Wouldn’t It Be Nice

As the theatrics around Donald Trump and the presidential election dominate the media landscape, the West’s support of Israel’s relentless attacks on Gaza and its approval of Ukrainian strikes on targets inside Russia are routinely underreported. And when they are discussed, usually in outlets controlled by think tanks, the harsh realities on the ground are papered over by statements glorifying the necessity of U.S. leadership.

A good example is a May 27 article in Foreign Affairs, the magazine published by the Council on Foreign Relations, an organization whose members include tech giants Apple, Google and Meta, financial empires Bank of America, BlackRock, JP Morgan and Goldman Sachs, and oil companies like Chevron and ExxonMobil.

In the article, Hal Brands, a professor of Global Affairs at Johns Hopkins, explains why he embraces “American Globalism” and doesn’t want his country to become a “normal great power”. Here is how he defines each of these models. A normal great power is a country that “behaves in the same narrowly self-interested, frequently exploitive way as many great powers throughout history”. And the American globalist model? According to the professor, “it has a special responsibility to shape a liberal order that benefits the wider world.”

The Beach Boys 1966 song Wouldn’t It Be Nice comes to mind. Even though the stated objectives of the then-teenagers for a perfect life were quite different, contemplating a world in which the self-styled, U.S.-led international rules-based order would actually benefit all makes for a few pleasant pipedream moments.

Yet, before long, the images that come up clash with reality and we awaken. And that’s when Professor Brands’ efforts to distinguish between the narrowly self-interested, frequently exploitative way and the liberal order that benefits the wider world no longer make sense. After all, America has for decades helped overthrow governments, engaged others in its proxy wars and invaded. And by doing so it’s thrown entire regions into a state of prolonged destabilization. In short, on closer inspection the U.S. globalist policy has proved to be uniquely narcissistic and abusive.

Fortunately, there is a positive: the narratives manufactured by the globalists and their parrots in the mainstream media are now widely disbelieved.

 

The European Perspective

When travelling in Europe during the past three weeks, I was surprised by how many people suddenly grasp some of the key geopolitical, social and economic realities. This is a big change from only a year ago, when Washington’s narrative was still widely accepted.

To begin with, it seems that none of my highly educated and connected friends can relate to the U.S. any longer. In my many discussions, there were frequent comparisons of America’s political scene to those in place in some of the third world’s notoriously dysfunctional nations. What a change from thirty years ago, when America’s entrepreneurial culture attracted large numbers of immigrants from Germany, Italy, Sweden, Japan and Australia!

Meanwhile, views on Washington’s foreign policy have also changed. Here are a few things I heard with great consistency on the Ukraine topic:

  • The rhetoric and actions of key NATO members are bringing us dangerously close to World War III. What started as “help Ukraine defend itself” is now turning into “let’s use Ukraine to attack targets inside Russia”. Europeans are deeply concerned about the outcome and are particularly critical of the latest moves by Britain, the U.S., France and Germany.
  • My European friends are also starting to recognize that America’s military engagements in various parts of the world make for a robust business model. With each new conflict, Washington and its allies draw down their arsenals of armaments and ammunition, creating an urgent need for replenishments, to be supplied primarily by the U.S. “defense industry”. The major complaint: America’s unique geographic position and its wealth of natural resources provide significant shelter, but Europe pays a steep price. Sanctions against Russia have undermined price stability, government spending has escalated, and refugees keep arriving by the hundreds of thousands.

I want to stress again that these assessments mark a huge shift, the consequences of which seem obvious. As more Europeans grow critical, disagreements between EU member states will escalate and U.S. influence will inevitably decline.

On the Gaza topic, the assessments of my European acquaintances were similarly unfavourable, resembling those I keep hearing in Canada and the United States. While everyone agreed that the October Hamas attack called for a forceful response, the actions of the Israeli Defense Forces were thought to be extremely disproportionate and disgraceful. Yet predictably, my friends’ references to war crimes and ethnic cleansing were immediately followed by the cautionary comment everyone is by now familiar with: “Of course, if I said that publicly, I’d be labelled an anti-Semite.”

Concerns were also raised about the broader Middle East context. At the people’s level, hostile sentiment against Israel—and by extension those who support it—is once again at perilous levels. That means regimes whose interests have generally been aligned with the West’s may veer in the opposite direction. Turkey and Egypt come to mind.

 

Back to China

Surprisingly, China didn’t come up in any of my discussions. Perhaps the relentless vilification of Beijing evident elsewhere hasn’t yet found its echo in continental Europe.

Yet, there is no doubt that the U.S. sees China as its main problem. In the end, Washington will do everything to prolong the postwar international order and reap its plentiful benefits—an objective clearly captured in the closing statements of numerous recent security conferences and Western summits.  China, a recent declaration stated, is the major threat to the “international rules-based order”.

Messages to that effect have been broadcast by both Republicans and Democrats and, as always when both major parties push a narrative, the American public has responded with enthusiasm.

Washington’s problem at the moment is that the situations in Ukraine, in Gaza and in the broader Middle East have drawn down U.S. military capacity and left the country in a position of classical strategic overreach.

Still, China is clearly the place to keep an eye on; its economic and political reach is rapidly growing, but for the moment a deeper U.S. engagement is almost unthinkable.

 

 

Overbought and Overvalued

Turning to financial markets, the debate about interest rates continues to dominate the headlines. Yet, while the “higher for longer” chant keeps bonds under pressure, stock prices are still resilient. Key indices such as the S&P500 are trading at multiples that are historically unsustainable.

As the chart on the left shows, equities have taken their inspiration from a few technology stocks whose AI-derived earnings are, at least in the near term, anything but predictable. Is it time to take some money off the table? There is no easy answer; on a relative basis, the U.S. economy is still chugging along, and the possibility of a decline in interest still beckons. More importantly, a number of companies and even sectors still trade at reasonable multiples.

The bottom line: selectivity should be your first priority. As always during these debt-challenged times, we focus on balance sheet strength and the generation of sustainable free cash flow.

Commodities have been on a roll, too. Through our stock holdings, we’ve been particularly focused on energy and metals such as copper and uranium, bets which have paid off handsomely.

What about bonds? If you’ve read our previous updates you already know. We’ve underweighted and frequently avoided debt instruments during the past several years, wondering how many issuers will eventually fail in their obligation to creditors.

We’re also holding on to our 15% physical gold position. While the yellow metal recently reached new all-time highs and keeps trading at lofty levels, it’s a fact that most North American and European investors still have not participated in the rally, as evidenced by outflows from gold funds. Demand in recent months has primarily come from central banks and private investors in the BRICS nations, with China in the forefront. My personal view: considering Washington’s rhetoric, the U.S. Treasury’s trillion-dollars-a-quarter debt escalation and the precedent of endless sanctions imposed on foreign governments and the seizure of their assets, Beijing has every incentive to liquidate U.S. Treasury bonds and dollars, and increase its gold hoard.

And finally, given the countless geopolitical, social and economic uncertainties, we hold a substantial cash position. The “higher for longer” dynamic has helped: American one-year CD’s still yield 5.5%; Canadian GIC’s 5.25%.

Some readers have asked what currencies are best suited for cash and term deposits. While many strategists are convinced that a dollar collapse is imminent (and have been for years), we see things a bit differently. First of all, capital flows are heavily influenced by interest rate differentials and, for the moment, U.S. rates still offer a meaningful premium to other key currencies. And second, America’s debt woes, economic challenges and political shortcomings are not unique. Other key economies, such as Germany, Britain or Japan are in fairly pitiful shape as well.

This is not to say that the dollar won’t lose its global leadership position, nor can we know whether its fall from grace will be sudden or gradual. But for now we’re holding our cash hoard in U.S. and Canadian currency.

 

Best regards,

Peter C. Cavelti