Zoltan’s Latest: “Bretton Woods III is destined to happen. It’s already happening”

…which is why Bretton Woods III is destined to happen. It’s already happening, and we will explore the Bretton Woods III topic in detail in our upcoming dispatch:- Z. Pozsar August 24th, 2022

It seems that Zoltan Pozsar is tasked with telegraphing the Fed’s comprehensive message out to the investing public if they will listen. Then the Fed implements small pieces of it. To the extent this approach is successful, structural volatility is kept to a minimum. To the extent that it is not.. then QE infinity will necessarily follow.

The economic and industrial work which Zoltan speaks so extensively on which must be done is a marathon, not a sprint. Sadly, elected officials don’t care about marathons when they are sprinting to the next election poll. Some Central bankers have also sprinted to their next jobs already. We’re skeptically optimistic one can tell the country to take its medicine when it is those same doctors that have made them sick; and then expect the country to swallow it. Maybe that is why Zoltan is doing this and not the current leadership. Who would believe their message if delivered by anyone else given current  track records?

Background

This is merely a first read through (10,000 foot view) of Zoltan Pozsar’s missive. We will get to a more detailed version soon. But wanted to get you some background first. We are also looking forward to Zerohedge’s more comprehensive take on this new “dispatch”.

We noted in our last post the following:

Zoltan’s post is also likely a warmup to a series of future posts about how monetary policy must be tighter to offset the coming fiscal easing/investment domestically. That means inflation without free money.

His latest post goes through several concepts all related to understanding and coping with the newly split world we live in. Again, this is as general as general gets for an analysis. But we think it hits the main points he wanted to convey.

Zoltan Pozsar’s latest 4000 plus word submission opens with this:

War means industry. Wars cannot be fought with supply chains that crisscross a globalized world, where production happens on faraway, little islands in the South China Sea, from where chips can be transported only if airspaces and straits remain open… Global supply chains work only in peacetime, but not when the world is at war, be it a hot war or an economic war. The low inflation world had three pillars: cheap immigrant labor keeping nominal wage growth “stagnant” in the U.S., cheap Chinese goods raising real wages amid stagnant nominal wages, and cheap Russian natural gas fueling German industry and Europe more broadly. Implicit in this “trinity” were two giant geo-strategic and geo-economic blocks: Niall Ferguson called the first one “Chimerica”.

I will call the other one “Eurussia”. Both unions were a “heavenly match”: the EU paid euros for cheap Russian gas, the U.S. paid U.S. dollars for cheap Chinese imports, and Russia and China dutifully recycled their earnings into G7 claims. All sides were entangled commercially as well as financially, and as the old wisdom goes, if we trade, everyone benefits and so we won’t fight. But like in any marriage, that’s true only if there is harmony. Harmony is built on trust, and occasional disagreements can only be resolved peacefully provided there is trust. But when trust is gone, everything is gone…

He then goes on to mix history, economics, pop culture references, and much more in what can be described as a chapter in his mission to educate readers on the tough love that is coming.

Cutting to the monetary policy chase: That means monetary policy is done being accommodative as well.

Last month we asserted this policy was coming: Inflation will be generated on the fiscal side, both by continuing external forces and pumped by US fiscal spending on our own supply infrastructure. Fed monetary policy will be to mitigate that inflation from now on.

He says at one key moment in the post:

Insensitivity to interest rates means that the to -do -list will have to be executed regardless of whether the Fed hikes rates to 3.5% or 7%

Note he does not say 1% or 4%. He is telling us the Fed intended rate floor. Further, it may appear he is saying we must invest in rebuilding regardless of the cost. He is. He is also saying (again), that interest rates will be much higher for much longer. Get used to it.

From supply chains, to monetary policy, to industry. From Goldilocks economies to deflationary tailwinds to technological advancements making stuff cheaper… All of it is done; he is telling us once again. In its place is a much stranger, much older mercantilist leaning world. But a world in which we must adapt as a society if we are to continue excelling. in this environment here are some things he recommends to investors.

And hopefully it will be like that… …and if so, any investor will have to be mindful that the above to -do -list is: ( 1) commodity intensive ( 2) capital intensive ( 3) interest rate insensitive (4) uninvestable for the East

That cycle is over…

…it broke like FX pegs broke in 1997 and like private money broke in 2008. Finally, uninvestability means that for certain large countries in the global East, it makes absolutely and categorically no logical sense to roll their investments in G7 debt claims. Not just because of what happened to Russia’s FX reserves, but also because rolling a $1 trillion portfolio of U.S. Treasury securities means that you will fund the West’s effort to re-arm, re-shore, re-stock, and re-wire…

 …and sadly things make no sense to continue like they used to, be either from a real (trade/production) perspective or a financial (FX reserves) perspective… …which is why Bretton Woods III is destined to happen. It’s already happening, and we will explore the Bretton Woods III topic in detail in our upcoming dispatch: War and Currency Statecraft

Yes we know Zoltan, we know… But if BW 3 is actually happening wouldn’t Gold be trading $10,000?

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