Will Global Tensions Derail the US Recovery?

May 20, 2014

by Robert Huebscher

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It’s not the Fed’s monetary policy that investors should fear, but the “geopolitical tapering” undertaken by the Obama administration, contends Niall Ferguson, the Harvard historian. Ian Bremmer, the political scientist and chairman of the Eurasia Group, disagrees – despite some tactical missteps, he said, the current administration has achieved reasonable results.

The two spoke at the Strategic Investment Conference in San Diego, hosted by Altegris Investments and John Mauldin. They were joined by Anatole Kaletsky, the economist and partner with GaveKal Research, who assessed the potential impact of today’s geopolitical uncertainties on the markets.

The geopolitical taper has already begun, Ferguson said, as entitlement programs are squeezing defense spending, and America is “reverting to the isolationist policies of the 1930s.”

Meanwhile, Bremmer said the volatility due to geopolitical risk is “quite great, but not because Obama is a terrible leader.” The ability of the U.S. to get outcomes it desires has diminished because Americans are less willing to engage militarily, Bremmer said, and that is a “structural change.”

The debate centered on three regions: Ukraine, the Middle East and China. Several common themes emerged, but none was as great as the concern over whether U.S. hegemony will endure in the coming years – and whether turmoil in those regions will derail the U.S. economic recovery.

I’ll look at what each had to say about those three hot spots.

Ukraine

The single biggest issue today is Ukraine, Bremmer said. We are not heading into a new cold war, though, because Europe is not aligned with the U.S., China is not siding with the Russians, Russia is not as powerful as it was during the last cold war and Americans don’t really care about the outcome.

We need to worry, Bremmer said, because those four things mean the Ukrainian situation will get worse. Our alliance with Russia is unstable, and Putin has been unfavorably demonized by the U.S. media.

“From the Russian perspective, overwhelmingly the Ukraine is theirs,” he said. Kaletsky agreed, and said there is no Russian who doesn’t believe Ukraine is theirs, and “there never will be.” Russia’s military infrastructure is tightly integrated into Ukraine’s, and “the idea they would let that go is ludicrous,” Bremmer said.

If the U.S. goal is to prevent the annexation of Ukraine, it faces political obstacles here and abroad. Obama’s approval rating is 47%, but Putin’s is 82% – up from 60% before the crisis started, Bremmer said. In addition, the Europeans have “almost bolted” from the U.S. sanctions, he said. “The ability of the Americans to keep the Europeans on board is very tenuous,” according to Bremmer.

Ferguson was the most critical of U.S. policy. He reminded the audience that Obama mocked Mitt Romney for stating, during one of their debates in 2012, that Russia was the principal geopolitical rival of the U.S.

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