Saddle the horses! Sharpen the swords! The crusades are back on!
The Pope has endorsed stopping the Islamic nationalist group ISIL in Iraq. At least that’s the way the media put it. If you read his actual comments, they’re far more diplomatic. But don’t let that stop you from heading to the Levant armed to the teeth. No doubt Tony Abbott won’t cut your welfare if you’re on the Christians’ side.
We favour sending in David Attenborough to quell the unrest in the Middle East. Years ago, he tackled an African tribe on the warpath head on by introducing himself politely. It worked brilliantly.
Of course, in the end the trouble in the Middle East isn’t about religion. Or the vast amounts of oil and gas recently discovered just off the coast of Gaza. It isn’t even about the kind of economic warfare our conference World War D was about. It’s all about nationalism. And yes, nationalism does impact your superannuation balance.
Mix nationalism with anything and you get a problem. Whether its religious nationalism like ISIL and Zionism, National Socialism like the Nazis, currency nationalism like the currency wars or economic nationalism like protectionism. Even retirement nationalism like superannuation is dangerous. The day when an Australian treasurer declares your super assets as a national asset is coming. Actually, it’s creeping in the form of new taxes.
But there are far more amusing clashes between nationalism and investing to chat about today. Just take Clive Palmer. He mixes his business interests with nationalism. That concoction blew up on the TV show Q&A last night, by all accounts. Clive allegedly stole funds from a Chinese company to pay for $12 million of his Palmer United Party (PUP) campaign efforts. The matter is before the Supreme Court, which is the arm of government that allows politicians to say ‘I can’t comment on matters before the courts.’
Anyway, Clive’s power as a politician (apparently he keeps his PUPs on a tight leash) mixed with his business interests came to a boil on live TV. He went on a tirade about Chinese mongrels and communists, and pointed out that the Chinese shoot their own people. Sort of like the Americans did in Ferguson, Missouri, recently. But the Chinese do it with far less bullets per person.
Of course, the Chinese are just as bad at mixing business interests and politics as Clive. Local governments and property developers made a lot of money in each other’s company (pun intended). Now that Chinese investors are holding the bag after buying the houses, it’s going rotten. Chinese house prices fell for the third month in a row in July, and twice as a fast as in June. Volume is down 10% for the first seven months of the calendar year compared to last year.
More interesting are the rumours that properties were put together in extraordinarily poor quality. It’s not as if the developers designed the high rises for people to live in. Who would want to live in the ghost cities that dot the Chinese countryside? We can’t remember the source, but Western analysts reckon many apartment buildings are so dodgy, it will be cheaper to knock them down than fix them up. That probably suits construction companies just fine. More stimulus. And more demand for the resources the shares in your super fund dig up.
Of course, the developers and local government officials don’t care about the crumbling buildings. They’re amongst the rich now. And 64% of the rich have plans to leave China, according to research from a Shanghai think tank. Many of the cashed up escapees are headed for Australia. Wait, that means more demand for our property too! It’s a win-win situation!
Clive didn’t stop with bashing the Chinese though. He’s also confusing how the government works with how business works. He pointed out the Australian government could run an eternal deficit because the Americans have pulled it off. (No mention of Greece, Spain, Portugal, Ireland, Iceland, Italy, Argentina…)
Sure, the two years of surplus the Americans have managed out of the last 50 isn’t exactly John Howard-like. But the fat lady has barely made an appearance during the overture, when it comes to the consequences of American government deficits.
The US government’s debt is the basis of the financial system. And its currency is the basis of international trade. That creates a vast amount of demand for both. As the global financial system and world trade grow, the demand for US treasuries and dollars grows with it. That allows the US to keep running its deficits and printing money. The increase in supply is balanced by the increase in demand.
But over time, the size of the US government’s debt begins to look pretty dodgy compared to its revenue source (taxes). You can only tax Americans so much. And treasuries do need to be repaid to be worth anything. Eventually they have to be repaid with printed money. But that devalues the dollars used in trade.
Many countries have begun opting out of the dollar system in preparation for a crash in the value of the dollar. Forced out of international trade by the US using sanctions, Iran led that charge. Now currency arrangements are popping up left right and centre. Even Australia is involved in one with China. All this means the demand for dollars and treasuries could tumble just as the US government’s deficit is out of control as well. The supply of treasuries is massive and the demand is looking fragile. Meanwhile, money printing is continuing as well. It’s the perfect set up for a crash.
The test of whether the US government can maintain a 50 year deficit will come when its reserve status disappears and its credit and currency are judged on their merits. Given their merits already, the time will come when the US government deficit and money printing will turn the country into a combination of Greece and Argentina, depending on who resides at the Federal Reserve at the time. We can’t see them hiring a German to run the Fed anytime soon, so Argentina it is.
Hopefully the world will have weaned itself off the dollar and treasuries by then. Otherwise, the global financial and trade systems will be in serious trouble. The only Western contender for reserve status would’ve been the euro. But jumping out of the frying pan and into the fire seems like a bad idea.
If you can’t make the connection between all this and our usual haunt, the stock market, you will on Saturday when we release a video explaining the investment implications of all this growing nationalism.
For example, in the video, Jim Rickards, author of the book Currency Wars, discusses why we have entered an era of ‘mutually assured financial destruction’ and what this means for your investments. Not to mention why a new global economic downturn is coming and will lead to a ‘sudden, instantaneous loss of confidence in the US dollar’.
Most of the speakers at WWD expected the transition away from the US dollar to be pretty rough. But maybe Australia will learn from their mistakes and pretend nobody ever took Clive’s deficit comments seriously.
For Markets and Money