Crisis in European Union

It’s not enough that Europe is sliding back into recession and deflation along with the worst demographic trends ahead of them, especially for stalwart Germany…

Now they have a terror threat that is looking more like 9/11 for the U.S.

The attack on French satirical newspaper Charlie Hebdo and more. Hundreds of thousands of troops deployed on the streets and dozens of arrests already, especially in France and Belgium… but also in the U.K. and Germany.

This wouldn’t occur if intelligence didn’t suggest a much greater threat ahead!

Major events like this may be hard to predict near term, but they do clearly come and build in the challenging half of a predictable geopolitical cycle.

And if we go back in history a bit, I wasn’t very happy that the forecasts for our second bubble into 2007 were much less than I expected, even though earnings were as strong as predicted during the rise of the tech bubble from 1995 to 2000…

But out of that divergence I discovered two new, powerful cycles… and it took a few years to figure it out but as I’ve said before, I have to dig deep when something we don’t expect occurs to reveal another important cycle or dimension of the economy.

I found a 29- to 30-year commodity cycle that peaked overall in mid-2008, but also in early 2011. The last one peaked in 1980. Now the commodity price declines are wreaking havoc in emerging countries that have the only strong demographic trends left.

The second steep drop in the price of oil is threatening to trigger the next debt crisis in emerging countries from fracking, much as the fall in housing prices triggered the subprime crisis in 2008 that in turn spread to fragile debt markets all around the world.

But shortly thereafter, I discovered the geopolitical cycle that goes back for two centuries and it’s even more critical as it most affects the valuations or the price-earnings ratios of stocks and all financial assets by 50% or so in adverse cycles.

That cycle ranges from 16 to 18 years wherein things are generally good in the world and then things go bad for a similar period. From 1983 to 2000 there were almost no geopolitical risks and since 9/11, everything has gone to hell.

Rising terror, one political crisis, one civil war and one failed war after the next. Recently we’ve had the scourge of ISIS, the French terrorist attack and the Shiite coup in Yemen, now the new headquarters for a resurging Al-Qaeda. The chart below shows the trends.

Chart Geopolitical

See larger image

The important point to note: This cycle does not start to turn up again until around early 2020 and will be more positive into 2036 or so, just as demographic cycles start to point up again more often as well.

I’ve been warning that the Arab spring in the Middle East, the Russia vs. Ukraine and Sub-Saharan African crises will continue for another five years or so. Terrorist attacks and insurgencies will grow and current events are proof of that!

But then as with everything cyclical, things will start to get better for no obvious reason. We will be predicting that positive turn when most analysts will be extrapolating the worsening trends of terror, war and civil war years into the future.

So, let’s take a closer look at what’s happening here. The root of this crisis is the same as the income and wealth inequality crisis in developed countries, like in the U.S. Income inequality, the world over, is at high levels between the rich and poor countries, just as it is for the population within developed countries.

Oxfam just came out with a report that shows that the top 1% in the world have controlled between 46% and 48% of the wealth since 2000, almost as extreme as in the U.S. at 51%. Both of these trends have been rising since 2008 due to quantitative easing (QE) policies.

The top 80 billionaires control as much wealth as the bottom 50% or about 3.5 billion people and I just wrote about this inequality issue in depth in January’s Leading Edge. I think that this staggering inequality is proving to be a powerful catalyst to the current power struggle that’s playing out globally.

You can call it Islam versus the West but I would call it the poor versus the rich… and it’s the same all over the world.

The greatest terror insurgencies come from countries that have a very high percentage of Muslim population and are poorer than $5,000 GDP per capita (adjusted for purchasing power or PPP).

Yes, you can argue that the Middle East has older cultural values and are slow to change due to a certain lack of economic progress. But it just seems unfair to them that the western countries are so damned rich at $40,000 plus per capita incomes compared to $2,000 to $5,000 or lower — up to 20 times or more!

If you’ve ever been to any of the emerging countries, you’ll see that many work much harder than we do for much less gain, because they have less infrastructure and have, more often than not, a corrupt government and economic system that favors the few (even more than our more democratic and free market system does).

They don’t just hate us because of our freedom and values, they hate us because they work so hard and yet are still poor and disadvantaged… and yes, since their cultures have been slower to change, they will continue to live so by sheer momentum alone.

What I’ve learned from studying history is very summary and important: Technologies change faster than cultures, and cultures change faster than genes…

That’s what creates this dynamic of change and differences between cultural sectors between countries and within countries around the world.

At a stage in technological change, there is a breaking point where individuals and cultures revolt against the extreme income and wealth inequality that results at times like this.

It’s no accident that the terror revolt is coming from the Middle East, Northern Africa and parts of Sub-Saharan Africa, like Somalia and Nigeria. It’s not coming from South Africa that has fared better economically or from Indonesia where you find the largest of the world’s Islamic population at 12.7%. Or even in the U.S. where the Muslim population is better integrated into our culture as we are a country made up of immigrants.

But there is another aspect to this terrorist revolution from Al-Qaeda to ISIS and others that may be evolving. It is extremely bottoms-up.

This poor and small insurgency cannot compete head-on with the top-down intelligence and militaries of the richest countries in the Western world that they’ve been attacking. So, they’ve been forced to go for the guerrilla model, like the Swamp Fox, Francis Marion, considered one of the fathers of modern guerrilla warfare from the Revolutionary War.

They increasingly organize into very decentralized “terror cells” that have their own missions. That makes it harder to track them and defeat them.

We keep taking down their central leaders like Osama bin Laden and others, and think they’ll weaken. But they keep coming back like cockroaches.

As much as I hate to say this, we could learn from them in their new bottoms-up network model that I espouse for companies and developed countries in the new Internet and network world (Chapter 8 of The Demographic Cliff).

We’ll figure out how to quell this insurgency from 2020 on when the geopolitical cycle turns back up again, much as the Vietnam and cold wars dissipated after 1983 in the last positive geopolitical cycle until the Berlin Wall and the Soviet Union finally fell in 1989. But falling oil prices and the great boom in the west were winning the Cold War for us long before 1989.

But we’ll only finally thwart this by fighting them at the bottoms-up network level through greater intelligence, as we have already started to learn to do — and not confronting them directly in their own backyard as this tactic has already failed in both Iraq and Afghanistan.

For now, don’t expect the geopolitical environment to get better until 2020. And until then, don’t invest in such afflicted countries from Israel to Iraq to Nigeria as falling commodity prices will only add insult to injury and accelerate the civil wars and conflicts in these poorer countries.

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Harry

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Categories: Cycles

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.