In a multipolar world countries will have to navigate multiple relationships, some will be difficult to classify as either alliances or rivalries.

I am not entirely sure as to the origin of the term ‘frenemy’ – the wikipedia entry for the word suggests it comes from the TV show Sex and the City – but it is perfect for today’s geopolitical context. Multipolarity is defined as a global system where more than one or two states are capable of pursuing a significant, and independent foreign policy. Great (and significant) powers have multiple foreign policy goals, some regional, some global, and some calibrated for the domestic arena. Out of this necessity to pursue multiple, often competing, strategies simultaneously arises a new type of a relationship between countries, one that is best captured by the pop-culture term frenemy.

Take the following two articles from Reuters:

In the first, a senior Iranian official told the newswire agency that the U.S. had informed Tehran in advance of its intention to attack the Islamic State (IS) militants in Syria and “assured Tehran that it would not target the forces of Syrian President Bashar al-Assad,” an Iranian ally. Another Iranian official, commenting on the U.S.-Iran cooperation against IS, tried their best to dance around the issue of an informal alliance, “This is an intelligence matter and I can assure you geopolitical and intelligence matters will not be shared with Americans… but military and security issues are being shared to fight against IS.” In other words, the U.S. and Iran are cooperating on geopolitical and intelligence matters!

In the second article, Reuters reported that the U.S. is looking to sell Vietnam P-3 Orion surveillance aircraft. The U.S. is upgrading its surveillance fleet with the new P-8 Poseidon aircraft and thus is looking to off-load the older, but still highly capable, P-3 to countries in East Asia that are concerned about China’s rise. To sell Vietnam the aircraft, Washington has to lift its arms embargo on Vietnam and ignore the human rights violations that it had repeatedly criticized Hanoi for in the past. But in the context of a more assertive China, which recently provoked Vietnam by floating a massive oil rig in waters that Hanoi claims as part of its exclusive economic zone, Vietnam and the U.S. are coming closer together.

Clients often ask me why American foreign policy so incoherent, particularly in the Middle East. It comes back to what Henry Kissinger said in the 1980s: “America has no permanent friends or enemies, only interests.” Perhaps the phrase should instead end with, “only frenemies.”

Market Diverges From FOMC

The money market has largely ignored the steady upward march in the median dots over the past year. Among other possible reasons, our Global Fixed Income Strategy service points out that the divergence between market expectations and the Fed’s median dots this year reflects differing views on the terminal fed funds rate.


The FOMC has only recently trimmed its estimate of the neutral rate by a quarter point to 3¾%, and the distribution around that estimate is fairly narrow (i.e. there is broad agreement on the FOMC). Meanwhile, the drop in the 5Y/5Y forward nominal Treasury rate implies that the market has revised down the terminal rate by about 100 basis points this year.

We side with the market on this call. The average real fed funds rate during successive business cycles has trended lower over the past 35 years. The rate averaged only 1% during the 2001-07 business cycle, a period in which potential growth was faster than it is today and demand was being buoyed by soaring home prices, rising debt, a falling dollar, strong EM growth, and fiscal stimulus in the form of the Bush tax cuts and increased military expenditure. If a 1% real rate was broadly consistent with full employment back then, it stands to reason that the neutral real rate is even lower today.

Testing the long side of the bond market might seem appropriate given our view on the terminal rate. Nonetheless, timing is critical. First, a low terminal rate has already been discounted, and market action in September suggests that the discounted terminal rate has bottomed for now. Second, market expectations can obviously shift around, and our model suggests that the U.S. labor market will continue to surprise on the upside for at least the remainder of the year.