Vietnam, Chinese EVs are encountering a formidable competitor in the form of VinFast, a homegrown automotive brand that has rapidly gained market share. While Chinese companies offer competitive pricing and advanced technology, they must overcome challenges such as negative consumer perceptions and the need to establish extensive charging infrastructure. VinFast, on the other hand, benefits from a well-developed charging network but faces the pressure to maintain its market leadership against increasingly formidable rivals. The Vietnamese government’s role in fostering a supportive environment for EV adoption, including policies that encourage both domestic and foreign investment, will be crucial in determining the ultimate shape of the country’s EV landscape.

Middle East Tensions Reaching Boiling Point

Israel-Lebanon facing highest risk since October 2023

Paul Salem, Eran Etzion, Brian Katulis, Jehanne Henry, Charles Lister, & Mirette F. Mabrouk, Middle East Institute

Will Hezbollah and Israel Go to War?

Dexter Filkins, The New Yorker

Killing of Two Israeli Enemies Puts Middle East on Brink of Wider War

Summer Said, Rory Jones, & Carrie Keller-Lynn, Wall Street Journal

Lebanon and Israel are facing the highest risk of full-scale war since October 2023, following a deadly rocket attack on Majdal Shams on July 27 that killed 12 young Druze residents and apparent Israeli retaliation strikes against top Hamas and Hezbollah officials abroad. The conflict has been intensifying over the past 10 months, with both sides engaging in calibrated attacks using drones and guided missiles. Diplomatic efforts by the US and regional diplomats are focused on preventing an escalation, with negotiations for a Gaza cease-fire being crucial to de-escalating tensions on the Israel-Lebanon border. Despite the high stakes, both Israel and Hezbollah appear reluctant to engage in a full-scale war, seeking to avoid major civilian casualties while demonstrating strong military actions. The coming days are critical as diplomats work to manage the situation and complete negotiations for a cease-fire in Gaza. Hezbollah, far more powerful than Hamas, possesses around 150,000 missiles, many capable of reaching deep into Israel. Despite a massive arsenal, Hezbollah has shown restraint, not yet deploying its long-range guided missiles. Iran significantly influences Hezbollah’s actions, supplying and controlling its arsenal, including anti-aircraft missiles that pose threats to Israeli jets. For Israel to neutralize Hezbollah’s missile capabilities and secure its northern border would likely necessitate a ground invasion, complicated by the need for a full restock of Israeli weaponry that would likely take about twelve months under current U.S. supply rates, according to a former Israeli National Security Advisor.

Complicating the already tenuous situation, Hamas political leader Ismail Haniyeh, who was attending the inauguration of Iran’s new president—along with representatives from Palestinian Islamic Jihad, Yemen’s Houthis, and Lebanon’s Hezbollah—was killed in Tehran on July 31st in a mysterious strike that Hamas attributed to Israel. This occurred just hours after Israel reported the killing of a top Hezbollah official in Beirut. These killings were significant blows to Iran’s “Axis of Resistance” and have heightened the risk of a wider regional war, despite ongoing U.S. diplomatic efforts to prevent escalation. Danny Citrinowicz, who served as head of the Iran branch for Israeli military intelligence and is now a fellow with the Tel Aviv-based Institute for National Security Studies, indicated that Iran’s inability to protect its allies highlighted vulnerabilities. As a result of these events, Israel is bracing for potential retaliatory actions both domestically and abroad, while U.S. Secretary of State Antony Blinken emphasized the need for a ceasefire between Israel and Hamas to manage the broader conflict, which is looking increasingly unlikely.