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Geopolitical Risk Is Back To Cold War Highs

Summary:
One month ago, Deutsche Bank made a startling observation: populism has risen to the highest level since World War II. Commenting on the shocking outcome in the recent Italian elections in which anti-establishment parties got a majority of the vote, DB's credit strategist Jim Reid said that "it's hard to get away from the fact ...

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One month ago, Deutsche Bank made a startling observation: populism has risen to the highest level since World War II.

Commenting on the shocking outcome in the recent Italian elections in which anti-establishment parties got a majority of the vote, DB's credit strategist Jim Reid said that "it's hard to get away from the fact that the overall result was another resounding vote for populism. Indeed over 50% of votes submitted was for a populist party, including of course the party with the largest percentage - the Five Star Movement - and a possible kingmaker in subsequent coalition talks - the Northern League."

The chart below shows Deutsche Bank's global populism index updated for the Italian election result. It shows that the percentage of votes for populist parties on a population weighted basis is around 32% - a level its largely held since the Trump inspired surge in 2016. In fact, you have to go all the way back to the WWII period to find the last time that populism had such support.

Geopolitical Risk Is Back To Cold War Highs

A focus on just on Europe shows that the continent with the high double-digit youth unemployment has become a hotbed for anti-establishment sentiment, which has everything to do with the economy, and lack of opportunities, and nothing to do with Russian operatives, much to Samantha Power's chagrin.

Geopolitical Risk Is Back To Cold War Highs

Reid's troubling conclusion is that "it's hard to get away from the fact that populism is currently going through an explosion in support at present." Reid also notes that while the above index excludes a vote for Jeremy Corbyn's Labour party but "one could certainly argue that some of his more radical views and policies are populist in nature." And if DB were to include Corbyn's support in the 2017 UK General Election "then our index edges above 35%, eclipsing the 1940s highs, and to the highest since the turn of the 20th century."

* * *

Over the weekend, in a just as troubling segue following last week's geopolitical events, Barclays looked at the variety of events that took place recently and found that, in addition to soaring populist sentiment - as per Deutsche Bank - "geo-political risk is back at Cold War Highs."

Geopolitical Risk Is Back To Cold War Highs

Here's Barclays' commentary on the soaring convergence of these two very troubling trends:

The US Office of Foreign Assets Control (OFAC) designated United Company Rusal PLC, a eurobond issuing-entity, as a specially designated national (SDN). This is significant, as US persons owning debt and equity of the entity will have to divest their holdings by May 7, 2018 under a General Licence. This unprecedented step had a significant effect on Russian asset prices, with the RUB falling by 12% against the US dollar from peak to through.

The political rhetoric between Russia and the US continued to heat up throughout the week. The US, UK and France announced that they would take action in response to an alleged chemical weapons attack in Syria sanctioned by the government. And, while Russia stated that it would protect Syria from any western missile strikes, the US stated  hat missile strikes were a likely response to this atrocity, regardless of the threat from Russia. Such rhetoric continued to escalate rapidly and, we think suggests the risk of further political turmoil in the Middle East. The evolution of these events could influence President Trump’s decision on whether or not to extend waivers on Iran sanctions on 12 May 2018.

China attempted to de-escalate the trade dispute with the US this week. At the Boao Forum, President Xi stated that China intends to ease local market access for countries that follow international trade rules, while strengthening intellectual property protection. The PBOC’s Governor Yi Gang also proposed new financial reforms, including easing limits on foreign ownership in the financial services sector. While CNY devaluation was mentioned by some senior officials, but could be counter-productive in light of the US Treasury’s report on currency manipulation due on 15 April. We think that China will likely leave room for negotiation and cooperation, while responding with tit-for-tat retaliation threats if needed.

Commenting on the convergence of these troubling trends, One River's CIO Eric Peters had this to say:

... the future always seems to magically find a way to tackle today’s biggest problem. Take mass unemployment, which is often tackled by war. Or excessive debt, which leads to inflation/default. Or political desperation/division, which leads to both war and inflation.

But it’s not all grim, after all, war leads to peace. And debt default leads to economic renaissance.

Of course, today’s greatest problem is inequality, which leads to populism. And populism can itself be a real problem, which eventually leads to greater equality, sometimes through war, or taxation.

We're not sure if to read that last sentence as optimistic, or as a warning of World War III.

Tyler Durden
Tyler Durden (a pseudonym) represents the idea that a return to truly efficient markets is a possibility and a necessity. After having experienced the inner workings of capitalism at various asset managers and advisors, Tyler believes that the current model is flawed and a deleveraging at every level of modern society is needed to reinspire the fundamental entrepreneurial spirit. Visit his blog: ZeroHedge (http://www.zerohedge.com/)

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