Bipolar world investing is creating new challenges for the current generation of investors.
The Russian invasion of Ukraine on February 24, 2022, was a historic moment in the world order cycle because it marked the end of a unipolar world, where one hegemonic power influences the behavior, and the foreign policy of other states.
The cold war concluded with the disintegration of the Soviet Union, with the US emerging as an unrivaled predominant global power.
US hegemony promoted a strategic global foreign policy, a uni world order that advanced US interests and strengthened the US dollar as a world reserve currency.
The willingness or acceptance through coercion of US hegemony as a system of world order created a framework to build a US-centric global economy.
“The Russian invasion of Ukraine on February 24, 2022, was a historic moment in the world order cycle because it marked the end of a unipolar world”
So the post cold war era was the renaissance of the global economy, which enabled the European Union to grow in economic and political dominance.
But great powers and former empires do not stop thinking they can also be great again. Russia and China were former Empires before the US even existed as a nation.
So the former great powers are challenging US hegemony, offering an alternative outside the US-centric system.
The Russian-Ukrainian war could be interpreted as the US influence on global foreign policy is waning.
“the post cold war era was the renaissance of the global economy, which enabled the European Union to grow in economic and political dominance”
In short, a bipolar world is emerging, outside the realms of US foreign policy, US energy policy, and the US dollar
The BRICS nations, Brazil, Russia, India, China, and South Africa already transact billion-dollar deals in energy and commodities outside the US dollar racetrack.
BRICS account for more than 40% of the global population and nearly a quarter of the world’s gross domestic product.
India is the fast-growing economy in the world with young population demographics. Argentina and Iran want to join BRICs.
Bipolar world investing offers countries and investors alike an alternative to the US-centric system
Sanctions on Russia, in the wake of the Ukraine war, accelerated Russian trade with BRICS.
“If the BRICS nations are moving away from a US-centric world then global demand for US dollars is likely to fall” – Win Investing
Bipolar world investing is likely to see periods of higher inflation in US-aligned economies
Two interesting trends have occurred since in the wake of the war in eastern Europe, global energy supply shocks and the Federal Reserve restricting the supply of US dollars.
The bipolar world investing era is likely to see the continuation of a strong US dollar and high Fed fund rates.
If the BRICS nations are moving away from a US-centric world then global demand for US dollars is likely to fall.
But demand for US dollars and US treasuries are complementary, so a drop in demand for treasuries means that the treasury 10 years yield is likely to go higher. The price of treasuries and their yields are inversely related. So when the treasury price falls, on the bond market, its corresponding yields rise.
The treasury 10-year yields determine the cost of borrowing, influencing auto loans, mortgages, and personal loans.
Rising treasury 10-year yield in a bipolar world could mean the end of cheap credit as tighter monetary conditions prevail.
Bipolar world investing means tighter restrictions relating to technology transfer
The US emerged from Cold War 1 as the unrivaled hegemonic power.
The arms race, and technology race, bankrupted Russia as both great powers attempted to outmaneuver each other with first strike capabilities.
The manufacturing and development of Silicon chips are crucial to the advancements of technology in civilian and military applications.
So Bipolar world investing means that strategic industries are more likely to be supported by the government, which is beneficial to the factory model.
The CHIPS and Science Act is a historic investment to surge production of American-made semiconductors, tackle supply chain vulnerabilities to make more goods in America, revitalize America’s scientific research and technological leadership, and strengthen America’s economic and national security at home.
“Emerging markets need more dollars to finance the rising cost of servicing their dollar-denominated debts” – Win Investing
Bipolar world investing is a rethinking of your portfolio away from a unipolar globalist model
The European Union is likely to be the worst impacted by bipolar investing, as there are no short-term alternatives to affordable Russian energy. So the EU single bloc trading currency, the Euro has depreciated by almost 15 percent against the dollar.
Bipolar world investing raises the risk spectrum
Emerging markets aligned with the US-centric system could also underperform in this new order bipolar world.
Rising 10-year treasury yields and Fed rate hikes create a global shortage of US dollars.
Emerging markets need more dollars to finance the rising cost of servicing their dollar-denominated debts.
So as emerging market economies sell their local currencies to buy more dollars to service the rising cost of debt due to interest rate rises, this results in the dollar appreciating even further against other currencies.
A vicious circle emerges, where the cost of servicing emerging market loans becomes so great that it triggers a tsunami of credit defaults in emerging markets.
But the destruction of dollar-denominated loans leads to further dollar shortages.
The greatest risk in bipolar world investing is unstable geopolitics
When diplomacy fails, and trade wars and currency wars break out, the likelihood of a shooting war breaking out is real.
That scenario is already playing out in Europe.
Collapsing economies and economic hardship lead to polarized politics, demagogues, and war.
So the greatest risk of bipolar investing is the potential of losing the entire investment due to war breaking out.
Capital flows to safe-haven investments precious metals can be a good hedge.