BY JOHN MAULDIN
Last week, George Soros said that we are in a cold war with China that could turn into a hot war. While Soros and I don’t often agree on politics, I did find my head nodding at times in his latest CNBC interview.
Then Luke Gromen of Forest for the Trees wrote about change in the geopolitical climate, which is not his usual beat.
Gromen argues that US national security may be more important than risk asset performance for the first time in decades.
Here’s an excerpt with his summary:
- Potential rule change: US national security may be more important than risk asset performance for the 1st time in 35+ years (but risk assets don’t seem to realize this yet).
- If we are moving back to a “Cold War” world where US policy is driven more by the national security establishment than the Wall Street/Treasury establishment (as has been the case for the past 30+ years), then it would seem the odds are good that the chart on the front page of the attached pdf would mean revert, implying as much as a 30–60% drop in corporate profits as a % of GDP just to return to the levels that prevailed during the last Cold War, before cheap Chinese labor & (at least temporarily disappearing) Fed largesse elevated US corporate profitability to all-time high %s of GDP.
- If a new Cold War is indeed breaking out, it would in turn seem to have severe implications for the global & US corporate debt & equity markets—it is HIGHLY unlikely that any of this money was borrowed assuming a 30–60% drop in US corporate profits as a % of GDP was even remotely possible, & on many metrics (IG, HY, leveraged loans, US equities v. ROW), valuations are quite stretched already. There are record levels of leverage in the US corporate debt market, & the rules appear to be changing for national security reasons in a manner quite unfriendly to corporate margins!
US Defense Experts Confirm the Fears
I was recently in Washington, DC for a personal meeting with Andrew Marshall.
Marshall was appointed by Nixon to run the Defense Department’s futurist think tank. Every president reappointed him until he retired three years ago at 94.
He is the most significant figure in US geopolitical strategy. You have never heard of him because he never wanted anyone to know who he was.
Chinese leaders read everything he wrote. His pictures are on their walls, literally. I can’t stress enough how important and influential he is.
In the meeting, there were also two US defense strategy mavens.
The topic turned to China.
Andy noted that he had been warning the US government about China’s real intentions since the 1980s. I asked about some of the China analysis I’ve seen.
These experts confirmed everything that I had read and then doubled down. The geopolitical risks are serious.
We in the West simply don’t understand the Chinese mindset or their intentions. Even though they write strategic papers every other year, detailing exactly what they are thinking and doing.
There should be no surprises. But we ignore these writings as political noise. And then try to exploit the vast (and real) potential of Chinese markets. Yet it may not work out the way we hope.
The point is that we do indeed live in interesting times. We simply can’t expect the old investment paradigms to meet the challenges of the future. Past performance is indeed not indicative of future results.