Risk level: Yellow - Elevated

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

THE BOOSTER SHOT

•             The times they are a-changin – and change brings volatility

•             Pay attention to stocks in U.S. distillates for early clues on economic momentum

•             Steering through tight economic corners requires a lot of political skill

We are still in a phase where geographically significant Turkey is also geopolitically significant Turkey. We pondered that extensively in our post last week by saying a Turkish pivot would have deep ramifications in the political geography of global oil and gas pipelines. If Turkey finds better friends in the Kremlin, we must then start to reconsider the belts of influence in the region given Moscow's long desire for regional influence. The nation state that controls the coasts controls the region, we said. Against that backdrop, meanwhile, are signs of a global economic cooling. Reuters oracle John Kemp pointed to demand in distillate fuels as a barometer for momentum. For the first four months of the year, stockpiles of those fuels in the United States declined faster than normal. Now, however, they're building faster than normal. With that in mind, we must review identity politics, the phrase du jour in theoretical circles that has deep roots in the cyclical nature of power. If transitions, economic or otherwise, are volatile, the price of oil as of late is a good indicator that things are changing. We were back in the win column last week with our Yellow alert, with Brent finishing the week down 1.35 percent to close Friday at $71.83.

               

In a recent column for the Carnegie Council of Ethics and International Affairs, we wondered if Trump's vague and sweeping claims were more meta than they appeared at first glance. We thought that deconstructing Trump's claim from the podium in Helsinki that "we're all to blame" for the collusion theories revealed populist enthusiasm for waning hegemony because of the way meanings are formulated in a socially constructed reality. Through that lens, the American president is insightful when he said Friday that "Turkey has been a problem for a long time." With the Ottoman Empire waning a century ago, it was Russian policy to take a patient approach to securing a geopolitical advantage by taking control of the Turkish Straits. With Turkish President Recep Tayyip Erdogan warning about external gamesmanship in the economy, we're reminded of the geographical and geopolitical significance of the region when the pivot was moving against the Kremlin tide three years ago. After the Turkish government in 2015 responded to Russian sanctions over the downing of an Su-24 warplane with threats to close the Bosporus Strait, the price of Brent crude oil moved more than 4 percent.  With Erdogan now expressing frustrations with the West, we're left to wonder about the consequences of Trump's policy of extending U.S leverage overseas by way of energy dominance.

If goods can't cross borders, armies will. If control over coastlines is indicative of geopolitical leverage, the United States is losing power overseas to Russia and China. That's not to forecast a looming war with Turkey, a NATO ally. But it does show that changes are afoot in the international landscape. Supporters of cyclical theories in international relations point to those profound changes as indicative of the evolution in the poles of global politics. Soviet economist Nikolai Kondratiev found a link between economic and military cycles. He observed that as economic cycles move from prosperity to recession, psychology changes as well. When the economy is doing well, people (or nations) are hopeful and want to keep the system that supports their prosperity in place. When things start to go bad, people (or nations) want change.  Carry this forward to the late Robert Gilpin's law of uneven growth. Gilpin said that as competitors to the established power in the international system grow, the hegemon's notion of prestige comes into question. When that happens, competition becomes intense and divisions among major powers widens. And when that happens, the potential for serious international crises grows. Returning to Kondratiev, a nation on the decline becomes paranoid. And when a nation becomes paranoid, it's easy to over-react.

The American president's outbursts on social media are indicative of a nation over-reacting to change. In early August, the Organization of Economic Development and Cooperation reported that its leading indicators were pointing to a gradual decline. At the same time, The Conference Board reported that second-half growth in the U.S. economy would likely represent the peak. Less support from monetary policy, like the expiration of U.S. taxpayer relief, will eventual drag on the U.S. economy, it found. Writing on Thursday, Kemp said trends in distillate fuels are adding to this sentiment. Because distillates account for about 30 percent of global oil demand, it's a bad sign when stocks start to build. U.S. distillate stocks drained through April at a faster rate than normal, but they're now building at a similar pace.

That plays well in the cyclical theories proposed by Kondratiev and others. But what about the cult of personality in identity politics? Markets move on the president's Twitter account and he knows it. Recall what happened when Trump in early June hinted of strong jobs data about an hour before the official release. What would happen on the geopolitical stage as trade disputes become personal? Writing on identity politics, international relations scholar Francis Fukuyama wondered about the fracturing of demographics with each emergence of a unique social group. With each new group comes a new grievance against others, and following the lines of cyclical theories, points to a breakdown in order.

"Democratic societies are fracturing into segments based on ever-narrower identities, threatening the possibility of deliberation and collective action by society as a whole," he wrote. "This is a road that leads only to state breakdown and, ultimately, failure."

Global political rhetoric smacks of paranoia and personalities. Trump spent much of the weekend turning his anger at the U.S. intelligence community and, with the Mueller probe moving deeper into his inner circle, we're left to wonder what's next. In the modern political era, the behavior of influential individuals has direct markets impacts.

Next week could be interesting on economic terms alone. On Wednesday, we get a look as U.S. Federal Reserve thinking with the August meeting minutes. We'll also see the price of crude oil swing when the U.S. Energy Information Administration releases its weekly data. If Kemp is right, we should be paying close attention to distillates. On Friday, however, things will get really interesting with the start of the annual U.S. Fed symposium in Jackson Hole. For that, we're issuing another Yellow alert for the week. Expect the price for Brent to climb on geopolitical tensions, but move lower if trade disputes escalate. The Fed and EIA will also big major market movers in the week ahead.