Not Fake News

Per usual, the world is a mess. At least that is what the media wants you to think. Granted, there are about as many geopolitical risks floating around as at any point in history. On the bright side, I don’t know anyone that is building bomb shelters. So we got that going for us, which is nice.


I’m going to break down some topics that should be of interest at this current juncture. If you don’t already know there is something out of the ordinary going on in Russia, China, Iran, North Korea, Turkey, Brazil, or Great Britain, you are about to find out.


To be politically correct, we are going to attack these topics alphabetically. Because, why not?

Brazil – Total political dumpster fire. That is all. Just kidding. But seriously…

Brazil has a temporary president (Michel Temer) that replaced their hyper-corrupt previous president last year. Apparently, the Temer administration has been cracking down on corruption in hopes of maintaining power after the October general elections.


Historically, Brazilian politics have been controlled by a handful of corporate oligarchs, not dissimilar from Russia. The main difference between Russia and Brazil is the Brazilian people’s willingness to revolt. We’re not talking about a literal revolution here; rather, they are protesting and new blood is gaining traction in their volatile political climate.

With a struggling economy and a weak currency, quasi-socialism doesn’t really work, especially when the government doesn’t control the media. As a result, investing risk remains very high with the prospects of a major political shift toward the end of the year.

China – Where do we even begin?

China’s economy is still growing very quickly relative to the rest of the developed world. I would like to point out the fact, we don’t actually know how fast they are growing because of the epic lack of transparency in their accounting practices. Nevertheless, they are growing faster than the rest of us.

They are also parlaying this growth into consistently more aggressive military posturing. They have built numerous islands in the South China Sea in order to bolster their defenses and put a stranglehold on shipping lanes in the region. For an example, have a look at Gaven Reef below.


Many experts opine the endgame will be trying to repatriate Taiwan and Hong Kong. After all, Russia did it with Crimea. Oh, and of course, there is also that pesky trade war going on. You can find more on that here.


Great Britain – Kind of weird seeing the UK on this list, but they have all sorts of unresolved problems.

The most pressing issue? Brexit. Prime Minister May has marginal support for her strategy. Some strategists even think the entire exit from the EU will need to be voted on again. Regardless, the uncertainty has cost many jobs and created further political tension in an already confusing environment.


To further issues, the Bank of England recently raised their rates into a slowing economy. How much is it slowing, you ask? Take a look at the graph below.

Who really cares if their GDP is slowing rapidly…? At least the pound will be stronger than it should be.


Iran – Nuclear deal, no nuclear deal… Depends on who you ask.


The United States has unilaterally moved to impose sanctions on Iran again. Even though our trading partners in Europe have not followed suit, they have to decide whether they want to trade with Iran or with the US. If a company does business with Iran, they will not have access to the US market. Ultimately, Iran is going to have to renegotiate the deal if they want to continue selling oil at normal prices and not on the black market.

The long and short of it is: Iran’s economy doesn’t really affect the rest of the world, with the exception of oil prices. Less Iranian oil on the market means higher oil prices. This is theoretically good for both US producers as well as Russia and Saudi Arabia.

North Korea – Not to sound insensitive, but the Democratic Peoples Republic of Korea is irrelevant.


As long as they don’t blow anything up, they have no meaningful influence on global markets. To that end, the United States has seemingly began fruitful dialogue with the hermit nation and is aiming at preventing any further nuclear activity.


Only time will tell if Kim Jung Un and President Trump are actually going to do karate in the garage, but count me as a viewer if they start their own reality show.



Russia – This is not a cop out, but if you haven’t heard about anything Russia related, you live in a vacuum.


I’m going to pass on discussing Russia’s involvement in global politics and focus on their economy. It is a bit of a dichotomy. Unemployment is as low as it has been since the communist days, and wages have ticked up recently. All of this is great, except the Ruble is down over 10% relative to USD this year alone. Inflation has begun to cause problems, and Putin has waged proxy wars and disrupted its neighbors in hopes of distracting from a weakening economic outlook for the country.


From an investment perspective, one should do some SERIOUS due diligence before going out and buying any Russian investments.

Turkey – This is one of the few instances I actually wish there were more media coverage.


The Turkish President, Recep Erdogan, literally doesn’t understand economic principals. By forcing his central bank to keep interest rates artificially low in the face of incredible inflation, international tariff pressure, and a legitimate currency crash, Erdogan argues he is fighting inflation. He actually said that higher rates will lead to more inflation. How ‘bout that? It also doesn’t help that President Trump is attacking Turkey on Twitter.


For your viewing pleasure, have a look at this chart of the steady weakening of the Turkish Lira.


Final Thought: This was a small sample of existing global risks. In the face of constant shifts in geopolitical tension, diversification is your friend. Making a contrarian play in the face of obvious problems is not a contrarian play, it is a stupid one.



Disclosures:


Any opinions are those of Alexander Leonida and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.

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