As my friends and clients know very well, but also anyone who has read any of my writings before, I always held that understanding history and geopolitics is one of the most important elements of sound investing. Most mainstream investors, “experts”, as well as the financial press tend to ignore these forces, as does the public at large, of course. “Who cares what happened decades ago in some faraway land? I just need someone from Wall Street to tell me if I should buy Netflix today ” – that’s the attitude. And this is why they are so often surprised when an escalation finally comes about and actually impacts them directly, and not just in terms of their portfolio.
But even for students of history and keen observers of current geopolitical developments, finding analyses that contain valuable insights and viewpoints that provide real food for thought is increasingly challenging. For me, Simon Hunt’s analyses and insights have been essential to separate the signal from the noise and this is why I was very grateful indeed when he agreed to an interview. Having founded Brook, Hunt and Associates, a global metals consultancy, in 1975 and Simon Hunt Strategic Services in 1996, he has an extensive and deep understanding of the role of geopolitics in investing, as well as direct experience of the dynamics on the ground, particularly in China and Asia at large.
From the questions I had for him in our discussions and in this interview, one theme emerged as a common denominator: “Where are we in this strange but pivotal social and economic cycle?” In his own words, “the short answer is that over the coming three-odd years the world will either shift from a US unilateral domination into a global structure where spheres of influence will be agreed between America, China, Russia and others, or if America does not gracefully relinquish their hegemonic structure, war of some description, whether physical or financial will likely be the result. From that framework emanates the outlook for global growth and the financial system.”
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Claudio Grass (CG): Over the last two years, the pandemic has almost entirely monopolized mainstream news headlines, at the expense of most other important stories and developments that went largely underreported. This was especially true for geopolitical news and as a result, a lot of the crises we see today, like the Ukraine-Russia tensions, seem like they suddenly came out nowhere. Could paint for us the bigger picture and help us understand the context of the shifts we see today?
Simon Hunt (SH): The geopolitical and economic crises, whether currencies, debt or economic activity have been building up for years way before the recent geopolitical turmoil. Global debt reached 260% of GDP last year and will probably rise even more this year. The last time that world growth exceeded debt was years ago, in fact about 75 years ago!
And today’s political tensions between Russia and NATO including America really started building up after 1990, when America and its allies abrogated the agreements then signed between the two groups which are today lodged in the National Archives in Washington University.
For China, the worries for the wonks in Washington began around 1996 when China’s exports started accelerating from $52 billion in 1996 increasing virtually every year to reach $506 billion last year. Of course, CEOs thrived on this outsourcing, as I recall on many a flight back in the mid-1990s from China surrounded by US CEOs congratulating each other on the operations they were setting up there and on how much money they would make.
However, the steady build-up of US containment policies against both Russia and China have reached one of those important turning points in history. To us anyway, a view shared by many friends outside America (and a few within the country), Russia and China have matured economically and militarily sufficiently for them to stand up against America and say ‘Enough is enough. We are tired of your bullying tactics. We don’t want your dominating strategies. Your form of democracy does not travel well. We want a multinational world where trade is the common denominator and where countries can govern in a manner that suits their own culture and demographics’.
America’s efforts of exporting their form of governance have been nothing short of disastrous from Iran, to Iraq, to Syria to Libya and in Yugoslavia. Pretexts were found frequently to invade, probably orchestrated by the military-industrial complex to maintain their hold on the empire. How much more advanced economically and politically would the Middle East be today had not America invaded these countries, a sequence that began 20 years ago. It has taken that length of time for the damage to start being healed as countries begin to mend their fences with each other.
As one example, I came out to the UAE a year ago, first on a 3-week holiday and subsequently to use the UAE as my base rather than the UK.
The country has an autocratic government: Emiratis account for just 11% of the population with India, Pakistan and Bangladesh accounting for 47%. There is no racial tension, everyone gets on with their lives and everything works. Government decisions are made quickly and funds are poured into infrastructure whether roads, railways or 5G. There is no crime (plenty of desert!) and medical and education facilities are some of the best in the world. In sum, the UAE is a prime example of having a government that fulfills its needs – pragmatism, not ideology is their way forward.
CG: Focusing on the Ukraine situation for a moment, we’ve seen a lot of threats and “red lines” from the US and NATO, while Russia’s stance appears to be steadfast, or at least more difficult to read. What are the main motivations fueling the conflict and what’s the most likely outcome you expect to see?
SH: Ukraine is just one though an important part of the bigger issue which is the security of Russia’s borders. Despite the signed agreements between Gorbachev, Bush and other NATO country leaders in 1990 that they would not move ‘one-inch eastwards’ there has been a constant encroachment towards Russia’s borders.
If NATO and Ukraine had held to what they signed up for in the Minsk Agreement, there would have been no problems in or with Ukraine but neither party had any such intention. It was Obama’s war mongrels who initiated the overthrow of the democratically elected president in 2014.
Now the same pack of war mongrels inhabit Biden’s paddock. It will be difficult to dislodge their influence. Left to the professional diplomats, a solution to end the war and Russia’s fears over its border security would be found.
Russia has no intent of taking over the country; Ukraine is destitute, a broken and thoroughly corrupt country that would only be an albatross across Russia’s neck.
What is feared within Moscow is that America will launch a ‘False Flag’ operation, reminiscent of what they did in Syria, by for instance launching chemical warfare against the civilian population and blaming the operation on Russia, as Russia’s defense minister has suggested could occur.
Should that happen, then Russia would be forced to move into the Donbass region only up to the border with what I call Kiev’s Ukraine. Russia considers Donbass to be Russian territory just as they do Crimea.
The situation is tense. Ukraine has an army of over 100,000 pitched on the borders of Donbass heavily supported and armed by NATO whilst Russia has some 130,000 sitting 100-400km from Ukraine’s border.
If the war mongrels can be dissuaded from launching a false flag operation, then a diplomatic solution can be found centered around a lengthy moratorium that NATO will not allow either Ukraine or Georgia to become members of NATO and restricting the amount of military and missile equipment from a negotiated distance from Russia’s borders would be the start of any successful negotiation – that would be my guess.
Yesterday’s announcement from Moscow that Russia is withdrawing some troops and equipment back to their bases should not be construed as an end to the crisis as some are suggesting. It’s a typical Putin ruse.
In fact, the key to unlocking the negotiations is for NATO or any individual country not to locate any missiles in Eastern Europe. Everything else is a sideshow. This is the guts of Russia’s demands.
Of course, security of Russia’s borders is part of the global painting: the development of a country-wide structure that holds governance and values different to those led by America, well epitomized by Putin’s alleged comment to Macron, ‘Citizens of Iraq, Libya, Afghanistan and Yugoslavia have seen how peaceful is NATO.’
CG: Another nation that is often seen as an imminent threat to the West is of course China. Although the country’s economic growth has somewhat cooled off as it “matured” from its emerging status and the unprecedented growth of the last decade, its geopolitical agenda is still worrisome to many outside observers. Should its territorial disputes and massive foreign investments be read as expansionist signs and set off alarms in the West?
SH: China is of course a country that I know a little having started visiting it in 1993. For the next 15 years, I was visiting about 80 factories in some 50 different towns and cities every year. Since then, my visits have been confined to a few old and new friends whose portfolios are sufficiently broad to give me good insights into the economy.
China’s ambitions are not to rule the world by displacing America’s hegemony. She wants a multinational world where individual countries can create governances that are in tune with their culture and history. The development of BRI, the strategic alliance with Russia, the new 25-year agreement with Iran, the brokering of peace with other leaders between countries in the Middle East and Asia are integral to this ambition. The objective is to form a world outside the domain of America’s long arm.
Perhaps least understood is the importance of the 25-year agreement with Iran. Part of that package will be China’s investments in developing manufacturing capacity in Iran under the control of China’s SOEs. Thus, Iran with its cheaper labor, energy prices and location will become China’s new export manufacturing base.
Of note is that Iran spends around 20% of its GDP on education. Literacy is over 96%. Universities have around 700-750k a year of graduates of which about half have degrees in the sciences and engineering. What a good base for Chinese investment in manufacturing.
A key issue is of course Taiwan. Left to its own devices, China’s leaders believe that the passage of time will enable compromises to be reached allowing the island to be absorbed peacefully into the mainland. Deng apparently always said that 2028 would be the year of their destiny. Taiwan of course has been the largest investor in China with over 1 million Taiwanese working in the mainland.
But China is not being allowed to be left alone. The war mongrels in Washington want their pound of flesh as they have initiated far closer ties than was agreed under the 1992 Act. The new 2022 National Defense Authorization Act signed into law on 27th December 2021 signals US policy by surrounding China with a circle of military bases one of which will be Taiwan.
This will be crossing one of China’s Red Lines and will likely cause a far more aggressive posture against America starting after the Olympic Games. Let’s see what emerges. Bear in mind the even closer alliance which emerged last week between Putin and Xi in Beijing.
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In the upcoming second part of this interview, we’ll look at the shared goals and themes for both Russia and China, at the importance of the Heartland Theory in understand today’s and tomorrow’s dynamics, as well as at the impact on financial markets.
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