Within the economic cycle of a healthy economy are cycles that naturally fluctuate between growth and recession.
As I have commented in past articles and in my Leading Edge newsletter, my discovery of the 18-year alternating Geopolitical Cycle in early 2006 was an important boost to my hierarchy of cycles within the broader economic cycle.
I found the cycle, and the 30-year Commodity Cycle, when I was forced to explain why the second stock bubble, from late 2002 into late 2007, wasn’t as strong as I had originally forecast.
As it turned out, the Geopolitical Cycle tracked a very stable and low-risk global environment between 1983 and 2000, and then an endless succession of geopolitical crises since 9/11 in 2001.
That turn of events, along with rising commodity prices, caused the stock bubble of 2002 to 2007 to be less robust than I’d anticipated.
But that’s a good thing. These two new cycles are well worth the price of my over-forecast of the Dow back in 1998. Especially because they help me get a more accurate projection of what lies ahead…
Economic Cycle of Destruction Ahead
The Geopolitical Cycle has been very consistent and clock-like. The bad news is that it continues to point down into late 2019 or early 2020. And we’ve been witnessing this downturn since 2001.
After 9/11 came the Iraq war… then the Afghanistan war… then the civil war in Syria… then the Arab Spring (in Libya, Tunisia and Egypt)… then the Russian/Ukraine showdown… and now Iraq is falling apart after the U.S. left (surprise, surprise).
In East Asia, we’ve seen countless threats from North Korea… and now China is at odds with both Vietnam (over oil drilling off their coasts) and Japan over offshore islands and Vietnam.
Clearly this cycle is heating up again in Iraq, with the extreme terrorism and war from the ISIS-led Sunni minority.
Aggravating the cycle is the fact the U.S. is simply becoming less willing to intervene militarily, particularly after the costly and unsuccessful wars in Iraq and Afghanistan and our decreasing reliance on Middle East oil, thanks to our fracking revolution.
Personally, I was against the Iraq war and any interference in the Middle East from the beginning, primarily for the obvious reason that it had three conflicting religious groups that would never get along. How hard was that to see?
It was only Saddam Hussein’s ruthless rule that kept the country together. To think we could topple him and create a working democracy was naïve, if not downright idiotic.
Plus, I’ve spent time in Dubai twice and heard the full argument from all types of Middle Easterners for why they don’t want us interfering in their religious and sectarian issues. Even Dick Cheney originally argued this point, but then decided to go into Iraq anyway.
Now the obvious is playing out.
The minority Sunnis and the majority Shia are at war with each other and there’s no chance of the unified government the U.S. is still pushing for. Certainly not one with more Sunni and Kurdish representation. Seriously, how could we still be this naïve?
Given that the U.S. is very unlikely to go back into Iraq (or Syria) militarily, the question becomes: What is the most likely outcome that’s in the best interests of the Middle East?
I think the most likely outcome over the next six years, while the Geopolitical Cycle still points down, is that the Middle East realigns around the three sectarian groups: Shia, Sunni, and Kurd.
The Shia part of Iraq could ally with or combine into Iran. The Sunni part of Iraq could ally with or combine into Syria. And the Kurds could ally with or combine into Turkey.
Such a realignment of countries around common religious affiliations is the only way to see a more stable Middle East from my view. Let these groups be separate with their own sectarian cultures.
The question that then arises is: How would this occur? The answer is it would take place with increasing violence and war. The Middle East needs to go through a civil war, without the intervention of the U.S. or Europe, to sort out their own conflicts in their own way.
They’ve never been able to do that because our interests in their oil have us constantly intervening. As a result, not only are we overwhelmingly hated for it by those in the region, it’s also led to growing threats of terrorism against us. Could we have handled this any worse?
Going forward, a slowing global economy will put downward pressures on oil prices, which will only increase the crisis in the Middle East.
Iraq will become a key target for other Middle Eastern oil producers because it has the lowest costs of producing incremental oil in such a downtrend. But at the same time, the civil wars and violence will cause oil to spike at times.
So here’s what I expect we’ll see from this mess:
1. Increasing violence and civil war into at least 2019.
2. Increasing volatility in oil prices, but still with a downward trend into 2020 or later.
3. And a surprising stability in the Middle East, and in the world, when the next positive leg of the Geopolitical Cycle sets in from around 2020 (into around 2037). That’s also when global demographics will turn more favorable again, especially in the U.S.
2024 to 2037 is the next time the Spending Wave AND the Geopolitical Cycle point up together. But Western demographic trends aren’t nearly as favorable in the next global boom, so don’t expect the unprecedented surge of 1983 to 2000, the last time these two powerful cycles were up together.
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