Notes for: A Map of the New Normal: How Inflation, War, and Sanctions will Change Your World Forever

[!info] title: A Map of the New Normal: How Inflation, War, and Sanctions will Change Your World Forever author: Jeff Rubin published: 2024 edition: 1 ISBN: 978-0735246119

Introduction

This book (published in year 2024) highlight some of the important events that has happened around the world, that leads us to where we are at right now.

Key Events

Monetary Policies

• Quantitative Easing (2021)
  • Performed during Covid pandemic by governments worldwide
  • Government bonds are financed by Central Banks printing money and paying above market price
  • This kept interest rates on those bonds artificially low
  • No one complains since corporate and household debts are benchmarked to the government bonds
  • Low interest rate environment is unsustainable due to rising inflation
• Rising Inflation
  • Energy price shocks has caused periods of high inflation historically
    • Higher energy prices leads to higher food prices (production and transport cost)
    • That leads to lower purchasing power and workers demanding higher wages
    • If central banks does not intervene, increase in prices should lead to contraction in demand and the market should reach equilibrium
    • But if central banks intervene to soften the blow (politically popular), it may lead to wage-price spiral that worsens inflation
  • During Covid years, oil price hit historical lows but rebounded rapidly after the pandemic (potential energy shock)
    • Union movements around the world demand higher wages to combat rising cost of living. Politicians may support these movements to maintain popularity.
    • The “Great Resignation” during Covid created vacancies in the market, driving up wages
  • Unemployment must rise to combat inflation (through loss of jobs and hence loss of demand)
  • Stagflation is the worst-case scenario (rising inflation and unemployment)
    • Authur Okun’s Misery Index
• Deleveraging
  • Period of low interest rate fuelled the boom of mortgages and property market
  • It also made investors allocate more to stocks in their portfolio
    • Traditional portfolio balances between stocks and bonds (which are not performing)
    • Bond yields also gets eliminated by inflation
    • But the boom in stock market disproportionately benefited the wealthiest as they owns most of the stock market
  • If central banks try to perform Quantitative Tightening, the debt market will unravel (politically unpopular)
  • Central banks balance sheets will go into deficit as well (bonds purchased from government during QE is losing value due to rising market yield)
    • They can always print money, and the deficit will go away
    • But that will worsen inflation
• Moving away from petrodollar
  • Changing relationship between US and Saudi Arabia has prompted Saudi to now accept other currencies for their oil trade (perhaps the US thinks that they will be fully self-sufficient with shale oil production)
  • Sanctions on Russia has also prompted Russia to rublise their oil and commodities trade
  • Reduced usage of the dollars for oil trade also means reduced demand for US treasuries
• Weaponising the dollar
  • The US has frozen Russia’s foreign dollar reserve in retaliation for invasion of Ukraine
  • Central banks around the world are now concerned about their own dollars potentially getting frozen (China for example has a large dollar reserve) and they will be thinking about rebalancing their reserves with other currencies

Energy Shock

• Constrained Oil Supply
  • During years of good earnings, oil companies shifted their focus to dividend or share buybacks and neglected capex on oil production
  • Environment, Social, and Governance (ESG) push by the regulators also made companies reduce their investments in new fossil fuel production
  • Sanction on Russia for the Ukraine war has also caused a drop in global oil supply
  • The USA tried to work with Iran and Venezuela to secure new supply of oil but didn’t work out
    • The Keystone XL pipeline to bring oil from Canada to USA was cancelled by ESG concern
    • USA started draining their Strategic Petroleum Reserves (SPR) (USA can depend on shale production in the future)
• EU Energy Prices
  • Sanction on Russia caused EU to lose access to cheaper energy, increasing costs overall (manufacturing sector loses competitiveness)
  • Germany started importing LNG from USA (big win for USA)
• Trade-off Between Energy Security and Sustainability
  • EU turns to coal for energy to make up for the loss of access to Russian oil
  • Moved away from nuclear energy after Fukushima disaster in 2011 (but may explore Nuclear again starting in 2025)
  • Challenging for EV industry, as source of power becomes more expensive and is no longer green

Global Supply Chain

• Disrupted Global Supply Chain
  • Globalisation is basically wage arbitrage leveraged by low transport cost
  • Companies shift production offshore to keep cost low, which kept inflation low (prevented wage spiral) during the years of economic booms
  • The pandemic exposed how fragile the supply chain is as shipments are cancelled or delayed causing inflation
  • Friendshoring became a focus as global tension rises
• Food Shortages
  • War between Russia and Ukraine disrupted grain and fertiliser supply for the world, driving up prices
  • Climate change causes agriculture yields to fall in China and the USA
  • Major food exporter gains significant geopolitical leverage

Russia

• Russia has been used to sanctions thrown at them historically
  • They are good at being self-sufficient as they were always prepared to face sanctions
  • When EU closed their airspace from Russian airlines (and Russia also retaliated by closing off access to western airlines), it is the western airlines that got disproportionately impacted
  • When Boeing and Airbus stop supplying and servicing planes for Russia, they simply seized the existing planes, and developed their own domestic airline industry
  • We also see the same domestic market developments in China that are spurred by sanctions
• Sanctions Effectiveness
  • It is especially damaging for countries that are not self-reliant (but Russia and China are self-reliant to some degree)
  • But overtime as more countries become self-reliant (incentivised by existing sanctions), they lose their effectiveness, and may end up hurting the countries that initiated and imposed those sanctions (energy situation in EU)
  • It also depends on how big are the target economies (China and Russia are simply too big)
  • Russia pivoted to export oil and gas to China, India, and even Saudi Arabia
• No-limits Partnership with China
  • Sanctions has prompted Russia and China to strengthen their partnership so that they have more capacity to handle the threats from the West
• Existential Threat
  • Ukraine joining NATO is an existential threat for Russia. Russia has to respond.
  • See Prisoners of Geography by Tim Marshall
    • journal: [[202507011339-prisoners-of-geography]]
    • web: Russia

China

• A Multi-polar World
  • Shanghai Cooperation Organization (SCO) and BRICS expanding their influence in Asia
  • Improving trade relations and volume between countries in these two organisations speeds up the shift away from dollars
  • China has been helpful in bailing out countries that are defaulting from Belt and Road initiative. This buys them influence.
  • Alternatives to IMF and World Bank established by BRICS, and lending by China to individual countries, have less stringent conditions on the borrowing countries and may be seen as a fairer deal for developing economies
• Reaction to Sanctions
  • US have tried to limit the development and export of Chinese technology, by banning imports and sale of certain tech to China, delisting Chinese tech companies, or banning use of certain Chinese software.
  • Similar to Russia, this prompted the China government to focus on self-reliance and develop those technology with more investments and seek other markets
  • These measures also hurt US as China is a big exporter of solar and battery tech
• Dollar Reserves
  • China has a large dollar reserve and has been funding US government debts
  • If China unwinds their reserve and US treasuries, it will make cause future US government spending to be more expensive
• Taiwan
  • US has traditionally not declared that they will provide military aid to Taiwan in the event of a Chinese invasion, to prevent escalation by China
  • Biden’s administration changed their stance due to the increasing importance of semiconductor chips for all advanced manufacturing
  • Taiwan’s silicon shield is heavily reliant on imports of rare earth elements (REE), which China is the largest exporter
  • US could attempt to destroy Taiwan chips manufacturing facilities preemptively if they cannot secure Taiwan from a potential invasion
  • Both China and US are in a semiconductor race to improve their self-reliance. And this also includes self-reliance on REE mining. However, chips produced outside Taiwan are expected to be much more expensive.

Middle East

• Israel, Saudi Arabia, and Iran
  • US has been trying to improve relationship between Israel and Saudi Arabia, establishing military partnership. This may be an existential threat for Iran.
  • Terror attack by Hamas on Israel in Oct 2023 stalled the plans, which is aligned with Iran’s interest
  • China has been brokering improved trade relationship between Iran and Saudi Arabia, which are long time rivals
  • Saudi Arabia may enjoy the best of both worlds through improved relationship with Israel and Iran (which are proxies for US and BRICS), so they are not incentivised to take a side in conflicts