Trade

China’s bullying is a blessing in disguise

We should view China’s recent bullying as a blessing in disguise. Our government should resist quickly bending to its will for we would only embolden Beijing by such a rapid display of weakness.

China’s true colours are on display. Barley tariffs, meat bans and now minerals are up for debate. All because we wish to have an inquiry into the beginnings of the virus.

We are not blameless. Our universities squeezed the Chinese student lemon until the pips squeaked. These educational institutions never built in contingencies. They are culpable for such pathetic risk management processes. Our property market has benefited from Chinese investment. Our primary industries rode the back of this panda and now fear they could end up inside.

However China is welcome to source its coal from Indonesia if it so chooses. We have globally competitive cost curves which would be welcomed in other nations.

Of course there will be short term disruptions but the entire global supply chain is being rewritten. That can only be in our favour. We aren’t playing aggressor while covering up a pandemic. This isn’t lost on most of the world, even if governments might tiptoe around the subject.

We should be revitalizing our relationship with Japan. At least we know when we sign a contract, the Japanese will stick to it rather than the Chinese style of starting negotiations after a deal is inked.

Why would we move away from our relationship with America? Much more opportunities in partnering with the US and India as well.

Chinese military aggression is self evident. Its investment in defence and space is exponential. While a fraction of US military spending the Chinese power projections in the South China Sea as well as the Paracels, Spratly and Senkaku Islands should raise concerns. Man made military island bases in the Pacific as well as ‘trading’ ports around the world which would welcome Chinese naval vessels.

Don’t take our word for it. Japan revealed in its 2019 Defense White Paper just how much China has been toying with it. Look at the trend of Japanese Air Self Defense Force jet scrambles to intercept Chinese military aircraft approaching its shores. Less than 100 a decade ago to over 600 in 2018.

The map at the top of this post shows how many times PLA Navy ships have sailed through Japanese territorial waters in what would be our equivalent of the Indonesian Navy sailing through the Bass Strait between Victoria and Tasmania without warning.

China’s true colours should make the rest of the world sit up and take notice. While China has trapped many countries in debt turning them into financial colonies, this pandemic will create a world that wants to rely less on China. The Middle Kingdom might be a formidable trading bloc but its domestic economy is challenged and the louder the external rhetoric, the more we know how much it is hurting inside.

We needn’t fold at the prospect of threats. Best forge new all weather friendships. China will quickly learn how fast the world that is not in debt slavery to it will ignore the Forbidden City. We can forget pandering to the Paris Accord which China ignores while we are at it.

Surely lightning can’t strike twice, RBA?

The video posted here is of then Treasury Secretary Hank Paulson who steered the US financial system through the GFC. He is speaking to the Financial Services Committee in 2009. Perhaps the most important quote was the one that world central banks failed to heed –

Our next task is to address the problems in the financial system through a reform program that fixes our outdated financial regulatory structure and that provides strong measures to address other flaws and excesses.

Central banks across the globe honestly believe in fairytales to think they have learnt the lessons of 2008 or 2000 for that matter. Sadly they continue to use the only tool they possess – a hammer – which would be great if every problem they encountered was actually a nail.

When will people realise that had central banks practised prudent monetary policy over the past 20 years, they would possess the ammunition to be able to effectively steer the economy through Coronavirus? Everything the RBA and government are deploying is too little and too late. They never ran proper crisis scenarios and are now scrambling to cobble together an ill-contrived strategy wasting $10s of billions in the process all at our expense.

Central banks only have one role – to support markets with consistently sound monetary policy that creates confidence in the marketplace. Not run around like headless chooks and make knee-jerk responses and follow other central banks off a cliff like lemmings to disguise their own incompetency. The willful negligence displayed by our monetary authorities needs to be recognised. The RBA has got the economy trapped in a housing bubble of their own creation.

So when the RBA talks about, “Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus” it couldn’t be further from the truth.

While it is true to say that Australia is relatively more healthy than other economies in terms of the percentage of GDP in national debt, the problem is we rely on the health of our foreign neighbours. 37.5% of our exports go to China. What is the first thing that will happen when our trading partners suffer economic weakness at home? Nations that exercise common sense will look to push domestic production and supply so as to boost their local economies. It is a natural process.

Sadly the RBA, APRA and ASIC have been too busy convincing us that climate change was a priority rather than getting businesses to focus on sensible commercially viable shareholder-friendly strategies. Some groups like the AMA have been encouraged to parade their climate alarmist virtues on breakfast TV.

Unfortunately, instead of focusing on fireproofing our establishments from ruthless cutthroat overseas competitors, our businesses and commerce chambers waste time on chasing equality and diversity targets instead of striving to just be the “best in class”.

Sure, we may have certain raw materials (that the lunatic Greens and Extinction Rebellion protestors will do their best to shut down) that China or other nations will rely on, our service sector weighted economy will be crushed. Almost $250bn, a fifth of our GDP, derives from exports.

Just look at Australian business investment as a % of GDP dwindle at 1994 lows. Mining, engineering, machinery and even building investment are nowhere.

That means our ridiculously high level of personal debt will become a problem. It stands at 180% of GDP as recorded by the RBA on p.7 of its Chart Pack. Most of this debt is linked to housing. Housing prices should crater should coronavirus not be solved in short order. Delinquencies will surge. Families that are funding a mortgage with two incomes may end up being forced to do in with one. Then we cut our gym memberships, Foxtel and stop buying coffee from our local cafe. It is the chain reaction we need to be wary of.

That will work wonders for banks with 60-70% mortgage exposure and precious little equity to offset any ructions in housing prices. If you thought Japan was bad after its bubble collapsed – you ain’t seen nothing yet. By the time this is over we could well see Australian banks begging for bailouts. Note that cutting interest rates further kills interest rate spreads and smacks the dollar which hikes the cost of wholesale funding which these banks heavily rely on.

Yet our RBA knows that it must choose the lesser of two evils. It needs to keep the bubble inflated at all costs because the blood that would come from bank failure is just not worth contemplating. Maybe if they had listened to Hank Paulson they might have been able to hold their heads high rather than showing off, the fool’s version of glory.

Milton Friedman once said,

The power to determine the quantity of money… is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power… Any system which gives so much power and so much discretion to a few men, [so] that mistakes – excusable or not – can have such far-reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an independent central bank.

How right he was. When the economy tanks, await the RBA and government pointing fingers at each other when both failed to avert the coming crisis which had been so bleeding obvious for so long.

Batten down your hatches.

Juncker deserves a stiff drink after that

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President Trump strode into the Rose Garden with EC President Jean-Claude Juncker where, together, they announced the elimination of tariffs on industrialized goods.

No stranger to slapping people in the head, Juncker understood that when the leader of the strongest nation in the world slaps you back it is often worth paying attention to. There is much left to be desired about the unorthodox methods used to achieve such outcomes but if such deals are achieved that should be hailed as a success.

On top of that, Trump received commitments from Juncker to increase purchases of soybeans from American farms and to purchase large amounts of LNG, something likely to upset the puppet-meister.

So NATO members have promised to get their act together on honouting commitments to spending to display their new bonafides and the EU has seen that they are no longer dealing with a pushover.

Undoubtedly the mainstream media will overlook this and devote coverage to a tape recording instead of acknowledging that sometimes bluster works when the counterparts are truly pushovers in the end. Theresa May, are you listening?

Norwegians want a referendum on leaving the EEA & warn Brits not to become like them

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It seems more in Norway are wanting to have a referendum on the European Economic Area Access (EEA). The claims is that their costs have risen 10-fold since signing the EEA 25-years ago. Norway, while not a member of the EU, still pays around £650 million to Brussels to fund the EEA administration and other EU research projects. Two recent opinion polls conducted by Sentio reveals there is a strong majority wanting to have a say on the EEA agreement: 47% are in favour of a referendum on Norway leaving the EEA, with only 20% rejecting such a referendum. 70% of Norwegians do not want to enter the EU and the Labour Party has recently removed it as a policy platform.

Norwegian businesses had duty free access on all exports to the EU before the EEA was signed and this FTA would still apply if the EEA agreement were terminated. Ironically Norway used to export more to the EU as a percentage of total before the EEA than after it meaning that the supposed benefits of the club have not led to bigger trading opportunities within the block.

So to Brexit – Norwegian Prime Minister, Erna Solberg of the Conservative Party, sounded a warning before the UK referendum about following a Norway style deal, stating that “you’ll hate it…that type of connection is going to be difficult for Britain, because then Brussels will decide without the Brits being able to participate in the decision-making.”

That really bad sinking feeling…

sinkin

Clarksons is the world authority on shipping. These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.

Ship Prixces

Clarksons is the world authority on shipping. These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.

Daily rates are naturally falling fast. 1yr Capesize ships used in the transport of raw materials are now 52% lower than the 5 year average and down 30%YoY vs 2015.

daily px shi;s

Now one could have wishful thinking and view this as bottoming out but even with all the liquidity being pumped into world markets, trade is suffering from all that deflation in the system.

If you are not short global equity and bond markets you ought to be. Hard commodities look like a good bet

Gold