In his latest dispatch, Credit Suisse contributor Zoltan Pozsar strayed from his earlier statements that an L-shaped recession is needed to rein in inflation. But the road to recovery in a world gradually shifting to a new commodity-bound order will not be solved by traditional means of QE or economic equations.

“What must be done to go from “L” to “L/”? Pozsar noted. “Consumption is unlikely to generate the ‘/’ as we don’t have the former ‘spouses’ to import from. It follows that we will have to produce things on our own: “/” will come from investments, with the help of the government. »

Pozsar derives this view from the resulting “alliance of the sanctioned” between Turkey, Russia, Iran, China and North Korea. Russia and China, in particular, see their economic relations with the West seriously threatened – sanctions for the first, diplomatic relations for the second.

“The special relationship (“alliance”) between China and Russia is a bit like a disenfranchised spouse (China from the Chimerical Union) finding another (Russia from the Eurussia Union) ) to form an economic union out of revenge: one gets goods he doesn’t have, and the other tokens and stuff he can’t get from the West anymore because of Western sanctions.

While the Russia-China alliance would take time to complete – let alone dominate – a global economic order on its own, both states are serious challengers to US hegemony. In a commodity-based economy, producers dictate the movement of the global economy.

To illustrate the effects of war on industry, Pozsar took a deep dive into the weapons and artillery involved in today’s global conflicts. Quoting a FinancialTimes article, he noted that the United States had quickly depleted its stockpiles as it supported Ukraine in its war against Russia, given how Washington DC has invested more in sophisticated chip-based weapons.

“[Fetishes] for high-tech weapons and lean manufacturing have overshadowed the importance of maintaining stocks of basic kits. The total annual US production of 155 million artillery shells, for example, would only last about two weeks in Ukraine,” Pozsar quoted in the article.

Besides basic artillery, crafting replacements for chip weapons is also difficult to speed up. Aerodefense company Raytheon said it would take “a little time” to produce Washington DC’s order of 1,300 Stinger anti-aircraft missiles to replace those sent to Ukraine. The slow replacement not only affects domestic capacity but also other “wars” and alliances the United States wants to protect, such as Taiwan.

The chip shortage has reached such a point that Peter Wennick, CEO of Netherlands-based semiconductor supplier ASML, told a story in which an “executive of a very large industrial company” told him that they “purchased washing machines to tear off chips to put into industry”. modules.”

China’s blockade of Taiwan, one of the West’s top chip exporters, is also straining the supply chain.

Arming raw materials and waging economic wars revealed what Pozsar describes as “the implosion of the long chains of intermediation of the globalized world order”.

“The triggers are not a lack of liquidity and capital in the banking and shadow banking systems, but a lack of inventory and protection in the globalized production system, in which we design at home and manage from home, but buy, produce and ship everything from abroad, where goods, factories and ship fleets are dominated by states – Russia and China – that are in conflict with the West,” Pozsar said.

For its part, the West – the United States in particular – has imposed sanctions that should slow the incipient economic bubble by the alliance of the sanctioned, in particular by banning ASML from selling lithography machines to the Chinese chipmaker SMIC . Washington DC is also considering possible restrictions on shipping “chip manufacturing equipment to memory chip producers in China”.

But for Pozsar, that might not be enough.

“I understand why the United States wants to reverse time. But we cannot win by slowing progress. It will also be necessary to progress by building, and this is where industrial policy comes in,” he noted.

Pozsar speculated that the West will have to pour trillions into four types of projects starting “yesterday” – rearming its armament, relocating its sources, replenishing its stockpiles and rewiring the energy grid.

“Similar to how Basel III was the ‘tab’ associated with the Great Financial Crisis, the above listing is the ‘Great Crisis of Globalization’ tab that is currently unfolding,” he said. describe.

In rearming, the West must continue to invest in its armaments to defend the world order, revived by Germany’s plan to spend 100 billion dollars on armaments, the West’s plan to spend 750 billion dollars to rebuild Ukraine and the G7 plan to generate a US$600 billion plan to counter China’s Belt and Road initiative.

When relocating, the West must find domestic sources and production processes because it cannot rely solely on allies to import its necessities, as the Chinese blockade of Taiwan illustrates. Pozsar noted that the $52 billion CHIPS bill in Congress, with specific measures to fund initiatives to procure other sources of chip production for the country’s weaponry, is “just the beginning.”

Regarding resupply, Pozsar pointed to the current energy crisis in Europe where EU states need to start or step up replenishing their reserves. He also added that the United States must replenish not only its depleting strategic oil reserves, but also its food products, as the country battles historic droughts on the home front and the supply chain of commodities with China and Ukraine.

With regard to rewiring the energy grid – although this has been a key policy since before the pandemic and the wars as the world transitions to clean energy sources – the focus on realigning its sources given of the controversial relationship with Russia should be highlighted.

“I think the above four themes will be the defining objectives of industrial policy over the next five years,” Pozsar said. That said, he went into more detail about what these key policies would mean for investors in global markets.

First, Pozsar said these policies would be commodity and capital intensive. The high need for commodities in the scenarios mentioned above could lead to a demand shock “in a macroeconomic environment in which the commodities sector is woefully underinvested.” Given the need to scale up production, the above tasks would also require more capital for governments and the private sector to build capacity.

Moreover, in the execution of tasks, implementation must also be insensitive to interest rates because, as Pozsar puts it, “industrial sovereignty depends” on the correct execution of policies. Whether “the Fed raises rates to 3.5% or 7%,” executing the to-do list is imperative.

Although he noted that private equity depends on interest rates, he believes that industrial policy “will eventually ‘crowd out’ private equity” if done well.

Finally, Pozsar noted that the aforementioned policies should take into account its uninvestable nature for Eastern markets. Aside from the potential ramifications of defaults – as evidenced by Russia’s foreign exchange reserves – the East would logically not fund initiatives to bolster the West’s global order against the East.

“[Sadly] things make no sense to continue as before, either from a real point of view (trade/production) or from a financial point of view (foreign exchange reserves)… that’s why Bretton Woods III is intended to occur. It’s already happening,” Pozsar concluded.


Information for this briefing was found via Credit Suisse. The author has no security or affiliation related to this organization. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author holds no license.