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Devil without sheep’s clothing

Lightning striking the White House in Washington

Will the game of musical chairs in the White House and Trump’s stance towards the rest of the world fan the geopolitical flames and what will this mean for global markets?

“I’ve heard that you’re actually the devil incarnate and I wanted to meet you,” said US Secretary of Defence, James Mattis, to John Bolton, President Trump’s new National Security Adviser. The latter has a reputation as a neoconservative hawk who is not that worried if war breaks out. Nor does he shy away from confrontations with America’s allies. The appointment of Bolton continued the trend of choosing ever tougher hardliners as advisers and ministers. At the same time, many officials who were known for being moderates have been given the boot – often via Twitter.

Two comments are in order. First, folk who are not particularly diplomatic and thoughtful have also been ejected from the White House including Steve Bannon, Michael Flynn, and Sebastian Gorka. Plus, some of the people who were expected to keep Trump on track were not up to the task so their departure does not give cause for great concern. Take, for example, former Secretary of State, Rex Tillerson. Trump refused to take him seriously and/or ignored him. On top of this, he managed to antagonise his own department.

Second, the fact that ‘hawks’ are appointed to important positions does not automatically spell disaster. Historically, there have been instances when hardliners came up with gestures of reconciliation. This is not as surprising as it seems. After all, if a hardliner strikes a compromise this is easier to sell to supporters. Examples are Yitzhak Rabin’s territorial concessions to the Palestinians and the opening to China orchestrated by Henry Kissinger and Richard Nixon.

Dangerous people?

In other words, the game of musical chairs in the White House may not have such a dire outcome as some are predicting. Yet there is no guarantee that everything will turn out fine. Trump seems hell-bent – consciously or not – on doing everything within his power to confuse allies and opponents alike with his zigzag policies and out-of-control tweets. The hardliners outnumber the rest. John Bolton is far from alone; there is also Peter Navarro (the main economic adviser) and Mike Pompeo (the new Secretary of State). Meanwhile, those who appeared to keep things together are either increasingly irrelevant or gone.

The aforementioned trio – Trump, Pompeo, and Bolton – bring to mind British writer D.H. Lawrence who said in 1923: “The essential American soul is hard, isolate, stoic and a killer. It has never yet melted.” Half a century later, US historian Richard Hofstadter added: “Americans certainly have reason to inquire whether, when compared with other advanced industrial nations, they are not a people of exceptional violence.”

It is crystal clear that Trump has no qualms about taking a hard stance. Apparently, he enjoys seeing his allies flounder in an ocean of uncertainty and unpredictability and relishes being blunt.

North Korean pessimism

We will find out shortly if the US President will continue to steamroller forward and if he is going to initiate new crises with Pyongyang and Teheran and/or unsettle the world trade system.

We think the likelihood of a major breakthrough in relation to North Korea is not that high:

  • Kim Jong-un will not give up his nuclear arsenal; he has seen what happens to dictators who discarded their weapons of mass destruction (Muammar Gaddafi, Saddam Hussein).

  • Kim’s attitude has frustrated China in recent years but the chance is very slim that Beijing will give the North Korean leader the chop. Millions of refugees could flock to the Chinese border in a worst-case scenario.

  • Japan and South Korea (both are allies of the US) do not want to put the screws on North Korea with too much force as they fear a destabilising regional crisis.

  • The US demands complete nuclear disarmament from North Korea. Pyongyang wants America to considerably scale down its involvement in the region. There is not much room for manoeuvre on either side of the fence.

  • North Korea is haunted by deep fears of the US. The Americans carpet-bombed the country in the 1950s. Korean cities suffered greater damage than the German and Japanese cities that were firebombed during World War II.

So from a geopolitical perspective Trump & Co could fan global tensions rather than douse them in the coming period.

Fading order

As to trade, it is increasingly clear that Trump regards China as his real adversary. The problem is that he riles countries that he badly needs to help him rein in the giant country. On top of this, he is undermining the global liberal order that has benefitted America in the past decades.

Voltaire wrote about the Holy Roman Empire – which was tottering on its last legs after 1,000 years – that it was no longer holy, nor Roman, or even an empire. The same now applies to the global liberal world order according to Richard N. Haass, “the fading liberal world order is neither liberal nor worldwide nor orderly”.

Trump appears to half-heartedly apply the lessons learned from Lord Palmerston, the 19th century statesman who said: “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” The British interpreted Palmerston’s wisdom as a constant rebalancing of the European powers whereby the idea was to support the weaker European powers against the strongest great power in order to prevent hegemony on the continent. Trump takes a different approach. His very free translation boils down to America First. He does not seem to have any permanent friends or enemies even if he occasionally makes an exception for both camps. The only ‘fixed point’ seems to be Trump’s own (permanent) interests.

Vulnerable America

This takes us to the implications for the financial markets. Most experts think the US economy is way ahead of Europe (and other countries) in the economic cycle. If so, one consequence is that the statistical likelihood of a recession is rising. And whereas the Fed may slowly be applying the monetary brake, the central bank has too few buffers, it would seem, to effectively counter the next recession.

America is more vulnerable than it appears at first glance. Inequality has markedly increased in recent years. Plus, the median earnings for a fifth of all jobs are below the poverty line. Debts are again rising steadily while the financial sector comprises almost as large a portion of the economy as before the crisis and it very much remains to be seen if the sector is supervised properly.

Considering these weaknesses, whereas the central bank certainly has not regained its full fire power, the US cannot really afford to opt for political stunting. Europe is also riddled with weaknesses. Our economists refer time and again to the considerable interest rate gaps between Europe and the US. However, whereas EUR/USD could indeed drop substantially in the long run, the uncertain goings-on in Washington could counter that movement to a considerable extent.

Self-evidently, neither John Bolton nor Donald Trump really is the devil incarnate. Yet, there seems to be a growing chance that Washington will fan the geopolitical flames. If so, things may well get too hot for the liberal world order – in as far as the latter still exists.