Practical analysis for investment professionals
25 May 2016

Peter Zeihan on Geopolitics: “A World That Will Fragment”

How we view geopolitical strategic scenarios for the future dramatically impacts our investing perspectives today.

Geopolitical analyst Peter Zeihan outlined a global political framework that is in the midst of increasingly rapid change at the 69th CFA Institute Annual Conference.

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Zeihan began with a discussion of the pivotal 1944 conference at Bretton Woods, which he believes marked a transition in the world order from competing imperial preference networks to the military-backed promotion of international free trade. Ultimately, the structure created by Bretton Woods resulted in the successful prosecution, over half a century, of the Cold War against the Soviet Union.

Today, however, the United States is one of the least internationally involved economies, with only a small share of its GDP reliant on merchandise exports. Following the collapse of communism, the whole concept of global free trade “is a policy 25 years out of date,” Zeihan said.

Changes in Geopolitical Perspectives

Zeihan identified a number of factors that will influence the international scene.

  • The United States still has its Cold War military strength — notably, 10 aircraft carrier strike groups — to protect global free trade, but it sees no incentive to actually use that power, which is bad news for the rest of the world.
  • Domestically, US politics are in disarray with “the party coalitions on both sides already broken beyond repair,” Zeihan said. “Even if the Americans were convinced that their economic and physical security required international engagement, they are about to step out to lunch and it is going to be a very, very long lunch.”
  • The global demographic picture, when deconstructed into baby boomers, gen Xers, and millennials, has created intergenerational transfers that have economic, investment, and geopolitical impacts that vary sharply among countries. For example, Germany, with its abundant supply of gen Xers, currently has a capital-rich demographic profile generating export surpluses and can continue to fund its model — but only for another seven years. This fact, in turn, affects Germany’s ability to support those eurozone deficit countries that depend on it to keep them afloat.
  • As shale oil technology reduces fracking costs — which are already heading toward $35 per barrel — the United States is no longer dependent on foreign oil. “North America, for all practical purposes, has already achieved oil independence,” Zeihan said. Consequently, the US relationship with the Middle East has radically changed.

Challenges Impacting the Middle East

Zeihan believes there are five major challenges confronting the Middle East:

  1. Transcontinental terror groups are indeed a very big problem, but their effects are more local than international.
  2. Demography across the Middle East, especially in Saudi Arabia and the United Arab Emirates (UAE), is dominated by a bulge of 15- to 25-year-old unmarried males. From a security point of view, this most affects those countries that are unable to finance an effective state security apparatus.
  3. US security is now a domestic concern among these nations: “The entire chain of dependencies that kept the United States involved in the Persian Gulf have all broken at the same time,” Zeihan said. The Saudis are now on their own, absent their former US support, and worried about a resurgent Iran. Both Iran and Saudi Arabia are engaged in stoking each other’s political and economic fires. The United States now views the region wholly through its other interests.
  4. Russia also sees the Middle East as a means to other ends. With its inherent demographic and geopolitical challenges, Russia needs a distraction and that alone explains why it is in Syria. The Russian play, Zeihan posits, was to flood Turkey and Germany with so many refugees that it sours bilateral relationships, making them incapable of taking steps to counter Russian ambitions in Ukraine. Whether it came about by accident or design, this approach wins Zeihan’s admiration for its Machiavellian effectiveness.
  5.  Zeihan observes that whenever there is energy disruption, the places farthest away from the Persian Gulf  — China, Japan, South Korea, and Taiwan — suffer the most. With the United States on the sidelines, they will need to become more involved in the Gulf.

Alarmingly, Zeihan foresees simultaneous political crises that will erode local state authorities, unleashing violence and terrorism. Capital flight, driven by geopolitical concerns, will surely follow.

“The result is a world that will fragment,” Zeihan concluded. “The result is a breakdown in global trade.”

This article originally appeared on the 69th CFA Institute Annual Conference blog.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo courtesy of W. Scott Mitchell

Key Takeaways

  1. There are a number of demographic, political, and energy-related issues that will influence the international scene, notably US disengagement with free trade.
  2. Major challenges confronting the Middle East include the ongoing threat of terror groups, unfavorable demographics, and growing US isolationism.
  3. Simultaneous political crises will erode regional stability, unleashing violence and terrorism. Capital flight, driven by geopolitical concerns, will surely follow.


The New Middle East
Peter Zeihan

View the full transcript (PDF).

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About the Author(s)
Mark Harrison, CFA

Mark Harrison, CFA, was director of journal publications at CFA Institute, where he supported a suite of member publications, including the Financial Analysts Journal, In Practice summaries, and CFA Digest. He has more than 12 years of investment experience as a portfolio manager and securities analyst. Harrison is a graduate of the University of Oxford.

3 thoughts on “Peter Zeihan on Geopolitics: “A World That Will Fragment””

  1. Duke Mke says:

    Thought provoking.

  2. Gerald O'Hare says:

    The world is coming into a new dark ages and we are the only light. For decades we have protected trade and stabilized the world only to be demonized. Now we are stepping back and selecting who we want to be our friends. We will prosper but very few others will. Welcome to the 21st century where the USA remains the only superpower. Within North America peace and prosperity will flourish. Forget about foreign entanglements and especially forget about places like Philippines, China and Russia.

    The Philippines are quickly becoming the Venezuela of Asia, China is heading for the largest real estate bubble ever and Russia is disappearing. Europe will not recover financially for a very long time. Among the BRICS only India is doing well.

    The USA is heading into an almost isolationist mode, not fully but almost, which means the rest of the world should be alarmed. This isn’t the 20th century anymore Buster Brown. The sheriff has retired so learn to protect yourselves.

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