The Big Thing: We Are In A World War That Isn’t Going To End Anytime Soon.
I will start off by wishing you well in these challenging times and by saying that the picture I paint in the following observations is not the picture I wish to be true; it is the picture that I believe to be true based on what I have learned and what the indicators that I use to objectively see things now suggest is true.
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 with 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 today, that is most importantly that the US-Israel-Iran war is just part of a world war that we are in and that isn’t going to end anytime soon.
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 with missiles and the threat of nuclear weapons, of how many troops the US is sending and what they will do, of the cost of gasoline, and of the upcoming US 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 that when it ends 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 anytime soon. Because I have this different perspective, I will now explain it.
Here are the really big things going on that I think we need to pay attention to:
1. We are now in a world war that isn’t going to end anytime soon.
While this sounds like hyperbole, it is indisputable that we are now in an interconnected world that has a number of shooting wars going on (e.g., the Russia-Ukraine-Europe-US 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 US-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 past wars combined into a classic world war dynamic that affected them all, as is happening with the current wars. I described that war dynamic in detail in
of my book
, which I published about five years ago, so it’s there if you want a more comprehensive description. That chapter covers the arc of what we are seeing happen and what is likely to happen.
2. 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 United Nations, 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, and Cuba, and how that group is largely opposed to the United States, Ukraine (which is aligned with 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 this reflected in China’s and Russia’s actions at the UN on Iran needing to open the Strait of Hormuz. Similarly, as another example, 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, and China’s relationship with Russia will ensure that China will get oil from Russia. China also has a lot of other energy (coal and solar) and a huge inventory of oil (about 90-120 days’ usage). Also noteworthy is that China consumes 80-90% 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. As for the oil/energy economics, the United States is relatively advantaged, as it is in the enviable position of being an energy exporter.
There are lots of ways of measuring these alliances, including UN voting records, economic ties, and major treaties. They all line up as I described. (If you’re interested in reviewing the major treaties, which are broadly indicative of the relationships, you can find them in Appendix 1. Likewise, if you’re interested in seeing the major existing and potential wars and what my indicators say about the odds of them happening and/or escalating during the next five years, you can find them in Appendix 2.)
3. Studying analogous historical cases and comparing them with what is now happening, which is rarely done, has been and still is immensely valuable for me, and might be for you.
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 US-Israel-(and now)-GCC-countries 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 overextended empires, develop indicators for how overextended they are, and see how they have suffered from being overextended. In looking at what is happening now, it is natural to examine what is happening with the US, which now has 750-800 military bases in 70-80 countries (by the way, 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 United States’s ability to fight a war on another front (e.g., in Asia and/or in Europe). So 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 US 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 US military bases in them who expect the US to defend them could learn lessons and change behaviors based on how things go for those Middle Eastern countries with US military bases that expect the US 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 where there could be a big conflict (such as in Asia, where there could be a conflict between the US and China) will watch and take lessons from what is happening in the Iran war. I assure you that that type of thinking is now happening among world leaders and that what is now happening has happened many times before in similar parts of the Big Cycle. These calculations by world leaders are part of a classic sequence of steps leading to major wars that has repeatedly taken place and is now happening. Looking at today’s events and knowing this classic international world order/conflict cycle, it is apparent to me that we have progressed to Step 9. Does it look that way to you? Here is the classic sequence of steps:
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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.
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Big increases in economic wars take the form of economic sanctions and trade blockages.
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Economic, military, and ideological alliances form.
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Proxy wars increase.
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Financial stress, deficits, and debts increase, especially for the leading powers that are most overextended financially.
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Critical industries and supply chains are increasingly controlled by governments.
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Trade chokepoints become weaponized.
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Powerful new technologies for war are built.
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Multi-theater conflicts increasingly happen simultaneously.
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Within countries, loyal support for the country’s leadership is demanded and opposition to the war and other policies is squashed, because as Lincoln quoted from the Bible, “A house divided against itself cannot stand,” especially when it is at war.
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Direct military combat between major powers occurs.
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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. (Read Chapter 7 in Principles for Dealing with the Changing World Order for a more complete explanation of investing during war.)
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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 we are in the part of the Big Cycle when 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. To be clear, there is nothing precise about these indicators, the picture they paint, or the exact timing.
The indicators are just broadly indicative. For example, history has taught us that wars generally don’t have definitive start dates (with big military events followed by clear declarations of war, like the assassination of Archduke Ferdinand, the German invasion of Poland, and the bombing of Pearl Harbor, being the exception), and economic, financial, and military conflicts typically arose before there were clearly declared wars. Major wars were also typically preceded by developments and indicators like 1) military stockpiles and monies being drawn down; 2) budgets, debts, money printing, and capital controls being built up; 3) rival countries observing the countries fighting and learning what their strengths and weaknesses are; and 4) 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 in the cycle is for conflicts to intensify rather than subside, so what happens next will be influenced by how the US-Iran war goes. For example, there is already less confidence among some countries that the US 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 along this cycle to an all-out world war. I don’t know what’s going to happen, and I still hope for a peaceful world built on win-win relationships rather than damaged by lose-lose ones. I try in my own small ways to help that. For example, I have had wonderful, simultaneous 42-year relationships with both Chinese and US senior policy makers (as well as people outside of leadership), so in the past and especially during this contentious time, I have tried to support a win-win relationship in ways that are appreciated by leaders from both sides. I do this because I have affections for those on both sides and because win-win relationships are much better than lose-lose ones, even though this is getting tougher for me to do because some people think that “the friend of my enemy is my enemy.”
At this stage of the Big Cycle, just before major wars, circumstances like the inability to resolve irreconcilable disputes with compromises typically drive one stage in the cycle unavoidably to the next until there is a violent resolution, so it’s important to understand the typical Big Cycle and watch what is happening. By giving you my template to compare with actual events as they transpire, my hope is that I can help you see what I am seeing and then decide what you want to do about it.
Consistent with that, I believe that it is important to see that: the world order has changed from a multilateral rules-based world order led by the dominant US power and its allies (e.g., the G7) to a might-is-right world order with no single dominant power enforcing order, which means that we can expect more fighting. A student of history would recognize that the world order is now more like that which existed through most of history prior to 1945 than the post-1945 period we are used to and would understand what the most important implications of this are.
4. As history has shown, the most reliable indicator of which country is likely to win is not which is most powerful; it is which can endure the most pain the longest.
That certainly is a factor in the US-Iran war, with the president assuring the American public that the war will be over in a couple of weeks, gas prices will then decline, and we will go back to our normal prosperous times. There are many good indicators that point to whether a country has the capacity to endure the pain for an extended period of time, such as popularity polls (especially in democracies) and/or the power of government leaders to remain in control (especially in autocracies, where popular opinion doesn’t matter as much). In fighting wars, winning doesn’t occur until surrender. That is because it is impossible to eliminate all enemies. When China entered the Korean War against the United States at a time when China had very little power and the United States was a nuclear power, Mao supposedly said, “They can’t kill us all,” meaning that the enemy can’t win if there are people who keep fighting. The lessons of Vietnam, Iraq, and Afghanistan are clear. Winning happens when the winning country can get out with the losing country no longer remaining a threat. While the United States appears to be the most powerful country in the world, it is also the most overextended major power and the weakest at withstanding pain over a long period of time.
5. All of this is transpiring in a classic Big Cycle way.
By “classic Big Cycle way,” I mean that events are primarily driven by the five big forces:
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Money, debt, and economics in big cycles of monetary order and disorder;
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Political and social orders breaking down because of big wealth and value differences;
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Regional and world orders breaking down because of big wealth and value differences;
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Great advances in technology that are being used for both peaceful and war purposes, and the financial bubbles related to them that typically turn into busts; and
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Acts of nature such as droughts, floods, and pandemics.
While I won’t bore you with a more in-depth description of how the Big Cycle works and the five big forces driving it and the 18 determinants underlying them, I will again suggest that you understand it and direct you to
or
, both named Principles for Dealing with the Changing World Order.
6. Having good indicators and following them is invaluable.
Many of the indicators I use to track unfolding events are explained in Principles for Dealing with the Changing World Order. I especially recommend Chapter 6, “The Big Cycle of External Order and Disorder,” and, if you are interested in the unimaginable-in-peacetime investment-related developments that typically happen during wars, I recommend Chapter 7, “Investing in Light of the Big Cycle.” I recently shared these chapters online and you can find them
and
.
That’s my up-to-date big picture perspective. Because I use it to influence how I invest and what I should do in other aspects of my life, I will turn to those things next. As referenced above, what follows are two appendices sharing some information about the relevant alliances between countries and brief summaries of existing and potential significant wars.
Appendix 1: Relevant Treaties
Below are what appear to be the most important treaties, the strength of the commitments implied by each of them on a 1 to 5 scale, and a brief description of each treaty. By and large, other measures of allegiances (such as leaders’ statements and actual actions taken) are aligned with these treaties. However, it is now clear that all these treaties, especially those with the US, are subject to change and that actual actions will speak louder than agreements.
1. Key US treaties:
2. Key China-Russia-Iran-North Korea treaties:
Appendix 2: Existing and Potential Wars
What follows are what I consider the major existing and potential wars, a brief description of their situations as I see them, and my assessed probability of a military war breaking out or escalating within the next five years.
1. Iran-US-Israel war
This is now an all-out war that appears to be intensifying, with all sides depleting their resources. Things to look out for include a) which side ends up controlling the Strait of Hormuz, Iran’s nuclear materials, and the Iranian missiles; b) the relative willingness of each country to expend blood and treasure to win the war; c) the satisfaction of the countries involved with their alliances; d) the entrance into the war or the selling of weapons in support of Iran by one of Iran’s allied powers (like North Korea) or the outbreak of a conflict in Asia, which would require the US to have to choose between meeting its commitments to act and failing to act; and d) whether peace and safety are restored to the Gulf region.
2. Ukraine-NATO-Russia direct war
This active military war involving all the great military powers (except China) is a very risky situation, though it has not escalated beyond Ukraine for three years, which is good because a broader war has thus far been avoided. Currently, Russia is fighting Ukraine, NATO is supplying Ukraine with weapons at significant financial cost, and military spending in Europe and preparation for war with Russia are increasing. NATO troops not fighting directly and mutual fear of nuclear war are currently containing the war. The things to watch out for to signal a worsening are a Russian strike on a NATO territory or an attack on supply lines, NATO intervention in the military war, and/or an accidental clash between Russia and a NATO nation. I think that the odds are against these things happening and the war expanding beyond Ukraine, so I’d say that there is about a 30-40% chance of that happening over the next five years.
3. Taiwan → US-China war
The US and China are in ideological, technological, trade, economic, and geopolitical influence wars, but not yet a military war. But the Taiwan issue, which is a nonnegotiable sovereignty issue to Chinese leaders and the Chinese people, remains a flash point. All parties are openly preparing for a military war, spending a lot and developing a lot of military hardware to fight such wars. China has produced thousands of hypersonic, cruise, and ballistic missiles capable of precision strikes, along with millions of drones. US bases, aircraft, naval vessels, and other infrastructure operating within the First Island Chain—which extends south from Japan through Taiwan, the northern Philippines, and Borneo—are highly vulnerable. Things to look out for are a big increase or decreases in US support for Taiwan’s independence; a blockade by China; a US-Chinese military clash (accidental or intentional) that costs lives; and a more direct action by China to take control, possibly motivated by a belief that the US is too weak militarily, financially, politically, and/or geopolitically to fight back. More likely, the attack(s) would be made too subtly to even notice. If you don’t know what I mean by that, I suggest that you read The Art of War. I estimate the probability of a US-Chinese military war over this at 30-40%, with the greatest-risk period in 2028.
4. North Korea-related war
North Korea is a provocative nuclear power that has shown a willingness to fight for other countries that it is aligned with against the United States. It also has missiles that can carry nuclear warheads and reach the US mainland, but they are unreliable. Over the next five years, they will be improved considerably. North Korea has been particularly close to both China and Russia and could be an effective proxy of theirs. It is also particularly bold in developing and displaying its missile capabilities, but it would not sell these weapons to other countries. I would put the odds of some sort of military fight with North Korea over the next five years at 40-50%.
5. South China Sea-Philippines-China-US clash
There is a NATO-like treaty between the US and the Philippines, and there have been Chinese coast guard confrontations that could involve US naval patrols. It wouldn’t take much—e.g., a ship collision, a Chinese attack on a Philippine vessel, a blockade, or a missile incident—for the US to be expected to step in to meet its treaty obligations, yet it is inconceivable that the American electorate would stand for that. This would put the US leadership in the position of having to make a very difficult and very telling choice. I’d put the odds of this conflict over the next five years to be about 30%.
Looking across all these potential conflicts, the odds of at least one of them happening over the next five years appears to me to be greater than 50%.
