Geopolitical Instability Poses Opportunity

by: Nima Karamlou


The growth of Nationalism and its consequences.

A brief history on the rise of populsim and the end of the Golden Age.

War with Iran and its implications represent unpriced market opportunity.

"The drive toward nationalism is only part of the general revival of nationalism."

-Arthur Henderson

"Nationalism is power-hunger tempered by self-deception."

-George Orwell

Donald Trump has finally assumed his role in the White House and has already lashed out in a bold manner ushering in a new era for American politics, and the changing of so-called 'world-economic' guards from globalists to populists. The growing populist movement has spread not only across the United States, but across the pond in Europe. In fact, a majority of Western democracies that saw their powers grow substantially in the post war period have now seen their countries swept about with populist, and in some cases nationalistic fervor. Investors meanwhile have seemingly overlooked the negative, tail risks, associated with the movements creating opportunity for the unbiased observer.

Populist Movements and their Causes

The current causes behind the current populist movement are well documented. It is a well known fact that wages have failed to gather steam since 1973, household debt has boomed, and the security for future generations has all but evaporated. Indeed the bedrock of American values, the guaranteed prosperity of future generations, evaded the middle class for 4 decades. The 1970s spawned a period of stagnation and deregulation that extended further in the 1980s. Meanwhile, the booming financial and tech sectors ushered in the information age that automated many jobs as more efficient means of production were discovered.

Unfortunately for many, the promised prosperity of the capitalist system only extended its reach so far. The end of the Golden Age marked the beginning of the end of the welfare state. From a political perspective, it appeared that the liberal world order, which staked its claim on a promise of stable economic growth supported by big government had failed. The failure for the quasi-socialist states to exert their influence paved the way for conservatives such as Thatcher and Reagan to promote their free market ideologies. The two promised change and a return to the stability and growth that marked the Golden Age without the intervention of government.

Both Reagan and Thatcher were proponents of the free market. Throughout the golden age, governments played a major role in business from regulation to subsidies. Moreover, tax rates reached nose bleed levels. Much of this occurred without any scrutiny. Liberal politicians were quick to take credit for their seemingly successful policies that led to economic growth. Unfortunately, the short-sighted belief that policy dictated economies upended their efforts and brought an era of criticism and distrust of government over-reach that dominated the Reagan era. Much of the Reagan era policies pushed the Western Democratic order further into a free market system that successfully made businesses more competitive at the expense of the lower and middle class.

The Reagan era was indeed prosperous, but for a select few. The finance sector boomed and Wall Street profits had never been better. Furthermore, the inflationary spiral that led to stagnation in the 1970s appeared to have played out. It seemed that the American engine might have been restored. Nevertheless, under the surface, things were not what they had seemed. Debt levels boomed, unemployment was low, but because people were dropping out as new jobs were hard to come by. Growth seemed to have come at a cost in the new era of free market capitalism and not all who longed to enjoy the prosperity of the Golden Age could feast at the new table.

Throughout the next two decades, growth in inequality would continue to erupt as forces of globalization and technology would exert their force on the working class. Meanwhile, American greed continued to extend as the wants of the average American exceeded affordability. The stock market crashes of 2001 and 2008 are examples of this. In the 1990s, the age of information began with a bang igniting a decade long stock market rally that defied gravity. Greed extended beyond Wall Street to the mom & pop investors who levered up to participate in the rally. Like anything, the rally came to an end wiping out billions of dollars leading to a minor recession.

It was only a few years later where yet another, much deeper crisis, would once again wreak havoc on the working class. Throughout the era of deregulation, banks grew increasingly larger while less regulated. For example, the Graham Leach Bliley act passed in the 1990s under Clinton sought to extend Citigroup a helping hand in its merger with Travelers Group. The act was instrumental in tearing apart an important guideline in the Glass-Steagall act that barred investment banks, securities houses, and insurance companies from merging. The era of deregulation prompted an explosion of unregulated growth in the sector. Contrary to the idea that markets are rational, the financial sector's growth was marked with an irrational growth trajectory spearheaded by corporate greed. Housing loans were made out with out any worry regarding credit history. The music; however, stopped in 2008 when the housing market collapsed and the banks were bailed out. It was at this pivotal moment when faith in the political elite began to erode. It seemed that despite policy approach, democrat or republican, nothing seemed to work.

Today, belief in the establishment is far less than it was in the 1970s as Americans have grown ever more nostalgic and angry. A deep sense of longing for what America once was permeated across the country. The Obama years marked a time of stagnating growth, growing inequality, and a shift toward a more left social stance. From the eyes of the American in middle country, not only was growth nowhere to be found, but neither were traditional American values. The mix of nostalgia and anger made the environment all the more easier for a gutsy politician to make their way to the White House. Noam Chomsky, political author and professor of lingustics at MIT mentioned six years ago that,

"The United States is extremely lucky that no honest, charismatic figure has arisen. Every charismatic figure is such an obvious crook that he destroys himself, like McCarthy or Nixon or the evangelist preachers. If somebody comes along who is charismatic and honest this country is in real trouble because of the frustration, disillusionment, the justified anger and the absence of any coherent response."

Donald Trump and the New World Order

Donald Trump's election marks a very critical moment in history. Never in global politics have we seen a leader so willing to go against commonplace ethics, a policy he feels gives him an edge. Trump has evoked nostalgic pride in many of his working class voters that led him to victory in November. Trump's policies have been forceful and swift, striking many by surprise and inciting volatility in global financial markets. Although Wall Street views President Trump as a bullish tailwind, I view him more as a powder keg with out regard for geopolitical intricacies that are vital toward positive decision making. Trump's actions are inherently jingoistic in nature and represent a time for caution for world markets.

History offers us clues regarding the outcomes of sweeping nationalism and the result is certainly nothing short of disastrous. Both World War I and II were inherently a result of populism, only for different reasons. War is often utilized as a tool to strike fear in the general public. Already we are seeing examples of hard-line approaches from Donald Trump, particularly with Iran. Iran is a critical point in geopolitics as it possess alliances with critical Muslim majority nations and with Russia making the prospect of war all the more dangerous. In other words, war with Iran threatens to upend decades of anti-conflict between the East and the West.

Oil and Geopolitics

Oil has traditionally been a reasoning behind war. Long has the West sought to control the oil fields in the Middle East. First it was Britain who fought the Ottomans in World War I to command control of the oil fields to improve its military might. Later it was the United States, which sought to impose several coups to control the oil in the Middle East. After the end of World War II, the United States sought to control the 'Grand Area' by which it would exert its political and economic dominance on nations to feed its ever growing consumer society. The Middle East was a critical point to Grand Area planners who often said that one who could control the middle east could control the world. A great number of wars have been fought as a result of this Grand Area planning. Iraq, Syria, Lebanon, Egypt, and Libya have all been targets. Strangely; however, Iran has managed to evade the conflict.

With the election of Donald Trump and the initiation of his anti-Iranian, anti-Muslim security counsel, the Iranian target that has long been on the list comes closer to being taken out. This is of prime importance for oil investors because the Strait of Hormuz is located in Iran. According to the EIA, the Strait of Hormuz shuttles some 25-30% of the world's oil and may be threatened should the the outbreak of war occur. This will certainly cause oil prices to skyrocket spiking inflation and choking off economic growth. I am privy to this fact and it represents un-priced risk in markets.

Out of hope for humanity, I hope that we do not go to war with Iran as it may mark the end of our great human race; however, should the prospect of war come to our doorsteps, profits for oil investors shall certainly be plenty.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article contains the opinions of BlackVault Investments and in no is acting as an offering and/ or solicitation of securities or investment advice.