Marko Papic, Geopolitical Strategist
Marko Papic is a partner and chief strategist at Clocktower Group, an alternative investment asset management firm. In this podcast, he discusses geopolitical events and how they relate to investing.
1 Minute Summary
Alternatives to Chinese manufacturing: Close U.S. allies don't have sufficient manufacturing infrastructure because the U.S. told them for decades to develop their service sectors instead
China will continue to be an important manufacturing center and additional capacity may come from Turkey, India and Brazil
Investing in India: Investors with a foreign mandate have left China because of its supply chain issues and they shifted to Indian equities, raising equity prices
When China resolves their issues, Indian equities may drop
On Ukraine: The war will end sooner than pundits think after Russia takes sparsely populated territories and declares victory as a way to save face.
On Russia: Russia's military has lost credibility, which will lead many countries to act bolder when dealing with Russia, such as Finland and Sweden recently joining NATO
On Energy: Europe will continue to depend on Russia for natural gas for years because much of Europe has no near-term viable alternative.
When the U.S. develops facilities to transfer more natural gas to Europe, U.S. natural gas prices will increase four to five times to match European prices
U.S. recession: The Fed will ease off on interest rate hikes before crushing inflation in order to prevent very high unemployment, but they may ease off too late, leading to a recession.
Full Summary
Alternatives to Chinese manufacturing
U.S. companies are interested in moving out of China due to sanctions and supply chain issues
Southeast Asian countries have experienced wage growth, making them less competitive as manufacturing centers
Moving to most countries that are closely allied with the U.S. is not practical in the short-term because they don't have the infrastructure
The U.S. told its allies for decades to focus on services instead of infrastructure and to open their capital accounts, which reduced savings that could be spent on infrastructure
China will continue to be an important manufacturing center
Additional manufacturing capacity will likely come from countries not completely allied, and who think independently of the U.S. like Turkey, India, Brazil and possibly Mexico
Foreign investments
For the past 40 years, the U.S. restructured the rest of the world as the sole super power
Countries that came out ahead are those that didn't follow the U.S. foreign policy such as India
India is currently going against U.S. policy and is buying Russian oil because it's in India's own best interest
Investors should invest in countries that don't follow U.S. policy to the letter
Investing in Turkey
Turkey exported a lot of goods to the Middle East before the pandemic, but needs to stabilize inflation and not have wars near its borders
It's unclear whether India and Turkey will suffer long term if commodity prices stay high
Investing in India
India stocks have done well in the last two years because Prime Minister Modi is perceived as pro-business
Also, investors with a mandate to invest in emerging markets left China because of the political uncertainty moved to India
China will eventually stabilize and investors will leave India
India also doesn't have enough employment in the service sector to continue to grow through services
When will the war in Ukraine end?
Prior to attacking Ukraine, Russia did not demonstrate military superiority. They won in Georgia because Georgia is very small and Russia gave weapons to Syria, but didn't fight
Russia started the war poorly because they didn't first take out Ukraine's surface-to-air missiles, but now they're attacking sparsely populated, flat land which should be easier
Papic thinks the war will end sooner than other pundits think by taking sparsely populated territories and declaring victory, probably in over eight months, maybe 2-3 years based on history
Russia has a history of revolts
Russians are supporting their government now in response to foreign criticism, but in 6-12 months, they'll be more critical of their leaders
On Russia
Russia has incredible wealth, human capacity and commodities to export which the world needs for its green energy transition
A turnaround in Russian assets is possible
One source of a country's power comes from credibility of threat, such as the ability to accept large casualties
Russia stopped military operations in Chechnya in the 1990's after 4-5K casualties, so they're unlikely to continue through 20-30K casualties in Ukraine
Finland and Sweden are willing to join NATO because Russia's military has lost credibility
Uzbekistan,and Turkmenistan and Azerbaijan were already on poor terms with Russia and may grow bolder
"From an investment perspective it's tough to see how that [smaller countries growing bolder] really matters because the Russian sphere of influence is so paltry there's nothing for us to do in there."
An exception is that U.S. natural gas prices may rise if the U.S. builds liquified natural gas (LNG) infrastructure to send gas to Europe
Where will Europe get its energy?
Europe will continue to get its energy from Russia in the near-term
Russian oil was sold to other countries, which were often re-routed to Europe
Short-term, parts of Europe can't substitute natural gas
The U.S. can export some LNG, but Europe will continue to use Russian gas for decades
Natural gas in North America
"American energy is about to get a lot more expensive because once American natural gas is no longer trapped in the island of North America [because they develop infrastructure to export it] it will have to attain price levels of global natural gas and that means something like a 4-5x jump."
Higher gas prices assume the U.S. doesn't restrict LNG exports as it has in the past
U.S. recession
It's difficult to say if the U.S. will be in recession in 12 months
Inflation is high, but unemployment is at 3%
To fix inflation, the Federal Reserve needs to raise rates until unemployment hits 10%, which the Fed is unwilling to do
In the next few months, growth will slow down and consumers will shift from buying goods to services
You can't binge on services like you could on goods, which will slow down the Purchasing Managers' Index (PMI)
The conflict in Europe and Europe's polcies on China could lower U.S. Consumer Price Index (CPI) to as low as 5%
The Fed could then slow down interest rate hikes to 25 bps instead of 50-75 now
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