To: Our Clients
From: Peter Cavelti
Toward A Multipolar World
Now that the G-7 summit has revealed how far apart on key subjects the United States and its would-be allies are, increasingly many voices are suggesting the obvious—that a new world order, without America at the head of the table, may be in the making. In this essay, I’ll explore why they may be right.
Let me start off with an exchange recorded during the recent senate confirmation hearings for the new CIA Director.
Senator Kamala Harris:
“Do you believe in hindsight that those [CIA interrogation] techniques were immoral?”
Nominee for CIA Director Gina Haspel:
“Senator, what I believe sitting here today is that I support the higher moral standard we have decided to hold ourselves to.”
What’s remarkable about this is not the question, but Ms. Haspel’s answer. It implies that any atrocity can be justified, because her country holds the moral high ground. Former Secretary of State Madeleine Albright echoed that sentiment when interviewed about the Iraq catastrophe by CBS’s 60 Minutes:
“We have heard that half a million children have died. I mean that’s more children than died in Hiroshima. And…is the price worth it?”
“I think this is a very hard choice. But the price…we think the price is worth it.”
On another occasion, Albright also made this comment: “If we have to use force, it is because we are America. We are the indispensable nation. We stand tall. We see further into the future.” From the end of World War II, through Democrat and Republican administrations, this seems to be the core belief to which the American power structure and many Americans cling: American exceptionalism, American moral superiority and, above all, an America backed by no one less than God. It would be easy to dismiss such thinking as preposterous, but that so much of the world has been putting up with it for so long deserves closer scrutiny.
It’s easy to see how the infatuation with things American first started. To most of Europe and Asia, democratic ideals and empowerment of the individual, as articulated by America’s founding fathers, were deeply inspiring. That a nation based on such revolutionary principles could also become highly successful, not just in societal, but also economic and eventually military terms, evoked even greater awe. The defeat of fascism was clearly America’s finest hour. So convincing a victory was achieved that Washington came out of World War II with a hand no one could challenge: dominance of the most meaningful supra-national organizations, such as the International Monetary Fund and the World Bank; control of the world’s reserve currency; leadership of the key military alliance, NATO; and in partnership with its allies Britain and France, a voting majority on the UN Security Council, granting it unrivalled political sway.
Under these circumstances, being on America’s side was a seductive proposition. Unfortunately, to the U.S. itself, such power also corrupted. It was a military man, General Dwight Eisenhower, who later as his country’s president warned of the need to be vigilant about the creeping power of the militaryindustrial complex. Tragically, his warnings were ignored, as America’s rivalry with Communism provided the ideal pretext to engage in ever more military adventures. Vietnam was the most epic, but there were dozens more, as the U.S. consistently outdid its adversaries in Moscow and Beijing, rigging elections, and when that didn’t work, overthrowing regimes and placing brutal dictators in nations throughout Central and South America, Asia and Africa.
As a young man at that time, I remember my admiration for America gradually being taken over by bewilderment. I started to comprehend that U.S. morality was anchored not in reality but propaganda, but what alternative was there? If America didn’t operate the way it did, Russia or China would take over, and then the world would be run by regimes that completely disrespected individual rights. Even the most heinous crimes against humanity, like Vietnam, seemed tolerable in that light. Over time, much as Eisenhower had predicted, war became an irresistible business model for the United States. Overthrowing regimes, selling military equipment to the newly installed dictator, fomenting conflict with neighboring countries, always in the name of bringing democracy to the victimized party—it gradually became the nauseating mantra that characterized U.S. foreign policy thinking.
Sometimes the script was executed via a proxy war and sometimes America intervened directly. At times the rhetoric was loud and belligerent (as with Iraq under George W. Bush) and at other times it was deliberately toned down (as when Barrack Obama reescalated Iraq and later invaded Libya), but the impression that all seats on Washington’s political carousel were occupied by warmongers steadily grew. The dividends to the U.S. economy are debatable. Yes, the defense contractors, logistics and security providers and engineering companies benefit hugely, as do the oil and mining conglomerates who often walk away with juicy exploration and production contracts. On the other hand, America as a federal entity pays a massive price for this folly. At close to $700 billion a year, defense expenditures are a massive drain on an already out-of-control budget, while the maintenance of some 800 U.S. military bases in over 70 countries suggests serious strategic over-reach and continuously adds to anti-American sentiment.
Yet, so far the U.S. has steadfastly pursued its course and got away with it. This is even more remarkable if we consider that, since the collapse of Communism, it has operated in a power vacuum. In 1989, when the Soviet Union crumbled, much of the world hoped that it would next experience a Pax Americana, in which social and economic freedoms could prosper and military activities would be limited to self-defence. Unfortunately, nothing of the kind happened; on the contrary, the U.S. has since 1991 been in a fairly constant state of war. The American perspective offered to explain such reckless adventurism is that without it, numerous terrorist attacks like “9/11” would have occurred. More recent engagements have been initiated in the name of counteracting the rise of economic and military rivals, most specifically China and Russia.
Perhaps some of America’s allies would have bought into Washington’s rhetoric, or at least looked the other way, had the U.S. not also targeted them. But that changed when the Trump administration put into gear several initiatives that amount to at best political interference, and at worst a declaration of economic war. The bit of goodwill towards the United States that still existed in parts of Europe, Asia and elsewhere is now evaporating at a rapid rate. The nation that inspired so many a few decades ago is now feared by increasingly many. An annual WIN/Gallup poll of 67,000 people in 65 countries has, for the past few years, consistently ranked the U.S. as the greatest threat to world peace. 24% of respondents picked the United States, 8% Pakistan and 6% China. North Korea, Israel and Iran came next, while Russia was in 12th place. Now, contrast that with a Statista/Gallup survey conducted this past week within the United States (see our chart). It’s quite obvious that Americans have an entirely different assessment of their role in the world. They actually trust their military— more than they trust small business and far more than they trust their police, their churches, medical system or public schools. Oops!
A Tricky Journey
To put this all into a different context, let me resort to a historical fact. The journey from a multipolar world to a unipolar one is invariably an easy one. Getting back from unipolar to multipolar is far trickier. In other words, when the Cold War ended and America took on the leadership of the world, the danger of a nasty conflict between major powers vanished. Now we are headed in the opposite direction. Because the U.S. used its three decades of supremacy to project its power ever further (much like its predecessors who dominated the world at one time or another), it is now in every sense of the word overextended—precisely at the time when some of its would-be rivals have the momentum of growth on their side. America’s fiscal position is precarious and its global military presence is unsustainable.
Moreover, the systems that have placed the U.S. in its once superior position are crumbling. The economic model that made it possible for anyone willing to work hard to succeed is being plagued by rapidly escalating wealth disparity, while the dollar is starting to be incrementally replaced as a reserve currency and commodity settlement currency. Finally, the established model of warfare is being challenged: owning the largest arsenal of military hardware is of questionable value when the major powers can resort to cyber tactics, a discipline in which China and Russia appear to be on a par with, or perhaps even ahead of, the United States.
Land of Exceptional Delusions
What’s particularly distressing is that much of the world seems to recognize this, yet the majority of U.S. citizens are still trapped in the mantra of American exceptionalism that I referred to at the beginning of my article. Many of my friends in the U.S. laugh at the hollowness of North Korea’s propaganda machine, yet when Washington’s leaders spout their partisan lines, most Americans readily embrace the deeply biased offerings of their preferred news channels. To be sure, Pyongyang’s centralist missives are crude and transparent, while the dribble that emanates from Washington is highly polished. But to the trained eye, they’re equally devoid of integrity and substance.
In theory, when America’s middle class shrinks faster than China’s expands, or when the nation’s corporations enrich themselves by lobbying for ever more foreign adventures at the expense of the public treasury, the elected politicians are supposed to rebel. After all, aren’t the citizens of a supposedly functioning democracy entitled to rely on the country’s most honoured and respected institutions? Regrettably, this isn’t happening in today’s America, mainly because the country’s badly flawed campaign finance laws and the lack of term limits ensure that the legislators’ first loyalty is to the special interest groups and corporations that make their re-election possible. When the people’s elected representatives don’t address the grievances of citizens, the task should fall to the media. But, as we already know, newspapers and TV networks can make far more money by exploiting political polarization than by exposing systemic flaws.
So, if America’s decay is as alarming as I make it out to be, how will the country’s demise affect the world? The first thing politicians do when things are irreversibly bad is to find an enemy that can be blamed. With the help of the mainstream media, America’s self-righteous political machine is deeply invested in that exercise. The Democrats love the Russian election-meddling narrative, no matter how ridiculous it is—especially in a country that has actively interfered in dozens of foreign elections and overthrown numerous democratically elected governments, during the past half century. The Republicans, meanwhile, prefer to cast their nets even further, threatening military actions or invoking sanctions on numerous fronts. Worse, while going in that direction, why not threaten everyone in the world who doesn’t see things the American way? What grows out of that is that a whole host of nations who have for decades reluctantly tagged along with U.S. foreign policy are becoming seriously alienated. Think of Germany and several other Western European countries, as well as America’s neighbors Canada and Mexico. Think of China, as well, and then think of places like Indonesia and the Philippines, who had strong ties with the U.S. but have recently distanced themselves. And finally, think of unreliable but strategically critical regimes like Turkey or Pakistan who, for the past few decades, were on America’s side.
The bottom line is that the goodwill America commanded in many parts of the world has steadily diminished and is now mostly gone. Many commentators squarely blame the imperious, amateurish and narcissistic Donald Trump for this outcome, but doing so ignores the broader context. The fact is that America’s transformation from admired nation to a bizarrely inconsistent and unreliable one has taken place over a period of several decades and spanned both Republican and Democrat administrations.
To be sure, Trump has managed to considerably speed up the process, and the fights he’s picked in the name of “making America great again” add visibility to the country’s degeneration. But the root problems are deeply systemic and cultural, which is why Trump is a secondary issue. Consider the need to win at any cost, the belief that success should be defined in monetary terms, the conviction that America is the best, the country’s infatuation with firearms, or its tolerance of the disproportionate use of force by law enforcement and intelligence operatives—all of these are manifestations of a mindset that the rest of the world struggles to comprehend. Importantly, a growing number of Americans find it difficult to relate to these characteristics, as well.
The consequences for America are potentially devastating. The odds are that the country will become increasingly isolated, that its military will face ever greater challenges, and that its economy will struggle. Worst of all, there is a growing possibility that social stability will deteriorate, as increasingly many Americans find themselves disenfranchised by their system and become disgusted with the status quo. When U.S. citizens wake up to see their own country in the same unflattering light foreigners perceive it, the social consequences may become irreversible. After all, people who don’t respect their country’s institutions find it difficult to pay taxes and obey the law. It’s a dynamic Americans should understand much better than others; rebelling against an abusive government is where their nation got its start.
A Messy, Noisy Transition
Having filled more than two pages detailing America’s shortcomings and the tests that lie ahead, it’s high time I turned to two obvious questions: how long will it be before a serious rival to America emerges, and who will it be? The answer is simple: China is already brazenly challenging America’s hegemony and it is doing so on all important fronts.
Consider the following. Even though China (just like America) has a host of problems, its economy is growing at a healthy clip, while its middle class is expanding at about the same rate as America’s is shrinking. China’s infrastructure is modern and functional, whereas America’s is outdated and in bad need of a comprehensive overhaul. China, with its One Belt, One Road initiative has a clearly articulated strategic vision, whereas U.S. policy rhetoric on almost any subject seems incoherent. Social expectations in China are low, at least when compared to the ambitions harbored by North Americans or Europeans. When we look at technological leadership in industry, many would say that China is on a par with the United States, but a great number of analysts believe that in areas like Artificial Intelligence, China is actually ahead. Finally, on the military front, there is little doubt that in conventional terms, U.S. superiority is indisputable. However, when it comes to cyber warfare, America lags behind. So, the widely held notion that the U.S. must spend close to $700 billion a year to maintain its military “lead” and do so by upgrading conventional and nuclear arsenals is highly disputable, if not absurd.
China’s growing status as a U.S. rival on so many fronts makes U.S. foreign and economic policy look ridiculous. Why exactly would the lead power, in its quest to prevent the emergence of rivals, continuously pick fights with major powers around the globe? Russia’s economic distress is far too acute for it to pose a threat to U.S. hegemony, while the Europe Union is far too divided to challenge America. Yet, by continuously jousting with not only all the major powers, but also numerous strategically important secondary nations (including its neighbors and numerous historical allies), America is bound to gradually isolate, and thus weaken, itself. As every school kid knows, the bully in the sandbox gets away with his behavior until his would-be victims talk to each other. Once that happens, the dynamics change rapidly and irreversibly. The world becomes a very different place.
Now, none of what I’ve said so far is meant to suggest that a different world will be a better world. All I’m suggesting is that the era of American dominance over virtually all industrialized countries is ending. Perhaps the migration from a unipolar world to a bipolar one, in which America and its remaining allies stand opposite a Chinese-dominated axis, will occur faster than expected, and perhaps it will unfold over a period of a decade or even two. But whichever way it will manifest, one thing seems assured: the transition, however long it takes, will be messy and generate enormous headline noise.
When confronted with the magnitude and intensity of change that lies ahead, it may appear pointless to talk about investment implications. No one can know how it’ll all play out. It’s not only the geo-political scene that harbors a multitude of possible outcomes, but there are huge challenges to social, economic and monetary stability in a variety of national contexts. Japan, Russia and much of Europe have massive demographic challenges due to a rapidly aging population and a high dependence on social subsidies. Many nations are hopelessly indebted, a process that’s been recklessly encouraged by central bank policy, especially in the U.S., the EU and Japan. If we focus on likely social policy crises alone, the investment landscape will be in for considerably turmoil.
Given that equities are already significantly overvalued and bond yields bear no relation to the risk investors incur, it appears that caution should be upmost on our minds. I will reiterate the things investors can do to safeguard their portfolio:
-Reduce your overall market exposure. Recognize that cash is a critically important asset class; it reduces risk and gives you flexibility. Most importantly, it gives you peace of mind.
-Pay down debt. Debt leverage has brought huge rewards during the past many years; the future could look strikingly different. -Be careful when holding other people’s debt. A big slice of fixed income markets will be negatively impacted as long as interest rates continue to rise.
-Within your equity portfolio, diversify. Stress quality and liquidity, ideally coupled with attractive, secure dividends.
-Hedge your exposure to stocks and bonds with a holding of gold, ideally in physical, segregated form. We recommend 10% – 15% of total assets, especially at current prices. Gold is universally recognized as an exchange medium, is portable and negotiable and has, over a period of centuries, been a store of value for individuals as well as governments. It’s also blessed with attractive commodity fundamentals.
A Message From Dilbert
This has been a deeply troubling commentary on the decline of the nation that guided the European, monarchic model of governance into the modern age, and, perversely, on the ascent of a nation that is unevolved in terms of individual rights, but is demonstrably far more disciplined, flexible and focused— and perhaps more innovative. It’s been a difficult article for me to write and I have no doubt that it will be equally difficult for my American readers to comprehend what I’m saying. So, what better way to close on a light note, with a cartoon strip from Scott Adam’s Dilbert.
Take a good look at it and consider what Adams has captured here. You can pretty well apply these three frames to today’s Federal Reserve, the IMF, or the U.S. State Department. Or, alternatively, to the European Central Bank, the Brexit process, or the North Korea negotiations. It can even be applied to China, whose leadership, I’m fairly confident, is “winging it”, as well. Sadly, the policy wonks in all these places have no more grasp of policy formulation, or the consequences of their flawed decisions, than Scott Adams’ pitiful characters. The worst part is that the mainstream media embrace the heavily manipulated ‘good data’ as reality, and if they are aligned with the governing party, as a highly desirable outcome. It hasn’t always been that way—in fact, the world’s most influential news sources are mere shadows of what they were four or five decades ago.
Finally, a brief comment on your portfolio, which slightly appreciated in the second quarter. As you know, we used the stock market rebound of late March to substantially add to our cash position. Our rationale to turn exceptionally cautious was, and still is, that the market has had one of its longest advances ever, fuelled mostly by central bank hocus-pocus, and that valuations are extremely stretched, especially when considering that stock buybacks have been responsible for a significant portion of corporate earnings growth. Timing major market turns is notoriously difficult and I can’t pretend to know where the top is. But, having said that, I also can’t think of a moment in my five-decade investment career when there were more catalysts that could trigger a comprehensive breakdown than there are now.
Our defensive move has so far had little impact on results, because equities have been largely rangebound. We deployed a small portion of the cash raised to add to gold positions, taking advantage of the recent weakness in bullion. We hope that this adjusted asset mix will protect us through the turbulence ahead and thus help overall performance.
Please let us know if you have comments or questions.