Biden's Strategy Traces the Cold War's Mental Map

China-U.S. Relations

Summary:

Within days of each other, revealing portraits of the United States and China have been unveiled. In Washington, the Biden administration released its national security strategy.

Within days of each other, revealing portraits of the United States and China have been unveiled. In Washington, the Biden administration released its national security strategy. It says much about American psychology at a critical juncture. And Beijing witnessed the opening of the 20th Party Congress on 16 October that will see Xi Jinping confirmed as president for a record third term.

It comes as the White House launches arguably its biggest move to compete with, and restrain, China in its technology war, curbing the ability of world and US chip makers to sell semiconductors and chip-making equipment to Chinese customers. As Bloomberg notes, it strikes at the foundation of China's efforts to build its own chip industry.

This represents a dramatic escalation in technology decoupling and has been met with a forceful Chinese response. Furious officials in Beijing already threaten economic retaliation.

With Trump's trade tariffs still in place, Beijing has no doubt that the US is out to cripple its capacity to compete on equal terms. On top of its property crash, strains arising from Xi's zero-COVID-19 policy and slowing economic growth, it is not the atmosphere Xi desired to shadow the Congress.

Biden's national security strategy is, like those of his predecessors, sonorous in style and pronouncement. It puts America on a footing for what the president calls a moment of 'inflection' for the world, a 'decisive decade' for the United States.

Crucially, it projects humility about past failures. Washington stresses it has learnt from mistakes, delivering a relieved farewell to the post-Cold War era. Even more remarkably, it appears to have relinquished the goal of democracy promotion. 'We will not use our military to change regimes', it says, 'or remake societies'. This is the sharpest break of all. Largely missing is Biden's pre-election stress on a 'foreign policy for the middle class'. The shackles, it seems, are once more off.

This remains an America that will not easily — if ever — embrace the prospect of being a 'normal' nation, or even just a conventional great power. To do so would be to deny the very essence of what makes them Americans.

The enterprise sketched by US policymakers in this strategy remains vast and all-embracing. It touches all corners of the globe, embraces a panoply of policies. The community of nations, it assumes, in a statement that could have been uttered by Woodrow Wilson in Paris in 1919, 'shares our vision for the future of international order'.

The mental map of the old Cold War with all its obvious contradictions still has a powerful hold. Though divine providence is not openly summoned, its pulse quickens the American system, fuels its self-belief. 'Primacy', appearing only once in the document, is no longer the beating heart of US grand strategy. But its replacement, namely 'out-competing' Russia and China, carries the same meaning, even as it commits to avoiding the 'temptation to see the world solely through the prism of strategic competition'.

Indeed, in looking to eschew the notion of a new Cold War and resist a world of 'rigid blocs', the document remains a manifesto for the very binary Biden declared at the outset of his presidency — that between democracies and autocracies.

In doing so, the strategy is in some ways reminiscent of former US diplomat George Kennan's Long Telegram from Moscow in 1946 — which essentially established the intellectual basis for containment of the Soviet Union. Biden's document similarly depicts Russia and China as beset by problems associated with 'the pathologies inherent in highly personalised autocracies' that are 'exporting an illiberal model of international order'.

This is a key judgment of the strategy — Russia has proven form in its invasion of Ukraine and 'imperialist foreign policy', and the China threat is depicted as spreading.

But older rhetorical threads are also woven through the document's fabric, from presidents Truman through to Kennedy and Nixon. There are echoes of Truman's speech to Congress in March 1947 in its pledge to 'defend democracy around the world'. There are strains of Kennedy's inaugural address in January 1961 in the strategy's commitment to 'support every country in exercising the freedom to make choices'. And more than a dose of Richard Nixon's call from Guam in July 1969 — at another moment of relative American vulnerability — for even greater allied burden sharing.

It is worth recalling that after World War II, the United States made a deliberate choice to do everything it said it would never do. It entered into the very kind of 'entangling alliances' of which George Washington warned in his farewell address. It had dealings with corrupt one-party states and authoritarian regimes where it saw fit. And it stationed troops in military bases all around the world.

In early 1947, the esteemed American foreign affairs columnist Walter Lippmann warned that containment had created a 'strategic monstrosity'. It would compel the United States to embark on an unending series of interventions around the globe.

Lippmann reminded Kennan that 'the history of diplomacy is the history of relations among rival powers which did not enjoy political intimacy, and did not respond to appeals to common purposes'. Nevertheless, he added, 'there have been settlements. Some of them did not last very long. Some of them did'. But 'for a diplomat to think that rival and unfriendly powers cannot be brought to a settlement is to forget what diplomacy is all about'.

That is the very kind of advice all but ignored in Beijing and Washington today.

Source: eastasiaforum

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Justin

US: The Fed cannot slow the pace of hikes yet

There are lots of important numbers out for the US next week, but none are likely to change the market's forecast for a 75bp interest rate hike on 2 November. 3Q GDP is likely to show positive growth after the “technical” recession experienced in the first half of the year. Those two consecutive quarters of negative growth were primarily caused by volatility in trade and inventories, which should both contribute positively to the 3Q data. Consumer spending is under pressure though while residential investment will be a major drag on growth. We are forecasting a sub-consensus 1.7% annualised rate of GDP growth.

We will also get the Fed’s favoured measure of inflation, the core personal consumer expenditure deflator. This is expected to broadly match what happened to core CPI so we look for the annual rate to rise to 5.2% from 4.9%. With the economy growing and inflation heading in the wrong direction, the Fed cannot slow the pace of hikes just yet.

Also, look out for durable goods orders – Boeing had a decent month so there should be a rise in the headline rate although ex-transportation, orders will likely be softer. We should also pay close attention to consumer confidence and house prices. The surge in mortgage rates and collapse in mortgage applications for home purchases has resulted in falling home sales. With housing supply also on the rise, we expect to see prices fall for a second month in a row. Over the longer term, this should help to get broader inflation measures lower given the relationship with the rental components that go into the CPI.

Canada: a 75bp hike is the most likely outcome

In Canada, the central bank is under pressure to hike rates a further 75bp given the upside surprise in inflation. Job creation has also returned and consumer activity is holding up so we agree that 75bp is the most likely outcome having previously forecast a 50bp hike.

UK: Markets looking for clarity on fiscal plans and government stability

The ruling Conservative Party has said it will fast-track plans to get a new leader in place by next Friday - and potentially even by Monday if only one candidate makes it through the MP selection round. Candidates have until Monday at 2pm to clear the hurdle of 100 MP nominations to make it onto the ballot paper, before Conservative MPs vote on the outcome. With only a week to go until the Medium Term Fiscal Plan on 31 October, there's inevitably a question of whether this is enough time for a new prime minister to rubber stamp Chancellor Jeremy Hunt's plans for debt sustainability. Investors are - probably rightly - assuming that Hunt will remain in position under a new leader. But the bigger question is whether the Conservative Party can unite behind a new leader and whether a more stable political backdrop can emerge - because if it can't, then not only is there uncertainty surrounding future budget plans, but also whether we're moving closer to an early election.

Eurozone: ECB to hike by 75bp again amid ongoing inflation concern

The hawks have clearly convinced the few doves left of the necessity to go big on rate hikes again. Contrary to the run-up to the July and September meetings, there hasn’t been any publicly debated controversy on the size of the rate hike. In fact, European Central Bank President Christine Lagarde seems to have succeeded in disciplining a sometimes very heterogeneously vocal club.

To this end, it is hard to see how the ECB cannot move again by 75bp at next week’s meeting. As the 75bp rate hike looks like a done deal, all eyes will also be on other, more open, issues: excess liquidity, quantitative tightening and the terminal interest rate.

Besides the ECB, which will be the key focal point for eurozone investors, we’re looking at the survey gauges of the economy next week. The PMIs on Monday will be critical to determine whether the eurozone economy has slid further into contraction or whether an uptick has occurred. There is not much evidence on the latter in our view, but Monday will provide more clarity on how the eurozone economy is performing in October.

Key events in developed markets next week

Source: ING

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Michelle

At a dinner at the German embassy in London on October 23, 1980, German Chancellor Helmut Schmidt shocked British Prime Minister Margaret Thatcher when he told her that West Germany relied upon the Soviet Union for 14 percent of its daily natural gas consumption. "That was very dangerous and unwise," she said. Mr. Schmidt responded, "My dear Margaret, the Russians have always been the most reliable suppliers. They need us as much as we need them. There is no danger at all." For nearly 40 years, the chancellor's optimistic assessment appeared accurate, and Germany's dependence on Russian gas only kept increasing.

In 2021, for instance, more than half of Germany's gas supply originated from Russia. Germany was Russia's largest gas customer in the European Union, accounting for nearly 53 percent of its exports to the EU. These exports are primarily by pipeline. Two major pipelines, Nord Stream 1 (under the Baltic Sea to Germany) and Yamal (to Poland and Germany via Belarus) cross German territory. The more recent addition has been Nord Stream 2, a replica of Nord Stream 1 (both in terms of route and capacity).

Then came the war in Ukraine. Not only did the dynamics of gas markets change abruptly – particularly in Europe – but it also opened a new chapter in the German-Russian relationship, with significant repercussions on Germany's energy policy. Germany's Scramble to Revamp its Energy Policy_1

Germany's Scramble to Revamp its Energy Policy_1

Germany's Scramble to Revamp its Energy Policy_2

The role of gas

Germany is the largest economy in the EU and the fourth largest globally, which is why its economic health is closely watched. It is also a significant player in energy markets. An export-driven and energy-intensive economy, it is the seventh-largest energy consumer, accounting for 2 percent of the world's energy consumption (after China, the United States, India, Russia, Japan and Canada).

Compared to the world's biggest economies, Germany has the most extensive penetration of renewable energy in its energy mix – 19 percent. However, fossil fuels – coal, oil and gas – still dominate its primary energy mix, providing 76 percent of the country's energy needs. Natural gas (26 percent) is the second-biggest contributor after oil (33 percent).

Germany moved to the second level of its three-stage emergency gas plan, the first European country to take such action.

The main natural gas users in the country are residences (primarily for heating) and industry, where gas is used as a feedstock for industries such as chemicals. While in power generation, natural gas can be substituted with any other energy source, it is not easily replaceable in its role as an industrial feedstock. Germany's Scramble to Revamp its Energy Policy_3

Germany's Scramble to Revamp its Energy Policy_3

Germany's Scramble to Revamp its Energy Policy_4

To source its gas, Germany heavily relies on imports. Domestic gas production accounts for a mere 5 percent of total consumption and is in decline. The rest of the gas is imported from Russia (55 percent of imports), Norway (31 percent), the Netherlands and reexports from neighboring EU countries.

High economic cost

The loss of Russian gas supplies will therefore have a high economic cost. However, the impact depends on several factors, such as the volume of the disruption, its duration, the winter's severity and government and public responses. Given the volumes imported from Russia, Germany will be one of the hardest-hit economies in the EU in the case of a complete Russian gas shutoff, according to the International Monetary Fund. On June 23, 2022, Germany moved to the second level of its three-stage emergency gas plan, the first European country to take such action. Germany's Scramble to Revamp its Energy Policy_5

Germany's Scramble to Revamp its Energy Policy_5

Special relationship no more

For decades, German leaders dismissed warnings about the country's energy exposure, but the war in Ukraine, which coincided with new leadership in Germany, became the watermark in the German-Russian relationship. In November 2021, as trouble was brewing in Ukraine, Germany suspended the certification of the completed Nord Stream 2 pipeline, citing some regulatory gaps that the operator still needed to complete. In reality, Germany bowed to the mounting pressure from the U.S., the United Kingdom and Ukraine due to their concerns about Russia's potential military actions in Ukraine.

Moscow had been a reliable energy partner even during the Cold War, but the rule no longer applies.

When Russia's intentions became evident in February 2022, Germany went one step further and halted the pipeline, an act described by Ukraine as providing "moral leadership." With such a dramatic decision, Germany used Russia's favorite nonmilitary weapon to put pressure on its leading gas supplier.

Russia retaliated by gradually reducing gas flows through its operating pipelines, but interestingly, that did not happen immediately. In fact, Russia cut its supplies to other European countries, with Poland, Bulgaria, the Netherlands and Finland being hit first. Moscow tried to safeguard its biggest customer in Europe, and Berlin was initially reluctant to impose any sanctions on Russian energy imports, describing them as "a red line" in March.

Then in April, Germany's stance started to harden again. Berlin supported the sanctions on coal and, in May, the EU sanctions on oil. The measures were limited to seaborne imports, but Germany went further and announced it would ban all oil imports from Russia by the end of 2022. It also declared it would replace Russian gas imports by mid-2024, as Russia had become an "unreliable supplier," according to German Chancellor Olaf Scholz. The chancellor explained that Moscow had been a reliable energy partner "even during the Cold War," but the rule no longer applied.

From the Russian perspective, why wait for 2024 and lose all leverage if the German market was shutting down anyway? By cutting gas supplies sooner, as Russia has been gradually doing since the summer, Russian President Vladimir Putin was trying to achieve two objectives. The first is maximizing gas export revenues by putting upward pressure on prices. The second objective is to increase the likelihood of public discontent and anti-government protests in Western Europe by tightening supplies ahead of winter, which is the high season for gas demand. If prices increased further, movements like the Yellow Vests in France in 2019 could push Berlin (and other European capitals) to change their stance on sanctions and the war in Ukraine.

Countermeasures

Germany has announced several measures to minimize the impact of a complete loss of Russian gas supplies. Some included a more aggressive stance on previously set targets, such as those related to renewable energy. In April 2022, the German Cabinet published a draft legislative package called the Easter Package and described it as the "biggest energy policy reform in decades." Instead of its previous goal of reaching a 65 percent share of renewable energy in Germany's power generation by 2030, the Easter Package set that share to at least 80 percent with the aim of "almost" 100 percent by 2035.

Source: gisreportsonline

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Glendon

BTC and ETH pump: On-chain data shows that whales are stepping up their accumulations of Bitcoin (BTC) and Ethereum (ETH).

BTC being held by large investors has reached its lowest percentage in the last three years. Yet there has been an intensification in demand for the asset in recent months. This is despite (or because of) its price experiencing a 60% drop in 2022.

According to CryptoQuant CEO Ki Young Ju, BTC trading volume on exchanges has increased 20 times in the last six months. Because the price has not followed this jump, it is possible to conclude that the asset is in a strong phase of accumulation. BTC and ETH Pump in Sight? Whales Accumulate Bitcoin and Ethereum Again_1

BTC and ETH Pump in Sight? Whales Accumulate Bitcoin and Ethereum Again_1

"Volume renewed a year high last month, but there hasn't been much change in the daily closing price, indicating someone is buying all the liquidity on the sell side."

BTC: Binance leads buys

Ju's analysis also shows how Binance has been expanding its dominance during the crypto winter. "Since Bitcoin price hit the $20K level, Binance's spot trading volume dominance has skyrocketed and is now at 84%," he noted.

The largest exchange in the United States, Coinbase managed to grab just 9% of the total volume. The company recently saw a big drop in its revenues, which resulted in the sharp devaluation of its shares and cuts in its staff.

Despite the increase in volume, there are fewer and fewer coins on exchange trading platforms. Glassnode pointed out that the number of addresses sending BTC to exchanges reached its lowest value in two years last Thursday (20), which reaffirms that the asset is going through a strong phase of accumulation.

Whales invest millions in ETH

Crypto whales are also interested in Ethereum. Data from analytics firm Santiment shows that addresses holding at least 1 million ETH have purchased more than 3.5 million units of the asset in recent months. The total amount invested by these investors was $4.55 billion.

Like BTC, ETH has been increasingly scarce on exchanges. The outflow of the token on these platforms has surpassed the inflow in the last two weeks, indicating an intensification in its accumulation.

It remains to be seen how long the whales will continue to accumulate both assets and whether a new bull cycle can start after this phase.

Source: beincrypto

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Ukadike Micheal

By geographical good fortune, Russia is a great Arctic power. The length of its coast along the Arctic Ocean is 22,600 kilometers, almost 60 percent of the world's Arctic coast. The entire Arctic zone is four million square kilometers and sparsely populated because of the severity of the climate. The three largest Arctic cities are in Russia: Murmansk (325,000 inhabitants), Norilsk (205,000 inhabitants) and Vorkuta (85,000 inhabitants). The fourth-largest city is the Norwegian city of Tromso (62,000 inhabitants). Overall, only 2.4 million people live in the Russian Arctic, of which 300,000 belong to 47 indigenous ethnic groups. The rest are migrants and their descendants from more southern regions of Russia and the former Soviet Union.

Two decades of slave labor

In the 1930s, people arrived in the Arctic territories to develop large deposits of discovered nickel, copper and gold. The Soviets decided to use the Northern Sea Route as the shortest shipping lane from the northern European part of the Soviet Union to the Far East, connecting the Atlantic and Pacific oceans when navigable in the summer and autumn.

The massive use of labor from the gulags began in these areas. For example, the construction of the Norilsk Mining and Metallurgical Combine – now known as Nornickel – was provided by hundreds of thousands of prisoners, many of whom died from diseases, malnutrition and the harsh climate. Prisoners who mined gold in the Kolyma River area suffered some of the worst conditions.

After Soviet dictator Joseph Stalin's death in 1953, the gulags were liquidated. The development of the Arctic was carried out with a voluntary workforce enticed by higher salaries and the opportunity to retire early. These incentives are still being used today to attract workers to the Arctic.

Vast oil and gas deposits

The next stage of Arctic exploration began after the discovery of large oil and gas fields there, which formed the basis of Soviet and Russian exports. Although less than 2 percent of Russia's 145 million people live in the Arctic zone, the region provides almost 10 percent of the country's economic output. In 2020, 80 percent of Russian combustible natural gas (including gas liquids) and 17 percent of its oil were produced there.

The continental shelf contains more than 85.1 trillion cubic meters of natural gas and 17.3 billion tons of oil. The Strategy for the Development of the Arctic Zone of the Russian Federation and Ensuring National Security until 2035, approved by President Vladimir Putin in 2020, declares these resources to be a “strategic reserve for the development of the mineral resource base of the Russian Federation.”

Lacking investment

The development of the Northern Sea Route is an essential part of the Arctic economy's success. For this purpose, the Russian government plans to invest $29 billion and take these steps:

Development of the infrastructure of seaports and shipping lanes in the waters of the northern seas – from the Barents to the Chukchi

Creation of a naval operations headquarters on the entire water area of the Northern Sea Route

Integration of transport and logistics services provided in the waters of the Northern Sea Route, based on a digital platform designed for paperless registration of multimodal transportation of passengers and cargo

Construction of at least eight nuclear icebreakers for year-round navigation

Significant investments were also expected in the development of the economy of the Arctic zone and, above all, the development of the extractive industry there. Russia's Arctic Economy is Heading for Decline_1

Russia's Arctic Economy is Heading for Decline_1

However, even before 2022, achieving these goals was doubtful. This was due to two main factors. First, in the 2010s, there was a shortage of investment in the oil and gas sector. That was due to the long-term deterioration of the investment climate, including the first package of Western sanctions imposed on Russia in 2014 after the annexation of Crimea. Second, the emerging green transition of developed economies will cut the demand for nonrenewable energy sources by 2030.

The sanctions imposed on Russia after its February 2022 invasion of Ukraine have further complicated the prospects for Russian Arctic development. The gradual embargo on oil and gas purchases from Russia is taking hold. Moreover, potential trade partners will likely reject the use of the Northern Sea Route for international transit of goods. This likelihood will sharply limit the demand for goods and services that the Russian Arctic can produce.

That is especially true for natural gas, whose production and transportation for export have already begun to decline. In the first half of 2022, Russia reduced natural gas production by nearly 7 percent compared to the same period in 2021. In June, Russia produced just over 39 billion cubic meters of gas – 23 percent less than in the same month a year ago.

Oil production has also begun to fall, and the European oil embargo starting in December will only strengthen this trend. Output in August decreased for the first time since April – by 170,000 barrels per day, to just under 11 million barrels per day. In August, revenues from Russian oil exports fell by $1.2 billion (to $17.7 billion). That took place despite an increase in exports by 220,000 barrels per day, up to 7.6 million barrels per day.

Scenarios

It can be assumed that no new major economic projects will happen in the Russian Arctic or the rest of the country in the foreseeable future. In the absence of investment funds, there will be a gradual degradation of these territories. The only exception is the Norilsk Industrial District, where 44 percent of the world's palladium and 22 percent of high-grade nickel are mined. Apparently, the Norilsk Nickel Corporation is not under European and American sanctions because of its global importance.

A decrease in economic activity in the Russian Arctic has benefits. The pressure on the fragile environment will subside, making it easier to clear this territory from the accumulated waste over the past decades.

Source: gisreportsonline

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Justin

75bp hike now the call

Up until the past couple of weeks, both the market and we ourselves had been favouring a 50bp move at the 26 October policy meeting, but the September inflation report and the Bank of Canada’s Business Outlook Survey have indicated a second consecutive 75bp hike is now the most likely outcome.

While headline inflation slowed on lower gasoline prices, the core measures rose more than expected, confirming that underlying price pressures continue to run hot. The BoC had cited the risk of ongoing CPI increases following its last policy meeting, warning that data indicated a “further broadening of price pressures” while also highlighting worries that high inflation expectations create a “greater risk that elevated inflation becomes entrenched”.

Annual inflation rates 1990-2022 (%)

In this regard, inflation expectations have subsequently hit a new record high while employment growth has resumed and business sales expectations have ticked higher. The combination of these reports and the BoC’s current stance makes it difficult to justify slowing the pace of hikes, particularly with the Federal Reserve and other central banks continuing to push ahead with 75bp hikes at forthcoming meetings. The belief that the risk of doing too little to tame inflation outweighs the cost of doing too much, is now widely held.

More hikes to come despite growing recession risks

Nonetheless, there is spreading economic pain and although inflation is likely to be sticky in the near term, we expect the BoC to slow to a 50bp hike in December with perhaps a final 25bp hike in early 2023. As with other central banks in major economies, the mindset is focused on defeating inflation with an acceptance that the risk of a resulting recession is high. Given this situation, once the core CPI starts recording month-on-month readings of 0.2% or 0.3%, down from the current 0.4%/0.5% monthly increases, we think the BoC will pause with a strong likelihood that it starts to unwind rate hikes in the second half of 2023 as recessionary pressures mount.

Bank of Canada & Federal Reserve policy interest rates 2002-2022

CAD: Still limited benefits from BoC hawkishness

USD/CAD has remained close to the highs recently, as USD strength has combined with still-unstable risk sentiment and recently, a contraction in oil prices. As highlighted above, there has been evidence that the Canadian economy is slowing, although we don't see this as having played a major role in driving CAD lower, as external factors continue to be the central drivers.

Equally, the FX benefits from the repricing higher in BoC rate expectations after the latest CPI report have been quite limited. The OIS curve currently embeds 70bp of tightening at the October meeting, meaning that a 75bp hike should not be enough to drive CAD higher by itself.

It’s possible however that a hawkish tone by Governor Tiff Macklem will trigger a repricing higher in peak rate expectations, pushing them closer to the Fed’s 5.0% (currently at 4.6% in Canada). This scenario could see CAD trade moderately stronger after the meeting, but the adverse risk environment continues to point to a higher USD/CAD from the current levels, with risks skewed to 1.40 being tested. A return to 1.30 is still in our forecast for 2023 as CAD should benefit from low exposure to Russia and China, and may emerge as a market favourite to play pro-cyclical bets.

Source: ING

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Damon

Korea's producer prices bounced back in September following the first downturn in about two years a month earlier, as high energy and farming bills drove up costs, central bank data showed Friday.

The producer price index, a major barometer of consumer inflation, inched up 0.2 percent in September from a month earlier, according to the preliminary data from the Bank of Korea (BOK).

From a year earlier, the index jumped 8 percent.

The on-month rise came after the index dropped 0.4 percent in August for the first time since October 2020 due in part to a letup in oil price hikes.

Electricity, gas, water and waste-disposal prices gained 2.5 percent on-month in September, while the prices of factory goods also edged up 0.1 percent over the same period.

Farming goods saw their prices rise 2.2 percent, but the livestock prices fell 3 percent, the data showed.

Producer prices are one of the key indicators for the level of inflation, which has been fast rising due to high-flying crude oil and other commodity prices.

The country's consumer prices, a key gauge of inflation, rose 5.6 percent on-year in September, slowing from the previous month's 5.7 percent rise. The BOK, however, forecast inflation could stay in the 5-6 percent range for a considerable period of time.

To fight inflation, the central bank has hiked its policy interest eight times by a combined 2.5 percentage points since August last year, including the big-step 0.5 point rise last week.