Geopolitics 2016

By Alfonso Elizondo

Created Wednesday January 6 2016

After what happened last Monday January 4th in the global stock markets and the withdrawal of China in those same markets, they had to close prematurely after reaching a loss limit of 7% after learning that production in China had decreased for the tenth consecutive month. Adding the tensions between Saudi Arabia and Iran, which broke diplomatic relations last Sunday in response to the capture of the Saudi embassy in Teheran and following the execution of a senior Shiite cleric, every indication point to the fact that 2016 will have geopolitical tensions and there will be many multiple problems in balancing the new world order.

The Euro Stoxx 50 lost 3.28% while the German DAX went down a 4.3%. Although there are still no panic actions among most nations, markets don’t know what to do against tension in the Middle East, the increase of migration to Europe and the brutal brake of China’s manufacturing economy. This is making investors reconsider their estimates on growth and great geopolitical risk according to expert Paul Mendelsohon, of Windham Financial Services.

Moreover, in the past three weeks, the Chinese stocks have plummeted a 30%, Beijing has tried to stop sales and China security regulator has forbidden selling their shares to major shareholders during the next six months. On top of it, there is a plan to provide billions of dollars to 21 brokerage firms to sustain stock prices and put a cap on the marginal sales.

The stock market in China has retained a gain of 8% in 2015, outperforming the market in the United States, in line with the Standard & Pooris 500. Most of the Chinese stock market is made up of small investors Many of them have reported big earnings this year. But the question remains whether if the stock market crashes in China, it could be contagious for global markets. The stock market in the United States has been relatively good since the beginning of the Chinese market’s fall and the Greek drama affecting all of Europe.

The commodity prices have collapsed suddenly in recent days and the oil one has weakened the West Texas Intermediate crude which fell 8% only last Monday. Since the oil price started going down in 2014 there’s been talks of a great oil collapse. The world got plenty of US shale gas and from Canada, while Saudi Arabia decided not cut its production and stabilize prices.

Oil vendors focused on storage and the price per barrel went up while reserves and platforms declined. But in the summer of 2015 all changed. The selloff in Chinese stocks has increased the demand of the world’s biggest consumer of crude oil. Although now the West Texas Intermediate is trading above 52-dollars/ barrels, just last June they traded it at 61.

Not only the price of oil has fallen, but also the price of iron. So the 10 years Treasury bond has returned to 2.24 and there’s a lot of scepticism about the fact that the Federal Reserve will increase interest rates again this year, to avoid deflation. But China, for reasons not yet disclosed, is taking its fall in the stock market seriously. And this is perhaps the situation that will influence the most the geopolitics and the world economy in the next months.

Although China has not published the big drop in its industrial production, the fact is that it had never declined so much in the last 30 years. And this is because both the European market and the United States have reduced their consumption of Chinese industrial products and none of those two great consumers are showing signs of improvement. Europe is trying to survive a wave of migrations from the Middle East and African countries, while the United States have officially withdrawn from the production of goods and services to dedicate themselves solely to obtain wealth of speculative capital.

If to the contraction of these two markets we add the crisis in Brazil, India and South American countries, it is likely that China will have to give up or change its current economic plan developed through growth and seek new alliances with Asian nations or start a new trade route to Polynesia and Oceania. But there is no doubt that the intelligent government of Xi Jingping is already looking for and soon will find a peaceful solution to this new geopolitical and economic reality of the present world.

It is obvious that the United States are seeking as much as possible to survive their inevitable decline and it is likely that Europe, while shifting towards the political right, will end up in a process of political fragmentation and the EU will probably disappear. There is no doubt that the Middle East will continue to be the core of all major conflicts around the world, and continents such as Latin America and Africa will remain on the fringe when it comes to growth outside developed countries.

Addendum: Due to the immorality of their military actions in recent years, the United States and its European partners in the war business are now receiving the appropriate punishment for their crimes and are already suffering the scorn of a new society that seeks to avoid physical violence and that unilateral vision of reality that the West has cultivated for nearly two centurie