Rocks and Hard Places

It’s often said that the Chinese symbols for threat and opportunity are the same.

A nice little Confucian insight to share at dinner parties. Or in investment newsletter services…

Fake news I’m afraid.

Chinese for threat is 威胁.

Chinese for opportunity is 机遇.

Well that’s according to Feifei Wang, an interpreter on the ‘ask me anything’ website Quora, at least. Who to believe these days though?

It’s not easy.

The President of the USA says he doesn’t trust the FBI over Vladimir Putin…

The world’s a funny old place under the Trump presidency.

That’s why I’ve dedicated this week in Markets & Money to talk about the ‘Trump Effect’ on the world.

A world of alternate facts, shifting political landscapes and in turn I think, strange, new investment opportunities.

Which brings me to my topic for today.

The Trump effect on Australia.

As you might’ve guessed, I was ‘cleverly’ going to use the old threat/opportunity line to describe Australia’s position in this new world order.

But then the pesky facts got in the way. Unlike Trump I tend to agree with facts if and when presented.

And the more I thought about it, the more I didn’t like the analogy anyway.

It seems to me, it’s more like we’re between a rock and a hard place. Don’t ask me what the Chinese symbols for those are…

621 Days, 10 hours, 30 minutes…

That’s how long it’s been since Donald Trump won office.

And it’s also the length of time he has left the position of US ambassador to Australia vacant.

A worrying sign?

I think so…

As Trump showed in Europe last week, the actions of the past mean nothing to him.

The days of the US and Australia patting each other on the back, declaring undying mateship, are over. Though apparently Donald Trump and Greg Norman are firm friends, so there’s a glimmer of hope there…

[Editor’s note: sarcasm is a poor writing device, but hopefully that last line was clear…]

Now some are saying this isn’t a snub. Merely signs of an ill-prepared administration that is struggling to fill a whole host of different roles. ‘Don’t be so sensitive Ryan’, as my Dad would say.

But I’d disagree.

For better or worse, Australia has taken part in every US led war since the end of the second World War. To treat such a loyal ally so shoddily is a sign of — at best — disinterest.

And early on in his term, President Trump showed that Australia shouldn’t expect any special treatment.

First, he almost reneged on an Obama-era refugee deal. I remember his spokesman at the time, Sean Spicer, even referred to Prime Minister ‘Trumble’…that’s how off the radar we are!

Then it took a last-minute bit of political scrambling to save the Australian steel industry from steel and aluminium tariffs. Albeit with quota limits.

Tariffs are very bad for a trading nation like Australia. Which makes Trump’s tweet yesterday a bit worrying…

Donald Trump Twitter 26-07-18

Source: Twitter

[Click to open in a new window]

And it’s Trump’s trade war with China that is the clear danger for us…

Defcon one

For the last twenty years, Australia has sat in the middle of a political and economic sweet spot.

We’ve benefitted from the protection of US military power and the exponential growth in Chinese economic strength in equal parts.

And in the good times, it wasn’t a difficult path to straddle.

Sure, there was the odd bit of tension. But nothing compared to the current situation. The first shots in the US-China trade war have already begun.

We’re definitely at defcon one…

$US34 billion in US tariffs on Chinese imports has seen swift retaliation from Beijing. 

A further $US16 billion in US tariffs is in the pipeline for August, with the Trump administration threatening hundreds of billions more if China continues to retaliate.

‘Let us hit you or else’ seems to be the call…

Everywhere you look, the Trump-led USA is withdrawing from the rules-based world it helped create. A world in which middle power, trading nations like Australia could thrive.

At the recent meeting of the G7, the Trump administration would not even sign-on to a motherhood communique supporting a ‘rules-based international order’.

None of this is good for us.

Without rules, there is only power.

Our relationship with China has seen better days too.

China’s activities in the South China Sea; the Belt and Road policy projecting China’s economic power cross Asia; Huawei’s ambitions in the 5G network; the China political influence debate — all are raising tensions with Australia.

Tensions the USA is trying to stoke.

Yesterday The Australian reported a senior US congressman called on Australia to perform its own freedom of navigation exercises in the South China Seas.

A move designed to provoke the Chinese.

And they could hit us where it hurts in response…

No China, no economy

As The Sydney Morning Herald reported on Monday:

‘Australia has a very large and economically vital indirect exposure through our trade relationships with China, which accounts for about 30 per cent of our exports.

‘Thus, the deteriorating relationship between the US and China is of real economic significance and is proving to be a major influence over the value of the Australian dollar. It’s not the only influence – the dollar is still moved by domestic economic and financial data, which have been relatively positive – but it is of consequence.

‘If Trump were to go ahead and impose tariffs on all China’s exports to the US it would inevitably have a major adverse impact on China, which would equally inevitably retaliate.’

30% of our exports to China…

And that’s just directly. A lot of our other trading partners have significant trading with China that also comes under threat in a trade war.

For Australia, the effects would be particularly hard.

That’s the flip side of 20 years of growth. The bigger you get, the harder you fall sort of thing.

The Armageddon scenario — short of military conflict — is a significant devaluation of the Australian dollar down to below US$0.40. Forget the overseas holidays for a while.

Property prices in Sydney and Melbourne could fall by more than 25% as unemployment rises and investors flee the market.

And weirdly enough, interest rates could even rise in such a world due to global debt markets freezing up. Debt markets our banks have to go to fund our mortgage bill.

Now, I want to make clear, this isn’t a prediction. Or even a probable outcome. There’s no need to stack up on the tinned beans yet…

But it’s a possibility to be aware of.

There are others of course.

Tomorrow I’ll finish off Trump week and look at the other side of the coin. How this might actually play out well for us.

After all, good investing isn’t about being able to predict the future. But being able to understand what’s really happening beyond the headlines and react accordingly in appropriate time scales.

Good investing,

Ryan Dinse,
Contributing Editor, Markets & Money

Ryan Dinse is an analyst at Markets and Money. He has two decades of experience in financial planning, equity analysis and credit markets. Ryan combines fundamental, technical and economic analysis to identify and invest in good ideas at the appropriate stage of the economic cycle. He has a strong interest in technology, economic history and disruptive business models. His focus at the moment is as lead analyst on two of our most recent and innovative investor services, Crash Market Investor and Sam Volkering’s Secret Crypto Network. He will write about the exciting opportunities for investors to benefit from significant changes in world markets. He is a member of Fintech Australia, a former member of the Digital Currency Council, and is a fully accredited financial adviser.

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