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Car Wars: Episode I

• https://www.zerohedge.com

secretly dispatched two Jedi Knights, the guardians of peace and justice in the galaxy, to settle the conflict....

Source: Bloomberg

20 years after I sat down in a London cinema, saw the above trailer crawl (minus two small edits astute readers might notice), sighed and thought to myself "I watch Star Wars to get away from this kind of thing," here we have life imitating George Lucas. 

It's impossible to ignore we are potentially close to several major conflicts. India is considering military retaliation against Pakistan for a recent terrorist outrage – that's two nuclear powers; Iran and Israel have both warned the other that war is a real threat – that's one and a half nuclear powers; the West is upping the rhetorical ante in Venezuela even as President(?) Maduro shows no signs of leaving office; and China is still building a huge modern army, navy, and air-force that I am sure the US is going to see as strictly decorative. (In the same way China promised not to decorate the South China Sea with runways and missiles.) And on top of all that, as the recent Munich Security Conference showed, the US and EU are drifting ever-further apart on most of those fronts – and on the economic angle too.

Some might see the US under the Trump administration as the Empire; and some see them as the Rebels against a Russian/Chinese Empire and the risk of an Iranian Death Star. Of course Germany sees itself as Naboo: peace-loving, cultured, innocent, free-trading, and full of renaissance architecture and star würst - and unable to defend itself against physical predations from outside. The complication today is that it may be the Jedi who impose 25% tariffs on Naboo because the latter refuses to join in a greater struggle against others "Made in Empire 2025" plans. I have a bad feeling about this.

As we noted in a report yesterday ("Very dangerous cars"), the 90-day clock is now ticking over the potential imposition of 25% tariffs on EU autos into the US market. Naboo/EU ("Nab-EU?") is saying that it will fight back with its own tariffs on US products if attacked, which suddenly takes us closer to at least a US-EU trade war, with a US-China trade war still likely too. Indeed, Bloomberg notes in an editorial: "Trump Should Stop Before He Loses Germany", arguing tariffs would push Germany into recession and that a recent survey shows 58% of Germans already think the country needs to distance itself from the US. (And presumably they will then be paying to defend themselves, right? General Jar-Jar Binks to the front, please.)

Meanwhile, Politico has an article today written by Bruno Maçães, a former Europe minister for Portugal, titled (with one edit from me) "Russia to China: [Join me and] Together we can rule the world". In it former Putin advisor Sergey Karaganov is quoted as saying Russia is throwing its lot in with China and is lobbying Beijing to join it in a push to replace the US as global hegemon.  Maçães states Karaganov argued "China is deluding itself if it thinks issues between Beijing and Washington can be conveniently resolved to the benefit of both sides. If Beijing places its bets on peace and cooperation, the great Chinese adventure will come to an end, and China will have to live in the shadow of the US for another generation — perhaps forever...Chinese authorities, he argued, have no more than five years to make a decision." Then we come back to Nab-EU again, where "…if China has a word on whether we see the creation of an Eastern bloc, so does Europe. European markets and European technology are critical resources for China. More and more, Chinese authorities know what to expect from America, and they know all too well what to expect from Russia. But Europe is a different matter. Beijing will hesitate to push it away, and will wait for Europeans to make up their minds. We can keep them waiting. We can keep them pondering. In a dangerous world, Europe is the holder of the balance."

So the EU strategy is not to join the US, but to wait and do nothing. Is that attitude going to see the US back off vs. the EU? Or will the US see the EU as too weak and too fundamentally untrustworthy to bother with? Yes, the US is still global hegemon and needs the EU, Japan, Australia/NZ, etc., in its camp to remain one; but some think it can raise the drawbridge and go back to splendid isolation, telling the rest of the world to go hang: no more Clone Wars; just the The Revenge of the Sith, as some would see it. In short, there is a potentially paradigm-shattering geopolitical shift being discussed all over: does anyone have any idea how to trade it…or are we all just waiting for a New Hope? I fail to see how this is anything other than USD and US Treasury positive, for now at least. Longer term, we are all throwing light-sabres at a board.

And talking of paradigm-shattering, at the national level we see the same theme repeated, as seven UK Labour MPs split from the party over Brexit and anti-Semitism. Will they forge a new centre grouping, or are they the just showing how impotent the centre actually is in a world increasingly driven to polarities? GBP doesn't seem to care.

Day ahead   

Today is still relatively quiet as the US returns from the Presidents' Day holiday. However, once again we aren't short of talking points on many fronts. One of them is that we got the RBA's February minutes, and WE GOT SOME MORE NEW LANGUAGE! After so many copy-and-paste conclusions before now, the final paragraph stated:

"Members would continue to assess the outlook carefully. However, given that further progress in reducing unemployment and lifting inflation was a reasonable expectation, members agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, they assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while further progress unfolds.

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