Vijay Kumar Gaba: Xi Jinping

Tuesday, February 13, 2024

My takeaway from Putin’s interview

Recently, an interview (watch here or read here) with Russian President Vladimir Putin has been trending in the media worldwide. In this two-hour seventeen minute long interview, President Putin touched upon many important issues concerning global economics and geopolitics. Experts from the world over are analyzing the interview from multiple angles, e.g., strategic, political, geopolitics, economics, etc. Most analysis I have come across is deeply biased. The starting point of most comments is the trustworthiness of President Putin. Most Western analysts seem to be rejecting Putin’s assertions as mere propaganda; while the analysts from Eastern and Southern analysts are using the contents of the interview to justify their opinions about the US agencies (deep state) and NATO.

In India, pro-establishment media and experts have mostly refrained from commenting on the interview; whereas the critics of the establishment have used this opportunity to emphasize that President Putin has answered many tough questions while Prime Minister Modi chooses not to answer media questions. I have not seen much discussion in Indian media on the assertions made by President Putin.

As a tiny fish in the pond, I am incapable of making any intelligent comments on matters of global or even national importance. Nonetheless, I found the following three things in the interview that interested me as a small investor.

· “China's economy has become the first economy in the world in purchasing power parity; in terms of volume, it overtook the US a long time ago. The USA comes second, then India - one and a half billion people, and then Japan, with Russia in the fifth place.”

This is the only mention of India in this 2:17:19 hrs. interview. Indonesia got much more prominent mentions. China was repeatedly mentioned as a formidable global power. The recent trade trends are suggesting that near-shoring, friend-shoring, and China-proxy-shoring are emerging as more popular trends. Indonesia, Mexico, Vietnam, etc. are emerging as much stronger gainers of the China+1 strategy as compared to India.

· President Putin made it clear, in no uncertain terms, that the era of global peace that prevailed particularly in the post-Cold War period is mostly over. We are entering an era of mutual mistrust; frequent disruptions; persistent and potent threats of a larger war; and redistribution of global power.

This implies that (i) defense spending will increase for most nations; (ii) given the current state of the stretched fiscal position of most developed nations, the collateral damage of higher defense spending will be humanitarian aid; (iii) Rising mistrust may also result in tightly closed borders, adversely impacting immigration; (iv) Volatility in markets will rise materially; and (v) USD will face persistent pressures.

It appears too early for India to claim self-reliance in defense production. It is also early to anticipate that India could become the fulcrum of any major global alliance in the next few years. This means we could face serious trade and foreign policy challenges soon. The recent performance of the government in this regard is not very inspiring.

· President Putin hinted that Artificial Intelligence (AI) needs to be regulated and there must be a global understanding on this subject.

Failure to reach a wider understanding may pose a similar (if not greater) risk to the global peace and stability as the stockpile of nuclear weapons did in 20^th century. Misuse of AI could be devastating. The US and China are miles ahead of India in the development and deployment of AI in most areas, especially defense technology.

The implications for my investment strategy are as follows:

· The sentiment of nationalism apart, for small investors like me it may not make much sense to place significant bets on the China+1 theme. To global investors markets like Indonesia and Mexico may offer better opportunities.

· We should embrace higher volatility. The post global financial crisis (GFC) era of low volatility may be over in the next few quarters.

· Overstretched fiscal positions and the specter of war may keep rates elevated for longer than presently anticipated, even if China accelerates the export of deflation. The cost of global capital could rise for Indian entrepreneurs.

· It may not be a great idea to buy USD-denominated assets for small investors.

· Defense production and AI will remain relevant themes for many years. But buying these at any price may not be a good idea. (more on this tomorrow.

Thursday, October 19, 2023

Winds of change

In the past 6 years, several significant events have occurred that would shape the new global order in the next decade or two. I would particularly like to mention the following ten events that in my view could potentially prove to be transformative for the global order:

1. Incorporation of the Belt and Road Initiative (BRI) into the Constitution of the Chinese Communist Party. (2017)

2. Abolition of time limits, allowing Xi Jinping to remain General Secretary of the Chinese Communist Party and chairman of the Central Military Commission for life. (2018) (After winning an overwhelming majority in the 2020 elections, Russian President Vladimir Putin is also eligible to stay in office until 2036.)

3. The Exit of the UK from the common European market (the EU) (2017-2020); and the elevation of the first non-white person (Rishi Sunak) to the office of Prime Minister of the UK in 2022.

4. The beginning of the latest round of trade war between the US and China. (2018)

5. The tariff war between the EU and US. (2018)

6. The outbreak of the COVID-19 pandemic, allegedly from a laboratory in Wuhan province of China, and consequent breakdown of global supply chains. (2020)

7. Exit of the US forces from Afghanistan, handing over the regime to the Taliban (2021)

8. Invasion of Ukraine by Russia and subsequent economic sanctions on Russia. (2022)

9. Signing of a strategic partnership agreement between China and Saudi Arabia (2022)

10. Massive attack on Israeli civilians by Hamas and subsequent retaliation by Israeli defense forces killing thousands in Palestinian territory in the Gaza Strip. The attack divided the world with Western allies extending support to Israel and Russia, China, and Arab League nations uniting in support of Palestine. (2023)

I feel that each of the above-stated events, along with many other events occurring simultaneously, has added to the momentum of change in the global order that had been in existence since the early 1970s.

It may still be early days to project how the new world order would look like. Nonetheless, it seems reasonable to assume that the global economy may get a significant impetus from the rebalancing. The realignment of trade balances; localization of manufacturing; redistribution of population; and renewed focus on finding/developing new materials, technologies, and methods to promote sustainability may usher in a new industrial revolution.

Notwithstanding the labor pain that the transition would inevitably entail, the new world order would be much better, as has always been the case.

I think young investors need to evaluate the recent events and their likely impact on their investment strategies. I would be happy to share my thoughts on these events in the coming weeks.