Financial Markets, Iran, U.S. Global Hegemony

By: Raymond_Matison

Are you still in the market?  Markets for equities and bonds have been struggling over the last one and a half years.  Few real gains have been made – and it has taken an important policy reversal by the FED just to keep the markets levitated at current levels.  Neither earnings reports nor financial statistics seem to matter; charts have not mattered; the state of our domestic economy does not seem to matter either, as global trade, tariffs and sanctions are ignored in market valuations which remain scandalously unrealistic.  Negative earnings guidance is at record levels, but that too does not matter.  Both market fundamentals and charts continue to be completely ignored.  Every money manager simply follows announced guidance action of the Federal Reserve, and evaluates their statements to the point of analyzing missing or modified words from previous FED press releases.

During the Cold War, its belligerents developed a theory and practice to deal with the very real risk of a nuclear conflagration.  The resulting adopted strategy was called Mutually Assured Destruction, or MAD.  The operating theory was that neither nuclear power, Russia nor the United States, would initiate a nuclear attack while remaining vulnerable, because of the presumption of a vigorous response in kind, destroying both countries and perhaps making life impossible on the whole planet from radiation fallout.

It now appears that the mutually assured destruction concept has been applied to the money management industry.  Even if a fundamental analysis of the economy and current financial markets would require exiting those markets, no major money management firm dares to raise cash massively or quickly - for fear of starting a sales avalanche exposing market illiquidity.   Algorithms pick up drastic market moves early and can magnify the trend, which would bring market declines comparable to airplanes hitting air pockets.

Market indicators

Most financial indicators for our economy are negative: sales trends for homes and autos depict the poor health of the consumer in terms of big ticket items.   Mall and store closings corroborate the real state of the economy as it relates to mid-ticket spending.  Ship, air, rail and trucking product transport statistics confirm a weak outlook for consumer spending.  Manufacturing activity is making long-term lows as factory orders decline.

The nation’s sovereign debt is at a record – a record for which no prize should be awarded.  Trillion dollar budget deficits signal continued growth of this debt in the future – eventually guaranteeing the destruction of this financial system and its global currency.  Corporate debt is also a record levels, with significant amounts of such debt used to finance stock repurchases that shrinks corporate equity, which with increased debt weakens or enfeebles their balance sheets resulting in rating agency downgrading of corporate debt.  Consumers also have record debt levels from auto, educational, and credit card balances such that demonstrably consumers are incapable of servicing their overwhelming debt or making significant consumer expenditures.  Consumer debt is rising as savings rates are declining; but not only is debt up, but more tellingly, delinquencies are up also.  Notably consumer, corporate, and U.S. debt are all above that of the last financial crisis of 2008.  

Beyond domestic economics, international conditions do not seem supportive of growth, markets, or stability either.  The European Union bond market is operating with zero and negative interest rates.  That union is financially and economically fragmenting as Britain, Italy, and Greece and some other countries are not happy members.  EU member country sovereign banks are in various states of difficulty from high rates of default in business loan portfolios and insecure sovereign debt exposure of weaker countries.  Germany is arguably the economically strongest and financially soundest country of the EU, but its leading bank, Deutsche Bank, has experienced decline and deterioration for several years to the extent that it has become the EU bank to save.  Existing and threatened additional sanctions, extended trade tariff wars and required trade renegotiations are guaranteed to reduce trade, and global economic growth rate.  These conditions are not supportive of record market valuation.

Ray Dalio, super-capitalist and manager of America’s largest hedge fund, Bridgewater Associates, recently concluded in a thoughtful and lengthy article that capitalism is broken.  That proposition can be accepted and understood from the above-noted trade, economic and geopolitical trends.  Ray Dalio’s article can be accessed as follows:  https://www.linkedin.com/pulse/why-how-capitalism-needs-reformed-parts-1-2-ray-dalio while an article which provides a solution to America’s now failing capitalism can be accessed here: http://www.marketoracle.co.uk/Article64911.html

How can financial markets continue to remain at record altitude when capitalism itself is seen to be broken, the European Union in disarray, with incendiary geopolitics in the Middle East on the verge of kinetic war?   But none of this is important to the market, right?  If so, then why do we need the current FED policy reversal and market stimulation continuing ten years after the last financial crisis, and at a time when the stock market is near record territory?  Why is the European Central Bank, and the Bank of Japan still using crisis monetary policy?  The answer is that our domestic economy is in trouble, debt is a deadweight to a consumer-driven economy, increased income disparity has significantly weakened all consumers, and markets are manipulated by interest rates and financial derivatives and cannot levitate it for long.  At a minimum, it is not a prudent time to be exposed to market vicissitudes.  For our previously stated thoughts on the market articulated over a year ago see: “Stock Market Direction is no Longer Important”  http://www.marketoracle.co.uk/Article61810.html           

Means of investing

Investors seeking to invest generally will purchase mutual funds, ETFs, or seek a personal money manager.  Fund and individual money managers must invest such new funds even if they believe that the near term investment outlook is negative.  If money managers stay in cash, the investor will move his account to a manager who will appear more proactive, rather than sitting on the sidelines.  In addition, management fees paid relate to the total amount of funds under management, and are a strong incentive to invest even in precarious times.  In a market decline, if the fund experiences a performance close to the average of all funds, the manager is likely to keep the client.  Therefore, do not expect a money manager to risk the loss of client funds by remaining out of the market.

However, wise individual investors can make the choice not to be a part of the herd heading for the cliff.  Market declines, when they occur, historically have been multi-year events.   For example the stock market declined from 1966 to 1982; if you bought stock in 1962, it took sixteen years to get even.   For those who purchased stock before the great depression in 1929 it took more than thirty years to get even on a nominal basis before considering the loss of purchasing power due to inflation.  More recently, an investor buying stocks of the NASDQ in 2001 recovered his losses only by 2016.  With our markets being in record territory, but struggling to maintain current levels, this is not the correct time to buy.  It is even not the right time to hold investments – as all prices will soon decline providing attractive investment entry points for those who wait.

Being out of the market works for investors who have limited amounts invested, and therefore works for the middle class.  Individuals who have millions or more invested cannot effectively exit the market, as large sums become impractical for liquidating or establishing large positions, even if exiting the market means rolling over short term Treasury notes.

Iran

Iran has been in America’s State Department crosshairs for decades. However, it is important to understand the real reason for America’s selecting and depicting Iran as an enemy nation.  One must know and understand the history of Iran over the last century.  In reality, this targeting has nothing to do about Iran’s terrorism that you read about in the press.  The reasons for the conflict are far more fundamental and deep-rooted.  For decades the British had controlled Iran’s governance and exploited its world class oil fields while leaving the Iranian people destitute.  When, after repeated failed attempts to renegotiate their oil concession, the democratically elected president of Iran nationalized their oil fields and closed Britain’s embassy in Tehran, our English cousins appealed to the U.S. for help.

When the CIA overthrew Iran’s democratically elected president Mossadegh in 1953, and installed a puppet government, our elite global banking and oil cartel benefited financially from 40% of the millions of barrels of oil pumped daily from Iran’s oil fields.  When in 1979 Iran’s revolution threw out Britain and the U.S., this Cornucopia of billions of dollars profit was foreclosed to our oil oligarchs.  The effort over decades to destroy Iran through international vilification, condemnation, financial war and sanctions – such that the cabal could once more seize or control Iran’s oil is the real reason why America continually undermines Iran.  It also wants to punish Iran for their audacity to desire to be an independent sovereign nation rather than be part of the corralled and exploited oil-rich nations, and wants to keep Iran from becoming influential in the Middle East. 

Before America’s unilateral regime change, Iran was friendly to American interests as both Britain and Russia had been invaders or colonists.  Mossadegh had appealed to America, as a country that itself had fought a war to free itself from British colonialism - to help Iran free itself from British colonialism and become a truly sovereign nation.  But when America, the country with its beacon of liberty, freedom and democracy for the world, actually extinguished the democratically elected government of Iran, it lost its moral high ground.  Over decades this has caused countries around the world to coalesce and dismiss America proselytizing democracy as a farce, and increasingly oppose its geopolitical policies.  The history of Iran and its shameful oil exploitation by the most developed and advanced countries in the world is depicted in “Iran: The Last Century to the Present” http://www.marketoracle.co.uk/Article59864.html .

Important political decisions and their consequences.

Since America chose Sunni Islam Saudi Arabia with which to make their Petrodollar deal in the 1970s, our loyalties required America to be against Shia Iran.  Today our foreign policy and sanctions reduce the amount of oil being pumped in the Middle East and especially that from Iran and Iraq.  Such action serves to devastate Iran while raising the price of oil, which helps America’s fracking oil producers to remain profitable.  Middle East countries are interested in pumping all the oil that they can, as most have little other sources of national income.  An ample flow of oil promotes a low international price of oil which helps all economies and consumers around the globe, rather than oil producers; whereas, higher oil prices are likely to slow economic growth or precipitate a global recession.

Had the United States not overthrown the only existing Islamic democratic government and instead had made a petrodollar agreement with Iran, the history of the Middle East would be completely different and far more favorable.  Since Iran borders with Russia, an oil deal between America and Iran would have formed close security relations between the two countries such that Iran would be oriented toward the West, and America’s military might have installed a defense force in Iran near Russia’s border, as Iranians were fearful of communism.  This would have been a great win-win for America, Western Europe, and Iran.   Instead, Iran, Russia, and China are now close allies, and America is losing influence in the Middle East with an unravelling Petrodollar.  Unfortunately, governments must live with the consequences of their policies. 

U.S. global hegemony

When the Soviet Union collapsed in 1989, the US saw an opportunity to be the world’s singular leader – a global hegemon.  After the Soviet Union’s collapse, Russia engaged advisors from the U.S. to help them transition from their previous central planning to a market economy.  These advisors, which included the IMF and economists from Harvard University provided advice - which collapsed their economy, and looted the state.  Years later, President Putin observed that the biggest mistake that Russia had made was trusting Americans. 

Consequent State Department foreign policy has angered its allies and alienated nonaligned countries such that they increasingly seek to avoid U.S. control.  Iran, like Russia and China have been forced to seek allies of nations other than the United States, as it became increasingly clear that America’s financial, and geo-political actions were made to benefit solely maintaining its hegemony at the expense of every other country.

A current and stark example of ally blowback to America’s policies is Europe using its recently created Instex money transfer system to bypass US sanctions regarding oil trade with Iran.  Both Turkey and India have recently purchased the S-400 air defense systems from Russia, in stark condemnation of the U.S.  It may be that this system simply has more value – that is, a more advanced system at a far more attractive price, rather than it being about America and its politics.  However, India’s and Turkey’s resolve to purchase these systems, and Europe’s decision to maintain trade with Iran despite America’s sanctions demonstrates that countries around the globe are rising against US geopolitical policies which means that the U.S. is increasingly becoming more isolated.

Over the last century the U.S. has been the greatest economic, financial and military force in the world. Its leadership status has made it natural to be the arbiter of global disputes, the setter of geopolitical strategies and policies.  Unfortunately these strategies have often shown to unilaterally benefit the United States at the expense of other smaller and weaker nations.  As a result, over many decades these smaller nations have come to resent their being economically taken advantage of or being told what to do.  A smaller, weaker country cannot take advantage of a larger stronger country – the world just doesn’t work that way.  Repeating that smaller, weaker nations continue to take advantage of the U.S. maybe effective propaganda, but is pure bunk.

America can bomb almost any country back to the Stone Age.  It has that capability today and it has demonstrated its willingness to do so in the near past. Yet its power is not unlimited.  Soon after WWII, because of China’s involvement, America backed off and accepted the split of North and South Korea (See: “Bombing, Nuclear Threats, and Resolution”  http://www.marketoracle.co.uk/Article61317.htm ).  Because of the indomitable will of its people, and unacceptance of U.S. citizens for an unnecessary extended war in a far-off land, America did not prevail in Vietnam (See: “America’s Gradual Slide, Experience, and Withdrawal from Vietnam” http://www.marketoracle.co.uk/Article64750.html ).  Our military efforts in the Middle East (Afghanistan, Iraq, Iran, Syria, Libya, and Yemen) were destructive and disruptive, but have not been effective over time. 

On a relative basis the gap between America’s military might and other nations is narrowing.  Ironically, to some degree this is due to America selling military equipment to other countries and training buyers in its effective use.  Advising or training foreign troops also narrows this gap – particularly if over time a foreign country’s allegiance changes. Of course America’s major competitors and weapons manufacturers are doing the same thing, thereby narrowing the gap between America and the rest.  As a result, conflict has migrated to trade and the financial sphere where the U.S. still maintains significant advantages over other countries.  The global reserve dollar is the key advantage, and unsurprisingly it is now targeted to be dislodged.

Sidestepping direct military confrontation China has implemented a visionary trade plan, which has the prospect of benefiting half of the globe’s population, reducing poverty rates, and improving living standards. Its Belt and Road Initiative (BRI) will connect many countries from China to Europe in trade which heretofore have been in global economic backwaters.  The irony is that any country seeking to be or remain a global hegemon must obstruct such development - as it is easier to control weaker undeveloped rather than developed countries.  Accordingly, it must try to retard such development.  This concept is not new as Britain and other colonialist countries used such diabolical repression for centuries to facilitate and maintain their own supremacy.  It was morally wrong of these purveyors of Christianity to suppress peoples of other cultures solely for their own benefit, and it is wrong to do so now.

So how does one keep China, Russia, and other more developed potential contenders from challenging America’s preeminent position?  In the current economic situation one would work hard both overtly and covertly to keep the BRI from succeeding.  That will retard both China’s and Russia’s development and advancement.  The logical place where to create a break in the BRI is the geographically and strategically located Iran.  This strategy would achieve two things at once; it keeps Iran repressed and China and Russia restrained.  Such strategy, in a hegemon’s view, likely merits the threat of war.

However, regardless of the rhetoric, America will not go to war with Iran.  Actually, more precisely, America is already at war with Iran – as it has been for decades.  Financial war is war.  Also sanctions is a real war by other means.  Both are highly destructive without spilling blood.  But we will not see America’s boots on Iran’s ground.  Why?  China and Russia are equally aware that America is obstructing BRI’s development.  However, China’s and Russia’s financial and geopolitical investment in Iran is measured in billions, Iran’s geographical location is of strategic importance to the BRI, and they will support, and if need be, protect Iran from invasion and destruction.  America’s understanding of this backstop by a group of powerful nations opposing U.S. hegemony will keep it from engaging its military machine. There may be proxy actions by America’s Middle East allies, but recognition of the global balance of power will prevent full scale military war.

Conflation

Let us once again consider the over-bloated financial markets in context of the three principal elements discussed in this article affecting their future performance.  Few will argue that measures of financial value both in equities and fixed income are extreme.
One cannot argue that levels of government, corporate, and consumer debt are also not extreme – beyond any ability to be repaid in full without complete destruction of its currency.  It is equally impossible to argue that in light of increased consumer debt and increased default rates that the consumer-driven economy is healthy.  Based on international trade and tumult in global markets due to tariffs, sanctions, and instability of the European Union, global economic growth in the developed world will remain weak.  America’s global military and trade hegemony is receding as other nations grow stronger.  The financial unipolar dollar world is changing, likely to evolve with a number of global trade currencies – diminishing the role of the dollar.  All of these events conflate to an environment not constructive to our bubble financial markets. 

Iran and the Middle East will remain in the news as a disruptive area for many years.
China’s BRI will traverse Iran, and as a result both China and Russia will profit mightily, and therefore have a strategic interest in protecting Iran from continued British or American usurpation.  They will intervene directly by financial or military means to save their investment and their strategic client state, and safeguard the whole of their trade belt to Europe.

Capitalism with American characteristics is indeed broken as our citizens are suffering because of it.  Our leaders would be wise in trying to heal our nation, rather than seek risky adventures outside our own borders. America’s slow retreat from its prior global hegemony is irreversible – so it should be accepted without the need for WWIII.  Other parts of the globe will rise, empowering other countries and cultures.  America can take pride in its past role of global development, and containment of evil forces in the last century.  Life goes on.

So can the markets still rise? Sure.  Indeed the FED’s indication that there may be one or more interest rate reductions this year signifies that the bubble may inflate further before bursting.  In that context the FED is disingenuous, highly depending on the ignorance of the masses, in stating that it has not achieved its desired 2% rate of inflation.  Because the printing of money is the definition of inflation, the FED has achieved multiples of that target, and its subsequent rise in prices is corroborated by the bloated bubble markets of investment and other assets.  The fact that such data is excluded from a measure of consumer price increases is simply fraudulent.

This is not an opportune time to be invested.  There is a bright investment future on the horizon, but we must be willing to wait for it.  Not losing money is the first and most important rule for investors.  The expected rate reductions by the FED will take time to work through as will subsequent increases.  The cathartic market decline will take time.  The restructuring of the global economy away from dollar dominance will take time.  Our own dollar reset in terms of debt, pension and medical liabilities will be traumatic, and also take years.  So it may be prudent not to be in the markets for the next several years – particularly if you believe in the investing formula of sell high, buy low.  Those following this rule will have the cash to buy low and sell high.  Are you still in the market?

Raymond Matison

Mr. Matison was an Institutional Investor magazine top ten financial analyst of the insurance industry, founded Kidder Peabody’s investment banking activities in the insurance industry, and was a Director, Investment Banking in Merrill Lynch Capital Markets.   He can be e-mailed at rmatison@msn.com
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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