The Tech Behind Skynet Is About To End Up At The Firm That Gave The World Windows Vista
By Michael Every of Rabobank
"Wars without Gun Smoke"
The key Fed release yesterday was summed up by Philip Marey as “minutes of inactivity”: in short, the Fed are on hold, the decline in bond yields is due to soft data, and if those data heat up again, it will be yields moving, not the Fed. The FOMC feel they are winning the war against inflation without having to use more ammunition because of the high (rates) ground which they control. Yet they will fire again if needed, and waiting to win is a very different thing from giving up the high ground and beating their swords into ploughshares… or shares of any kind. Markets blind-sided by Covid in 2020, inflation in 2021, war and inflation in 2022, and now more war in 2023, are still failing to grasp that the world has changed even if they haven’t, and 2024 is not going to be the ‘new normal re-run’ they think it is.
ECB President Lagarde also reiterated it’s "too early to start declaring victory" vs. inflation, and that she would be prepared to hike rates again if needed; that’s despite Europe sliding into recession, and Germany into deeper structural dysfunction as its constitutional court kneecaps its ability to borrow.
Even where higher asset-prices are loved, such as Australia, the war vs. inflation isn’t over. The RBA is threatening that if wage inflation stays at 4% and productivity stays much lower, rates will have to rise again. Now apply the same logic to the rest of the West, as everyone grapples with high nominal and, increasingly, real wage growth vs. ultra-low productivity, UK data being the latest awful example.
Moreover, inflation also depends on the geopolitics of a Cold War with hot flashes that encompasses the global role of BRICS11 (10, excluding Argentina) commodities, plus Chinese goods made with them, vs. the financialised world of the US dollar. See the recent EBRD paper underlining the surge in the use of CNY for international settlement for many in the Global South trading with Russia. If Western central banks try to roll out large rate cuts early in 2024, they will be shocked to find that all they will likely get is much weaker FX, a new surge in commodity prices, then with Western firms using their concentrated pricing power to keep margins high, and then higher wage inflation. We just went through that, nothing has changed structurally for the better, and much has got worse, and yet some seem to have already forgotten the painful lessons.
More clearly in the realm of geopolitics, at time of writing we were on the cusp of an Israel-Hamas ceasefire and the release of at least some of the hostages being held. Yet the gun smoke will clear for a while, then return. Indeed, the US is close to classifying Yemen’s Iran-backed Houthis as terrorists (making the administration’s past push to end Saudi Arabia’s war against them look awkward in hindsight), and has also stated that Iran is ultimately responsible for the seizure of the commercial ship in the Red Sea at the choke point of the Bab el-Mandeb at the end of the Suez Canal. Again, anyone thinking this is close to a 2024 low-flation resolution has a very low resolution grasp of how this volatile region works.
Meanwhile, the US has stepped up joint naval patrols alongside the Philippines, raising tensions with China; and one of China’s most modern PLA-N vessels, the landing ship Longhushan, is on fire - so smoke without guns. We are also a day closer to the Friday deadline for filing for Taiwan’s 13 January presidential election, and for now the KMT/TPP alliance is still off, meaning the pro-independence DPP candidate, current vice-president Lai, is best placed to win. Watch this space.
Relatedly, I want to share a recent paper from the journal International Security titled ‘Wars without Gun Smoke: Global Supply Chains, Power Transitions, and Economic Statecraft’. It shows that while the conventional wisdom is that conflict is highly likely during a power transition between declining and rising powers -- the Thucydides Trap, though who fires first is disputed -- global supply chains now provide new economic weapons to wage these conflicts peacefully, and businesses on the front lines can make it harder or easier for great powers to do so.
The authors argue that as a rival dominant power and a rising power approach power parity they face structural incentives to use economic statecraft to decouple their economies to either retain dominance or gain it – which we see today. The resulting threat to businesses’ profits then changes business-state relations. Logically, when businesses support their home state's geostrategic goals, it becomes easier for that state to sanction its adversaries or implement industrial policies. But when a business is at odds with its home state, it undermines the national agenda. Business-state relations --the degree of cooperation between businesses in global supply chains and the home state that has jurisdiction over them-- therefore have security consequences because they shape the effectiveness of economic statecraft. As the paper puts it, “much like morale on the battlefield, cooperative relations are a force multiplier for economic statecraft and conflictual relations are a force divider.”
Crucially, the paper argues that high-value businesses within the dominant power tend to oppose their state's use of economic statecraft, whereas low-value businesses within the rising power tend to cooperate with their state's use of economic statecraft.
We are given the example of how the City of London stopped the UK from using sanctions against Germany back, or even undertaking a small preventative war in 1905. We also have Norman Angell’s pre-war paeon to free trade as the route to world peace, ‘The Great Illusion’, which he recanted after the war. Today, we can look at US Fortune 500 titans selling goods to neutral countries while pretending not to sell to Russia, and/or paying $40,000 a head to give China a standing ovation. Meanwhile, on the other side we have team players for China, Inc., and echoes of the Lenin quote: “The capitalists will sell us the rope which we will use to hang them.”
This deserves a mention for markets as they look ahead to 2024 in hope for three key reasons:
Because it implies imminent and permanent Western decline, with a vast impact on every asset class far beyond myopic calls for imminent rates cuts: the latter would likely accelerate that worrying trend in some key respects.
Because resisting that historical/current decline suggests vastly more coercive economic statecraft within the West, with huge implications for many businesses and asset classes, as we are incrementally seeing already: again, 2024 rate cuts do not fit the bill in isolation, or perhaps at all.
Because we know what happened in 1914, and are not short of flashpoints at the moment.
Put that in your peace pipe and gun smoke it. On which note, it seems OpenAI and Sam Altman might be doing exactly that, and he may not join Microsoft after all. This entire farcical episode suggests someone was smoking something.
More so given some opinions that OpenAI is not just working on a ChatGPT that can replace white-collar jobs writing reports (Shock! Horror! For the people who spent decades writing reports saying it was a good idea to do this to blue collar workers), but on an AGI (artificial general intelligence) that is Skynet from Terminator or the Machines from the Matrix. And that tech could maybe now end up at a profit-maximizing firm that gave the world Windows Vista. Somehow that (tendentious yet) potential existential threat also gets overlooked by those thinking about stock prices and/or hoping for 2024 rate cuts.
I for one welcome our new Machine Overlords. Unless they also start talking about rate cuts.