As a global macro investor for over 50 years who has needed to study all things that affected markets over the last 500 years to know how to deal what’s coming at me, it appears to me that most people tend to focus on and react to the attention-grabbing things that are going on at the time—like what is going on with Iran now—and miss the much bigger, more important, and longer-term-evolving things that are driving what is going on and what is likely to happen.
For instance, this week, headlines have focused on the recently announced two-week ceasefire of the U.S.-Israel-Iran war. But I believe the conflict in Iran is just one part of a larger potential world war, with countries like China, Russia, and Iran on one side and the United States and countries with U.S. military bases on the other.
I wish it were not true, but I fear we are entering a world war.
Certainly, what will happen with the Strait of Hormuz (most significantly, whether control of passage through it will be taken away from Iran, and which countries are willing to spend how much blood and treasure to make that happen) will have many enormous repercussions all around the world. There are also the issues of whether Iran will still have a capacity to inflict harm on its neighbors through missiles and nuclear weapons, of how many troops the U.S. will send to the region, of the cost of gasoline, and of the upcoming U.S. midterm elections. All these near-term issues are important, but they lead people to miss the really big, even more important things. More specifically, because most people tend to have this short-term perspective, they now expect, and the markets are pricing in, that this war won’t last long, and when it ends, that we will get back to “normal.” Virtually nobody is talking about the fact that we are in the early stages of a world war that isn’t going to end any time soon.
Here is why I believe we are entering a long-term world war—and what big trends we really need to pay attention to:
Interconnected conflicts
It may sound like hyperbole to say we are in a world war, but it is indisputable that we are now in an interconnected world that has a number of shooting wars going on (e.g., the Ukraine-Russia- Europe- U.S. war; the Israel-Gaza-Lebanon-Syria war; the Yemen-Sudan-Saudi Arabia-UAE war that also involves Kuwait, Egypt, Jordan, and other related countries; and the U.S-Israel-GCC-Iran war). Most of these wars involve major nuclear powers, and there are also significant non-shooting wars (i.e., trade, economic, capital, technology, and geopolitical influence wars) that most countries are in. Together, these conflicts make up a very classic world war that is analogous to past “world wars.”
For example, past “world wars” consisted of interrelated wars that were generally slipped into without any clear start dates or declarations of war. Those examples of both past and current wars combine in a classic world war dynamic that affects them all.
Countries are taking sides
Understanding how the sides are lining up and what their relationships are is very important.
It is quite easy to see objectively how the sides are lining up via indicators such as their treaties and formal alliances, their votes at the U.N., their leaders’ statements, and their actions. For example, one can see how China is aligned with Russia and Russia is aligned with Iran, North Korea, Cuba, and Venezuela, and how that group is largely opposed to the United States, Ukraine, most European countries, Israel, the GCC states, Japan, and Australia.
These alliances matter a lot in imagining how things will go for the relevant players, so they need to be considered when observing what’s going on and what’s likely to happen. For example, we see that reflected in China’s and Russia’s votes at the U.N. on Iran needing to open the Strait of Hormuz. Similarly, while it’s said that China is particularly harmed by the closing of the Strait of Hormuz, that is wrong because China’s mutually supportive relationship with Iran will probably allow oil going to China to get through. Plus, China’s relationship with Russia will ensure China gets oil from Russia. China also has a lot of other energy (coal and solar), and it has a huge inventory of oil. Also noteworthy is that China consumes between 80% and 90% of Iran’s oil output, which adds to the power of its relationship with Iran. All things considered, it appears that China and Russia are the relative economic and geopolitical winners from this war. Though to be sure, the United States is relatively advantaged in terms of global energy economics, because it is in the enviable position of being an energy exporter.
There are lots of ways of measuring these alliances, including U.N. voting records, economic ties, and major treaties. But they all line up as I described. And it is increasingly clear that lines are being drawn.
History is repeating itself
Studying history is immensely valuable to me and helps me contextualize current events.
For example, both an examination of several analogous cases in history and logic make it obvious that how the United States (the dominant power of the post-1945 world order) performs in the war with Iran (a middle power), how much money and military equipment it expends and depletes itself of, and how well it defends (or doesn’t defend) its allies will be watched by other nations and will enormously influence how the world order changes. Most importantly, we know that what happens in the war with Iran will have huge implications for what other countries (most importantly, those in Asia and Europe) will do, which will have big implications for how the world order will change.
These changes will come in ways that have repeatedly happened before. For example, from studying history, it’s easy to identify over-extended empires, develop indicators for how overextended they are, and see how overextended empires have suffered from being overextended. In looking at what is happening now, it is natural to examine what is happening with the U.S., which now has 750–800 foreign military bases in 70–80 countries (site note: China only has 1) and has commitments that create expensive vulnerabilities all over the world. It is also obvious that overextended powers cannot successfully fight wars on two or more fronts, which would lead to doubts about the United States’s ability to fight a war on another front (e.g., in Asia and/or in Europe).
This naturally leads me to think about what the current war with Iran means for Asian and European dynamics, as well as Middle Eastern dynamics. For example, it would not be surprising to see some problems develop in Asia that would test and reveal the United States’ willingness to rise to the challenge. This would be difficult for it to do because of its extensive preoccupying commitment in the Middle East and the lack of American public support for the Iran war going into the midterm elections, which makes fighting a war on another front implausible.
This dynamic might lead one to expect that other countries watching the dynamic with the U.S. and Iran might change their calculations and behaviors in ways that will reshape the world order. For example, it is logical that leaders of countries with U.S. military bases in them who expect the U.S. to defend them could learn lessons and change behaviors based on how things go for those Middle Eastern countries with U.S. military bases that expect the U.S. to defend them.
Similarly, one might conclude that any country that is close to any strait that could be strategically important and/or that has American bases on its territory in a part of the world in which there could be a big conflict (such as in Asia where there could be a conflict between the U.S. and China) will watch and take lessons from what is happening in the Iran war. I assure you that this type of thinking is now happening among world leaders.
Here is the common pattern that has happened many times before that they are thinking about:
1. The economic and military strengths of the dominant world power(s) fall relative to those of the rising world power(s), leading them to become roughly comparable powers and to begin challenging each other in economic and military conflicts over their disagreements.
2. Big increases in economic wars take the form of economic sanctions and trade blockages.
3. Economic, military, and ideological alliances form.
4. Proxy wars increase.
5. Financial stress, deficits, and debts increase, especially for the leading powers that are most overextended financially.
6. Critical industries and supply chains are increasingly controlled by governments.
7. Trade chokepoints become weaponized.
8. Powerful new technologies for war are built.
9. Multi-theater conflicts increasingly happen simultaneously.
10. Within countries, loyal support for the country’s leadership is demanded, and opposition to the war and other policies is squashed.
11. Direct military combat between major powers occurs.
12. There are big increases in taxes, debt issuance, money creation, FX controls, capital controls, and financial repression to finance the wars. In some cases, markets are shut down.
13. Eventually, one side beats the other and gains indisputable control of the new order, which is designed by the winning side.
I have many indicators suggesting that the monetary order, some domestic political orders, and the geopolitical world order are breaking down. These indicators suggest that we are in a transition stage from the pre-fighting stage to the fighting stage, which is roughly analogous to the 1913-14 and the 1938-39 periods.
World wars don’t always have a clear start date
To be sure, there is nothing precise about these indicators, the picture they paint, or the exact timing. For example, history has taught us that wars don’t always have definitive start dates with big military events followed by clear declarations of war. The Assassination of Archduke Ferdinand, the German invasion of Poland, and the bombing of Pearl Harbor are actually the exceptions. Economic, financial, and military conflicts typically arise before there are clearly declared wars.
Historically, major wars were typically preceded by developments and indicators like military stockpiles and monies being drawn down; budgets, debts, money printing, and capital controls being built up; rival countries observing the countries fighting and learning what their strengths and weaknesses are; and the overextended leading world power facing the challenge of trying to fight wars on different fronts that are very far apart. These factors all matter, and my measures of them indicate that we should be concerned.
The classic dynamic at this stage is for conflicts to intensify rather than subside, so what happens next will be influenced by how the U.S.-Iran war goes. For example, there is already less confidence among some countries that the U.S. will defend them, which, when combined with the recognition that nuclear weapons are a great defensive as well as offensive power, is leading to more talk among countries’ senior policy makers about obtaining nuclear weapons and building up their stockpiles of them and other weapons, particularly missiles and missile defense systems.
To reiterate, I’m not saying that things will definitely progress further to an all-out world war. I don't know what's going to happen. I still hope for a peaceful world built on win-win relationships rather than damaged by lose-lose ones.
