The End of Pax Americana

“The Pax Americana is dead; long live the (new) Pax Americana for the 21st century.”

— Arthur Herman

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December 6, 2024 — “The democratic institutions are working as intended,” John Robb, our Grey Swan geopolitical observer, wrote to me this morning. “Votes show there is a desire for change.”

The change that is desired?

“Less globalist. More nationalist.”

On Tuesday, the French government collapsed, and the Prime Minister, Michel Barnier, stepped down,  following its first vote of no-confidence in the Assemble Nationale in 60 years.

Only one motion of no confidence has ever been passed in France since the 5th Republic was established under President Charles de Gaulle in 1958. It was in 1962, and it was aimed at Prime Minister Georges Pompidou. But it represented the first political crisis in post-war France.

Mon dieu.

Six weeks later, the two men found themselves more secure than ever. One wonders what will happen this time around now that the “right-wing” populist Marine Le Pen has forged an alliance with France’s far-left populist wing to form a majority combattre Macron’s centrist government.

As if that wasn’t dramatic enough…

The real global headliner this week was a brief declaration of martial law in South Korea. South Korea’s President Yoon Suk Yeol is now facing possible impeachment over the six-hour declaration.

South Korea’s constitution gives a president the authority to impose military rule during “wartime, war-like situations or other comparable national emergency states.” But not the right to keep it in place if parliament opposes it with a majority vote.

The military deployed troops with assault rifles and police officers to the National Assembly to block its entrance. Even so, 190 of the parliament’s 300 members managed to enter and unanimously vote down Yoon’s martial law edict early Wednesday.

It’s easy to forget that South Korea, an economic powerhouse and success story, has always been a political mess.

The nation’s short history is full of coups, assassinations, and much longer periods of martial law. The Republic’s first president even went into exile, who got off comparatively lightly compared to others who took on the job.

It was only in the late 1980s that South Korea began to consider the peaceful transfer of power. Even then, many of the country’s Presidents have subsequently been imprisoned or under investigation for abuse of power and corruption.

For most Americans, both France and Korea are news items well below their radar.

Americans are more likely to hear that South Korea’s economy has grown at an average annual rate of 6.9% since 1960. Today, most Americans associate South Korea with high-tech products from companies like Samsung, Hyundai, and LG Electronics.

If there’s further political turmoil, the Koreans risk another bout of capital flight like the “paper tiger” crisis that hit Asia in 1997 and roiled financial markets globally.

“It’s notable that the list of normally stable and healthy democracies,” John Authers observed in Bloomberg yesterday. “Are now mired in serious political uncertainty.

“France, Germany, Japan, South Korea, the list reads like a roll call of the greatest beneficiaries of the postwar Pax Americana economic order that now appears to be ending.

“If any country was the ultimate exemplar of globalization, it’s South Korea. This probably isn’t a coincidence. These nations face a big test, and electorates and political establishments are fragmenting under pressure.”

All while the world’s capital is getting hoovered up by Wall Street…

The AI bubble continues to grow as stocks continue to mark new all-time highs. U.S. stock valuations are now at their highest levels since late 2021, right before a brutal bear market in 2022 (which was saved by the positive Grey Swan event of ChatGPT kicking off the AI boom).

Going further back, you’d need to go to the peaks of the 1999 dot-com boom to find a higher valuation for U.S. stocks. The party can go on, but not indefinitely.

Bitcoin, a crypto proxy, has benefited from an enormous boost of enthusiasm following the Donald’s re-ascendency to the thro… er, office of the president. Trump’s decision to run as a crypto candidate is more than lip service, given the names he’s putting forward to manage policy.

Stocks and crypto each got a boost on Wednesday with Trump’s nomination of Paul Atkins, a laissez-faire crypto advocate, to head the SEC. And the creation of a new post for venture capitalist and PayPal co-founder David Sacks. Sacks will ostensibly become Trump’s new “AI Czar,” looking to shape regulation for AI and crypto.

Those rallies promise to continue through the holiday season. But into next year? Chaotic nation states, an overextended market, and the return of tariff and trade war talks may frustrate investors.

“During the Cold War,” John Robb continues, “there was a balance between the two since nationalism was required to oppose ideological infiltration. Nationalism was discarded when the war ended.

“Nationalism means accepting responsibility for widespread domestic prosperity, family formation, a cohesive social identity, etc. In short, it means stable, meaningful progress for everyone.

“Globalization after the Cold War allowed the establishment of developed countries to relinquish these social responsibilities.  This change allowed the elites in these countries to prosper like never before, but it has deeply damaged the societies that made it possible.

“The danger to democracy is that the globalists running these countries won’t accept the change and the responsibilities this change would entail.  They have labeled these votes as undemocratic, populist, etc., and have become increasingly heavy-handed in their attempts to ignore, reverse, and refute this desire for change.

Now what do people want? Robb:

•  Fair, beneficial trade.
• Borders that work, citizenship that matters.
• A stable and meaningful national identity and a shared public morality.
• Strong viable families (marriage, children).
• Shared prosperity (not just GDP growth, where the vast majority of benefits go to elites).
• A government that can see socioeconomic problems (opiates, border, health, endless wars, etc.), solve them, and can punish those responsible for failures.
• Respect.  Acknowledgment.  Responsibility.  Successful problem-solving.

What are we likely to see?

If the early 2000s are any indication, the tech revolution being encouraged by Trump’s next administration and a continued spate of easy money policies from the Federal Reserve and U.S. Treasury mean we’re likely to see AI and Bitcoin radically alter the post-Cold War geopolitical landscape even more.

The advent of commercial Internet applications beginning in the late 1990s boosted global GDP from $33 trillion in 2001 to an anticipated $105 trillion in 2024. It also helped cement globalization at a time when manufacturing jobs were starting to be shipped overseas.

So began the rumblings of populism that would culminate in trends like Trump’s first election or Brexit in 2016. And again in France and South Korea this year.

Until there’s a clear macro trend in the post-election rally, staying defensive with hard assets such as gold, which isn’t subject to any government’s money printers, looks like a winner.

As does bitcoin, which is flirting agin with $100,000 right now. Long-term, bitcoin’s hard-coded maximum supply indicates there could be more.

If you’re interested in speculating quickly on the rally going into the end of the year. Check out the latest research from our friend James Altucher for advice on how to play the Trump melt-up rally in crypto right here. James astutely predicted the rise of bitcoin years ago, and still sees further upside for crypto ahead in 2025, which may thrive even if nation-states falter.

Regards,

Addison Wiggin,
Grey Swan

P.S. Where does all that money go? Here’s one indicative nugget from the Morning Brew:

TurboTax finding you an extra 12 bucks each year is pretty chill, but perhaps not as chill as saving $8 billion on your taxes via an intricate network of ungovernable loopholes. According to a New York Times analysis, that is roughly how much Nvidia CEO Jensen Huang, the US’ 10th-richest person, will save on his estate taxes by routing his wealth through a series of trusts and foundations.

Huang’s estate is technically supposed to pay 40% of his ~$127 billion net worth to the government, as per the estate tax law that dates back to the early 20th century, when the US realized it needed to keep dynastic wealth in check. But in recent years, the estate tax has become more of a suggestion and less of a rule as lawyers grow increasingly cunning about how to safeguard their clients’ riches and the budget-depleted IRS becomes powerless to enforce the law. A proper enforcement would have saved the government $120 billion last year, which the New York Times notes could more than triple the federal funding for cancer and Alzheimer’s research.

P.P.S. Turning to matters a little closer to home, on Wednesday, we warned about the growing danger of a banking crisis into next year. Several readers voiced their concerns about exceeding the FDIC’s $250,000 insurance limit.

Stephen writes:

I suspect that many of us have most of their savings in one bank, in CD’s perhaps, and it may well run beyond $250k. What to do…hustle around now to find banks to deposit the overage and be required to being issued yet more checks and debit cards? Hope that we can withdraw $$$ in cash as soon as TSHF about our bank failing…unlikely we could do that for several reasons.  Any suggestions that don’t involve running around to make constant cd renewals, etc?

Our Portfolio Strategist, Andrew Packer, has investigated the idea, and aggregating your assets may be right for you.

Per Andrew:

If you have just one bank account, hitting the FDIC insurance limit is definitely a problem.

If you have multiple accounts (savings, checking, business), each is insured up to $250,000, so there’s some protection there. The same is true if you have a joint account with a family member.

If you’re a company that needs to have ready cash for payroll, it’s a different story.

That’s where companies called aggregators come into play. They can bundle your cash and allocate it to different banks nationwide.

It’s a concept that’s taken off since the collapse of SVB. So if you had $2.5 million in cash, it could be broken out to 10 different banks and be fully insured. Plus, since many smaller banks may be offering higher interest rates, it may offer better returns on your cash than being stuck in a big bank.

I met someone at FutureProof who works for Ampersand, one of the aggregator companies. So it’s a market need that’s being met and can avoid the danger of having your money all in one bank.

We suspect that the FDIC may raise its insurance levels in the next bank crisis, so for now, make sure you’re protected.

Thanks, as always, for sending in your thoughts and questions. Keep ‘em coming over the weekend here: addison@greyswanfraternity.com.