by Kaisa Stucke, CFA

Hungary has seen increasing domestic civil unrest over centralization of power and international criticism over potential changes in its democratic process.  Hungary’s Prime Minister Viktor Orban supports the creation of an “illiberal democracy,” noting that countries with restricted democracies have been the rising stars on the international front.  He is also one of the first European leaders to turn friendly toward Russia, noting that geopolitics are changing and that Eastern European countries should redefine their international policies according to these changes.

His actions have caused many Western leaders to call Viktor Orban an autocrat, a dictator and a destroyer of democracy.  We do not believe that autocracy is the ultimate goal of Viktor Orban, but that he is attempting to secure the best outcome for Hungary under a set of changing geopolitical circumstances that he believes are forthcoming, while making sure his Fidesz party stays in power.  Orban believes that Russia will become increasingly belligerent and the West will be too entangled in its own crises to turn its full attention to its Eastern front.  All of Eastern Europe has also watched the West’s handling of the Ukraine crisis and the lack of response is making the regional powers ask, “What will the West fight for?”  As a result, Hungary has pursued a multi-dimensional foreign policy, trying to re-assess its bargaining power with Europe and Russia, taking from each the most for Hungary while keeping both at arm’s length.  Historically, Hungary has tried to pre-emptively align itself with regional powers that are gaining strength.  Hungary’s current foreign policy shift toward Russia could be a signal of changes in Eastern European geopolitics.

In today’s geopolitical commentary, we will explore the differences between the rules of the geopolitical game that is played by Hungary, the West and Russia.  We will also describe the history of Hungary’s balancing act between the powers of the East and the West and how this history has affected the current politics of Hungary.  We will discuss the most likely outcomes and the international significance of these outcomes.  As always, we will conclude with market ramifications.

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by Bill O’Grady

Last week, we began our two-part series on the fall of the Berlin Wall with an examination of the end of Marxism.  In this report, we will examine the rest of the important consequences from the fall of the Berlin Wall.  These are:

• The Collapse of the U.S.S.R.
• The Onset of the U.S. Unipolar Moment
• The Impact of German Unification

We will conclude our comments with potential market ramifications.

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by Bill O’Grady

It has been 25 years since the Berlin Wall ceased to divide East and West Berlin.  After signifying the “hard border” between two competing world systems where East German security forces “shot to kill” their countrymen who tried to cross into West Berlin, suddenly, Germans were safely pouring across the dividing line.  Although communism did not end as a political and economic system with this event, it signaled the end of its power.  Essentially, the communism of the former Soviet Union is only practiced in North Korea and Cuba today, and the latter may be poised to jettison socialism and communism after the elderly Castro brothers pass from this earthly plane.

The fall of the Berlin Wall was a momentous event but like all such occasions, only the passage of time allows us to appreciate more fully the incident’s importance.  In another 25 years, we will have an even more nuanced understanding of this event.  But, a quarter century does offer us perspective we did not have in 1989.

In this report, we will examine the first of four important consequences from the fall of the Berlin Wall.  These are:

• The End of Marxism
• The Collapse of the U.S.S.R.
• The Onset of the U.S. Unipolar Moment
• The Impact of German Unification

We will offer a simple conclusion this week and end next week’s report with market ramifications.

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by Kaisa Stucke, CFA

Falling energy prices and historically high domestic hydrocarbon production have left many consumers giddy at the pump, while leaving many investors wondering what the market ramifications of cheap oil and natural gas could be.  Short-term effects have included improved consumer confidence and increased consumption as people have more available income.  A longer term question that many analysts have been asking is whether the abundance of cheap domestic energy could breathe new life into the U.S. manufacturing sector.

This week, we will take a look at the possibility of a manufacturing renaissance in the U.S.  We will start by exploring the domestic and global implications of falling energy prices, paying attention to the countries and industries that could possibly benefit or suffer from energy price declines.  We will briefly comment on the geopolitical effects of falling energy prices.  We will then look at the factors that could boost or hurt the domestic manufacturing base, commenting on the importance of each.  As always, we will conclude with market ramifications.

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by Bill O’Grady

Being the global superpower is a great burden.  There are military, political, economic and financial obligations that are costly to maintain.  At the same time, history shows that when there is no dominant hegemon the world tends to suffer from instability and chaos.[1]  Although the superpower may wish to abandon the encumbrance, the consequence of an unstable world isn’t an attractive alternative.

Since the fall of the Berlin Wall in 1989, the U.S. has been the sole superpower.  The costs of that position have become increasingly apparent to Americans, leading to political factions calling for a retreat from the role.  So far, the political elites remain committed to the hegemonic role, but it is unclear if it can be maintained.

One possible solution to the superpower problem would be to “shrink the world.”  In other words, some nations may opt out of the international system the U.S. crafted since WWII, which includes open trade, free markets and democracy. As we saw during the Cold War, the communist bloc created a “smaller world” where economies were closed, markets were managed and authoritarianism was the primary governmental structure.  Although the creation of a new bloc in opposition to the U.S. may appear to be a retreat from America’s hegemonic role, it may actually make the burden more manageable.

This week’s report will review the burdens of superpower role.  We will examine growing opposition to U.S. hegemony and discuss the impact of “shrinking the world” by allowing the creation of a competing superpower.  As always, we will conclude with market ramifications.

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[1] The best analysis of the key role of the superpower is from Kindleberger, Charles, P., The World in Depression, 1929-39, University of California Press, Los Angeles, 1973.

by Bill O’Grady

Since the initial Greek financial crisis in 2010, economic and financial problems in the Eurozone continue to periodically emerge.  The most recent issue is that the Eurozone may soon face deflation; price levels continue to decline.  The current yearly CPI is up a mere 0.3%.  Although the Eurozone did experience a bout of deflation in 2009 in the aftermath of the Great Financial Crisis, the current flirtation with deflation is due to weak growth in the Eurozone.

Traditional Keynesian prescriptions for deflation include expanded fiscal spending and accommodative monetary policy.  However, there is no unified fiscal policy in the Eurozone, and the European Central Bank (ECB) has an unclear mandate to execute unconventional monetary stimulus measures.  Complicating matters significantly is German opposition to both fiscal and monetary stimulus measures.

Germany’s opposition to reflation policies are usually attributed to simple national interests (Germany is a creditor nation and benefits from deflation) or due to the lingering effects of the post-WWI hyperinflation.  However, we believe that a more careful examination of the historical record suggests that the experience after WWII and the Wirtschaftswunder (economic miracle) that lasted into the early 1960s has played a larger role in shaping current German policy.

This week we discuss German history from 1946 into the late 1950s with a focus on how German leaders shaped the economy and rebuilt the nation after the war.  We will pay particular attention to the economic model that German leaders constructed and show how the Merkel government is trying to impose that model on the entire Eurozone.  As always, we will conclude with market ramifications.

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by Kaisa Stucke & Bill O’Grady

Very few countries have seen as spectacular of a decline in its economic standing over the past 100 years as Argentina has.  The country started the 20^th century as one of the richest in the world, but has fallen behind as a result of its turbulent political history and inconsistent economic policies.

Argentina has been in the international headlines recently due to its sovereign debt default.  This default is the eighth default in the history of the country.  Additionally, Argentina is facing capital flight, rising inflation and dwindling dollar reserves.  The government’s response has been to tighten its grip on the economy, instituting trade barriers to protect its domestic industries and restricting capital outflows to support its official currency peg.  While this is a serious issue for Argentina and a possible concern in the general trade policy for Latin America, we do not believe that this situation will persist in the rest of emerging markets.  More than anything, Argentina’s extensive government interventions and resulting economic calamities might serve as a cautionary tale for other countries that may be considering deglobalization.

This week we will look at Argentina, its long history of economic booms and busts, its political background, and its extensive chronicle of sovereign debt defaults.  As always, we will conclude with market ramifications.

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by Kaisa Stucke & Bill O’Grady

During the first round of Brazilian presidential elections on October 5, the incumbent Dilma Rousseff of the Workers’ Party received 42% of the votes while Aecio Neves of the Social Democracy Party received 34%.  Since none of the candidates received more than 50% of the vote, the second round of runoff elections will be held on October 26.  Currently, Rousseff leads the polls, signaling a likely continuation of state-centric policies.

The results from these elections are significant for the Brazilian domestic economy as well as foreign investors.  Whether Rousseff or Neves wins, the next president will inherit a low growth and high inflation environment.  Additionally, the incoming president will have to deal with high government spending while maintaining the high social spending that the ruling party has relied on for populist support.  The growing domestic middle class is demanding an end to corruption and better social services.

Foreign investors are also closely watching these elections as a win for Neves could signal a more market-friendly political environment with better government fiscal responsibility and political transparency.

This week, we will look at the Brazilian presidential elections along with the current political and economic environment in the country.  We will briefly describe the recent political history of the country and look at the specifics of Brazil’s economic development.  As usual, we will conclude with market ramifications.

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