By Michael Every of Rabobank
The immediate focus in markets today is on tech slumping again, rotating from JGBs, then gold, silver and other metals. Yet despite the scale of market moves -- around a trillion dollars of paper losses, as ‘Bill Gates stated: “The majority of AI companies will fail”-- few writing about it understand the sector. It is, to quote Chamberlain, "A quarrel in a faraway land between people of which we know nothing." That line echoes far more broadly and deeply.
US-brokered Ukraine-Russia peace talks in Abu Dhabi saw a "productive" first day yesterday. That’s as the EU agreed a €90bn loan for Ukraine, funded through joint debt, much of which is to buy arms. However, a UK minister noted long delays to rearmament because it’s “a bigger task than many people outside defense realize.” The FT says officials believe Russian spy spacecraft have intercepted unencrypted communications from Europe’s key satellites. It’s claimed China is funding 60% of Russia’s invasion and Moscow “can only maintain this war because China is essentially bankrolling it.” One report even says Russia is using neural chips to turn live pigeons into drones. In short, it’s not purely threats to Ukraine, or Russian GDP, or current weapons that Europe needs to pace itself against. Much, much more spending could be needed.
Tomorrow sees US-Iran talks held in Oman, despite a change of venue, Iran nearly backing out, and the US shooting down an Iranian drone near an aircraft carrier. Markets are still hoping for ‘peace in our time’, but it takes no specialist knowledge to know that isn’t really true of the region. Indeed, there is still a strong local view that the talks are likely to fail, opening up a political path for a US and Israeli attack on Iran’s nuclear program, ballistic missile plants, and perhaps the regime itself – which Iran pledges would mean a regional war.
Trump and Xi spoke ahead of his planned state visit in April. The US side stressed lots of deals to be done, including on soybeans; China stated Taiwan is the “most important” issue; in the background, as Bloomberg puts it, “‘Lone Wolf’ Takaichi Wants to Build a Bold, Outspoken Japan.”
For those expecting détente, note China just warned Panama of “heavy prices” to pay after Hong Kong’s CK Hutchinson saw its contract to run ports at either end of the Panama Canal quashed. That was Donroe Doctrine lawfare taking de facto control of a critical global trade chokepoint. Elsewhere in LatAm, Costa Rica just saw a pro-Trump president elected.
In geoeconomics, the European Parliament unfroze the EU-US trade deal, but a vote is not likely until March, as Von der Leyen tries to seal a security and trade deal with Australia. Yet Oz matches the UK in finding rearmament hard, is a long way from Europe, and part of AUKUS - recall the French submarine debacle? Moreover, an FTA won’t float many boats, and even with one, Europe doesn’t jump the queue for resources, smelt them, or teleport them home.
The key thing to focus on is control of resources, upstream and midstream. Even those who don’t understand AI grasp it needs A LOT of cheap electricity, copper, and rare earths. In that regard, the White House is proposing a critical minerals trade zone to 50 countries, including the EU, Japan, India, South Korea, Australia and the Democratic Republic of Congo (DRC), to curb China’s dominance - as Beijing may stockpile copper after restricting exports of silver. The US just pledged hundreds of billions of capital into the mining sector, with its Exim Bank leading the way; is seeing state stakes in such firms; and now physical deals - the DRC is to ship copper to Saudi Arabia and the UAE through a US-backed partnership with Mercuria Energy Group Ltd.
The proposed bloc would share a price floor for key inputs as well as a common tariff vs. China. As Vice President Vance put it, “We want members to form a trading bloc among allies and partners, one that guarantees American access to American industrial might while also expanding production across the entire zone.” In other words, shift industry back to the US – but also expand industry across the bloc rather than buying cheap downstream goods from China.
Understand that this means global decoupling, starting with upstream and midstream; locks countries into a US system vs China; and the only alternatives are China; to build one’s own mines and smelters, if so blessed - as Glencore just cancelled investment in a Canadian copper smelter due to regulatory uncertainty; or to gain the hard power to get scarce supplies outside both the rival systems.
We are seeing a realpolitik 19th-century model emerge to power the technology of the 21st - as the Hong Kong press note, ‘The AI race: US and China defence sectors emerge as key battlegrounds.’ Indeed, Nvidia’s AI chip sales to China have just been stalled by a US security review: KYC measures to prevent chips heading to the PLA.
Yet even as von der Leyen announced that the EU will work with the US on the critical minerals front, with all it implies, new friction stems from France and Spain. The former just raided the Paris office of X; the latter proposed a social media ban for under-16s and legislation to make the CEOs of tech platforms criminally liable for failing to remove illegal or hateful content, and for using algorithmic amplification. Telegram founder Durov stated the Spanish proposals would make it a “surveillance state”, and Elon Musk labelled Spanish PM Sanchez a “tyrant”; Spain retorted that Musk poses a “threat to democracy.”
This year’s Munich Security Conference (February 13-15) is likely to see a stronger US attack on EU regulation of US social media platforms that last year’s, already a heart attack for EU officials who had no idea what was looming in Greenland. Could the US tell Europe (and the UK and Australia, with turmoil in their government and opposition, respectively) that they either accept glasnost, i.e., freedom of speech no matter how offensive, alongside a US reverse perestroika of a state-backed upstream and midstream (then, slowly, downstream) decoupling from China, as part of a US Warsaw Pact military protection… or they can go their own way on all of them?
Meanwhile, this all means economic models assuming a free flow of ‘aggregate supply’ vs. demand are wrong. Metals join energy --where the Hong Kong press also notes, as we had predicted, that ‘China’s cheap oil flows under strain as US ramps up Iran, Venezuela pressure’-- in being the pivot variables that macro forecasts revolve around. Central banks need to take that into account as much as analysts and politicians.
In that regard, even though the top Republican on the Senate Banking committee says that Fed Chair Powell hasn’t “committed a crime,” so may stay around longer (and potentially, and unusually, even after his stint as Chair ends), temporary Fed governor Miran just resigned from his concurrent White House role, which might imply he expects to extend his stay at the FOMC. If so, it would be alongside Fed Chair Warsh, who also doesn’t think economic models do anything useful, and neither does much of how we do central banking now. Presumably, like any good head of Gosbank, he fully grasps what the US grand macro strategy is re: upstream, midstream, and downstream production, and how inflation increasingly rests on the back of "A quarrel in a faraway land between people of which we know nothing."
