January 2024 Monthly
Middle East War Goes Boom, Ukraine Talks Presage End of War, Taiwan Under Survellaince & Election Outcome, Looking at 2024 Elections Especially the UK
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*Not financial advice, merely pointing out political trends*
Financial markets have continued to be strong in January, as the RRP drawdown which we discussed (from $1.1tn to $570bn) continues to pump liquidity into the system. New highs were seen in major US indices. We would highlight that the RRP at this pace will basically run out in February or March, which would then put the equity market rally at risk. The market bottomed in 2002 the day of peak usage of the RRP, at almost $2.5tn.
Global markets remain resilient despite the rising conflict all over the Middle East, and the continued deterioration in Ukraine. We intend to keep you informed although we understand these are not market moving events, because the media covers them so poorly.
Milei continues to execute at an extraordinary pace in Argentina. People around the world can look at him and wonder if their own leaders are even trying. We will give readers a break on Milei this time, but will be back next month.
There are several major elections this year, among them Taiwan, Mexico, the US and the UK. We chose a special focus on the United Kingdom because we see it playing out differently than people expect. We see a populist revolt coming that will toss out the Conservative government in the UK and potentially have a unorthodox configuration running the country.
Themes are below. We have not yet added a Middle East regional war theme, because there is no obvious linked trade. The oil inventory story can move energy higher without a need for a major war or supply disruption – those are just added boosts.
1. Middle East Keeps Burning – US vs. Houthis War to Start
2. Ukraine End Game In Sight
3. Taiwan Elects New Government- Beijing Introduces New Surveillance
4. Checking In on 2024 Elections- With Focus on the UK
1) Middle East Keeps Burning, US vs. Houthis War to Start
Missiles have been flying around the Middle in the past month – hitting targets in the Red Sea, Iraq, Syria, Lebanon, Israel, Gaza and Pakistan. Whew! The regional war is here. What are the two major players’, Iran and Israel, next moves?
First, who are these Houthis that have been gumming up the Red Sea for the past few weeks? They are an Iranian backed rebel group, in Yemen, which has been battling the Yemeni government for two decades. Saudi and others supported Yemen, and now the war is a stalemate. The Houthis have a powerful military of 20,000-30,000 troops, Iranian and Chinese manufactured ballistic missiles, and a civilian population of 30m.
As we pointed out, the Houthis have been attacking cargo ships and Red Sea traffic has fallen drastically. The US finally responded with limited air attacks (map above). At the same time, Iran has also been launching missiles from Iran into US and Israeli-linked targets in Syria, Northern Iraq and other places.
We have been saying since nearly day one that we had the set up for a regional war, which now seems to be almost here. But there are still three ways that this can escalate into a new major war. All of them seem likely over the near term.
A. The Israeli military and Hizballah have been swapping missiles over northern Israel/southern Lebanon. But Israel is warning that things are about to get serious, with Defense Secretary Gallant issuing a final warning:
This would be a full scale invasion of the first 50 miles of Lebanon, with up to 50,000 combatants per side.
A. With the Red Sea shipping channel closing off, there remain two more key chokepoints that Iran and The Houthis could work to block. This de facto partial naval blockade of Israel would wreak havoc on Israel’s war effort. Coupled with Hizballah shelling of Israel’s largest ports, Tel Aviv and Haifa, and Israel could be very isolated very quickly.
If Iran wanted to get particularly aggressive, they could close the Persian Gulf to only ‘friendly’ ships of oil going to China or equivalent. This would further weaken the West by forcing them to pay much higher prices for oil that they are importing.
B. The press hardly mentions it, but America still maintains a substantial military presence in Syria and Iraq. Iran and their linked groups in Iraq have shelled these American bases over 100 times in the past three months. As of now, they have been more skirmishing than a full scale attack. But we think Iran is experimenting with tactics and weapons systems that are seeing combat for the first time. If this regional conflict escalates, an easy Iran move would be to unleash a full scale invasion or bombardment of the US assets in the region. Those bases are isolated and it would be very difficult to reinforce over a certain size of attack.
On January 21st, the press reported that the US is planning to start a long sustained bombing campaign against the Houthis. How Iran responds to this is the key question.
Remember, the general Russia-Iran-China strategy is to tie down the US and its allies in as many places as possible. They plan on using supply chain disruptions and higher energy prices to drive economic pain. And by eventually making America have to react in almost ten places – Ukraine, The Sahara, Gaza, Red Sea, Syria, Iraq, Lebanon, the Persian Gulf, and soon to be some new locations….America will neither have the resources nor the will to fight all of these battles. We don’t think the USA military realizes that it is walking into a trap, but it is.
2) Ukraine End Game In Sight
It’s getting to crunch time for Ukraine in 2024. First off, their battlefield performance has been horrific – the counter offensive failed after capturing a few square miles. Russia continues to move its battle lines inexorably forward. But it’s now an open secret that Ukraine is running out of men to fight this war. Absent fresh conscripts, Russia will break through Ukrainian lines by spring and could quickly surround Kyiv and Odessa.
But the population, with no clear strategy from Zelensky, seems to be in revolt. From the article:
President Volodymyr Zelenskiy told his end-of-year news conference on Dec. 19 that the military had proposed mobilising 450,000-500,000 more Ukrainians, but that it was a "highly sensitive" issue that the military and government would discuss before deciding whether to send the proposal to parliament.
They need the young men because the army is rapidly consisting of middle aged men, whose performance is not quite up to par:
Now Ukraine faces another challenge. House Republicans are threatening to cut off Ukraine unless Biden has a solution to reversing the crisis at the US Southern border. They are also worried about where the $200bn has gone, with little accountability and military results. If the US government pulls funding for Ukraine, the government and military would collapse in a few weeks.
The US, finally recognizing reality, has begun secret peace talks to resolve this before it lasts too long. Saudi Arabia hosted extensive talks in December, but without Russia and China:
Finally, a few outlets are reporting that Zelensky may fire his Defense Minister Zaluzhny, who has been at odds with Zelensky for a while now and arguing for a different strategy. This would make the decision to continue the conflict or go for peace entirely on Zelensky.
So now it looks this will be resolved one way or another in 2024. Either the US cuts funding and the country collapses. Or the US wraps up a peace deal. Or the Ukrainians run out of money and men to fight the war and are overrun. There could also be a replacement of Zelensky, if they hold elections, and a new President settles peace quickly. Russian Defense Secretary Shoigu had always said that this ‘Special Military Operation’ could last until 2025, and it looks like he will be right.
Economically speaking, Ukraine is a disaster. Its economy has shrunk by 40% since 2021, it has massive deficits and debts, and is entirely reliant on external financing. Most of the debt is to official creditors like the US and IMF, who can wipe out non-official creditors. Private unsecured creditors would get pennies on the dollar in any scenario we have outlined. Last year, the benchmark 10year rallied from 16 to nearly 30, and is now trading at 25.
3) Taiwan Election Outcome, and China Steps Up Surveillance
This column has often written about the risks posed to Taiwan that are far greater than most people think. Our piece from last summer goes through all the major issues in great detail. China 100% wants to retake Taiwan and is making all the preparations to do so.
It added two new signs of preparation, as it recently sent both observation balloons and satellites over Taiwan. As far as we know, this is a first for both. And this comes on top of years of practicing blockades, missile strikes, and aerial reconnaissance.
On another note, but equally important, is that Taiwan recently held a Presidential election. The current VP, William Lai, won with just over 40% of the votes. The legislative elections produced no majority in the Parliament. We expect no major changes to US-China-Taiwan relations, meaning the current tension will continue. If Lai continues to host US delegations and buy American arms like his predecessor did, then surely China could get more aggressive.
CSIS did a good piece on the key takeaways from the election, for those who want more.
4) A Glance at the 2024 Election Calendar
Mexico – Presidential Election June 2
The data is pretty clear here. Although incumbent AMLO cannot run again, he has picked his successor: Mexico City mayor Claudia Sheinbaum. She was very popular as a mayor, and presided over such a safe and functional Mexico City that legions of Americans moved there during the pandemic. We often joke that Mexico City is the best Californian city – and we’re not wrong! We recommend any reader who has not visited to give it a shot, it’s really now one of the world’s great capitals, but at a third the price.
Sheinbaum is ahead by 30 points and is going to win. She will actually probably be more friendly to investment than AMLO has been. We expect far fewer spontaneous policy decisions and nationalizations. Mexico is growing, picking up re-shoring investment flows, tourism, and people moving back to Mexico. Investors should look to buy any wobble before the election.
USA
We wrote a piece at the start of the year on handicapping the election. Just a quick update - after Trump’s convincing win in the Iowa caucus, Vivek Ramaswamy dropped out and endorsed him. Subsequaently, DeSantis dropped out on January 21st, and endorsed Trump.
This now leaves Nikki Haley as the only contender against Trump, but he is miles ahead of her in every national poll. We still think Trump is likely to be the Republican nominee, the only two questions remaining are a) will he be put in jail prior to the November election date b) who will his running mate be? Current polls suggest that if it’s Trump plus DeSantis,Vivek, or someone else, he would win the national election.
But continue to be the lookout for surprises from both sides as this race develops.
United Kingdom (second half of 2024, possibly January of 2025) – Watch for a Populist Revolt
We have decided to write an extended piece on the UK election because we think it will be one of the most eventful campaigns and elections of 2024. The UK is a Parliamentary system, so the government has to ‘call an election’, and then hold it a few weeks later. The current government is weak but remains a majority, and they can call it anytime. It has to be held in the next year, before January 28th, 2025. Current estimates are that the government will call it in the second half of 2024.
We think that the UK election is ripe to produce a populist revolution, very similar to the US in 2015-16 or the Italian election of 2018. Whether we see left-wing populists, or right-wing populists, or both, remains to be seen. But the environment is ripe for a total upending of the current establishment parties. This is nowhere close to being priced in to UK markets.
The Parliamentary System
European readers can skip this section. But allow us a slight deviation to explain to Americans how a Parliamentary system works- we are often surprised that few Americans understand the differences compared to the Presidential system which dominates the Americas from the USA to Argentina.
In a Parliament you vote for a representative only- not a separate President and local representative. If you are voting for a party, and that party gains a majority in the Parliament, they will pick the party’s leader to be its Prime Minister- effectively the number one civil servant. This has to be approved by the Head of State- sometimes a monarch like in the UK, sometimes an elected President like in Italy. That Head of State oversees the government and represents it at official functions, but, does not run the government day to day. If there is no majority by one party, then multiple parties have to, with supervision by the Head of State, work out on a deal who the Prime Minister is and how power will be shared.
Another difference in Parliamentary systems is that the Prime Minister’s Cabinet is composed of members of the elected representatives. A large part of negotiations in countries without a majority party is how the Cabinet will be divvied up, and who will be assigned which roles. The final difference is that if the members of the party or parties grow disaffected with their leader, they can hold a ‘confidence’ vote to determine if they keep him. If this no confidence vote succeeds, then the members can pick a new Prime Minister. If a no confidence vote fails multiple times, typically the Head of State will order new elections be held shortly in order to sort this out. That’s why elections in Parliamentary systems typically only have a few weeks of campaigning – since they can be called at any time, better to keep it short and sweet if there is no government.
Most systems have a time frame in which elections have to be called, typically around five years, even if there has been no crisis of confidence in the government. This is why since elections were held in the UK in December of 2019, there have been three Prime Ministers (Johnson, Truss, Sunak) but no new elections – the Conservatives simply rotated in a new one of their own. But the current system mandates a new election by January 2025.
The Collapse of the Conservative Party
The Conservatives have controlled Parliament since 2010, most of that time with an absolute majority. This was because the 2007-9 Global Financial Crisis created immense dissatisfaction with the Labour government of Gordon Brown. Since then, they have had various Prime Ministers running the show:
David Cameron (2010-6)
Theresa May (2016-19)
Boris Johnson (2019-2022)
Liz Truss (2022-22)
Rishi Sunak (2022- present)
But now, this appears to be at an end. One thing we can say with certainty: The Conservatives have no shot of winning this election. They can’t pass on the blame for the weak economy, they have betrayed key constituencies within their party, and Sunak is dishwater dull while campaigning. The disapproval rating of the government is now higher than at any point they have been in power:
Governments with 15% approval ratings don’t win elections. Current polls show that the Conservatives will be wiped out at the next general election- going from a party with a comfortable majority (365 seats compared to the 326 needed for a majority) to less than half of that, 169 seats. Opposition parties would control a staggering 74% of seats in Parliament. And we don’t really see a way they can recover over the next nine months to avoid this outcome.
It seems pretty straightforward then – a failing Conservative government will get voted out in a landslide, and Labour will take over with broad support. Right? But we think it’s time to scratch the record- this will NOT be a normal election. We think this election will trigger a populist revolt along the way. Not only are voters of all stripes fed up with the Conservative government, they are also underwhelmed by the Labor opposition and its leader. As we analyze the data, it becomes clear that Britons will vote for ANY alternative they think will represent their views, which are not represented by the mainstream candidates.
The Populist Platform
We have seen this movie before. In the US elections of 2015-16, the initial thought was it would be Jeb Bush versus Hilary Clinton. In other words, family members of the people who had been President for 5 of the 7 prior terms. But due to enormous dissatisfaction with the mainstream parties, populists arose on both sides. By the end of the cycle, Trump had engineered a hostile takeover of the Republican party along populist lines. On the left, a previously unknown Senator named Bernie Sanders generated huge support, and came incredibly close to winning before the Clinton supporters pulled all sorts of dirty tricks to win.
The economic malaise of Greece from 2010-15 produced left-wing party Syriza, and Italy’s long term underperformance led to a government of Lega and 5 Stars in 2018 and the extinction of the traditional parties.
At the moment, there are no populist candidates on the right or left in the UK. The Reform party, led by Brexit sponsor Nigel Farage polls at 11%. If an election were held tomorrow, they would not win any seats. But they still have time to adjust their messaging and take voters from the failed Conservative party. The Green party is running on an issue that ranks very low in UK polling, and won’t go anywhere in the general election. There is no Geert Wilders/AFD/Swedish Democrats party out there as of now to take the immigration issue to the forefront. Even if Conservatives were to dramatically change course and introduce a more populist candidate, the distrust felt by many voters means that that candidate would not go far.
The last party, the Liberal Democrats or LibDems, poses an interesting conundrum. They are the perpetual third party of UK politics and have a national infrastcuture. Their policy documents appear to have populist overtones and leader Ed Davey has hit the press.
Looking at more granular data supports this take. As of now, the data seems to show Labour with broad backing. But this is all reflecting a protest vote at the moment- actual personal approval ratings for Labour Leader Keir Starmer hover in the 30% range.
What issues are most important to voters? According to statista, they are a)economy/housing b)health c)immigration
We should modify this to say that the housing and economic issue are really the same thing. The economy issue is obviously going to dramatically hurt the Conservative party. While stagnant wages and high inflation are hitting UK residents hard, the biggest problem is the huge spike in mortgage payments. The UK is a very levered society, and most people have mortgages that reset every few years to current interest rates. This was fine when interest rates were 1%- but as they have risen past 5%, this is exerting pressure on everyone. Many people are seeing a doubling in mortgage payments on their current homes:
Without a novel solution for the low wages/high interest rates/ high mortgage payments issue, any candidate faces major risks.
The health system is another that’s wide open. Surprisingly, according to the data, Labour and Conservative voters are not vastly different in how they view the government health system, the NHS. Any populist who can come up with a new, ‘common sense’ platform that fixes the common NHS problems could take votes from both sides.
https://www.nuffieldtrust.org.uk/news-item/party-politics-and-attitudes-towards-the-nhs
The immigration issue, which is likely to become number two, is directly related to the net migration into the UK. Despite repeated Conservative promises to lower the overall numbers, it has actually skyrocketed in the past three years and is approaching one million per year (into a country of roughly seventy million). This is the issue where a right wing party could easily outflank the existing Conservatives. Addressing both the quality and quantity of the current immigration wave is key, as is calling out the Conservative Party for their countless broken promises on this issue.
There is ample room for a new candidate, either within Labour or outside, to galvanise voters and gather popular support.
The Three Scenarios
There are three scenarios to how this populist undercurrent plays out in the next year as we head to elections.
1) Keir Starmer adopts left wing populism, wins big. As of now, Starmer has been giving very mealy mouthed answers that exactly reflect a conventional center-left ideology. But that won’t work now. He needs to adopt high polling left wing populist ideas and hammer them. That would ensure he’s not vulnerable to a revolt in his party or defection by voters to smaller parties.
2) A right-wing party outflanks the Conservatives to victory
Either Reform, or a new party yet to emerge, could out-right wing the Conservatives. They could hammer that they are serious about immigration, that they have real economic solutions, and answer on social issues important to Britons. Reform has not yet stepped up to do this, but they still have time if they are smart.
3) The Greens or LibDem Party adopt left wing populism + some sort of sensible solution on migration. They either win or lead a coalition with Labour
The Greek solution would be to have a very left wing party offer new solutions on spending on health care, on mortgage relief, on economic subsidies to people who are suffering etc etc. This platform worked in a Greece suffering from four years of recession in 2015.
Small edit.....Reform in the UK is led by Richard Tice, and advised by Nigel Farage