Geo-Political Events

As outlined in earlier newsletters regional or world wars are not planned, but rather are stumbled into with parties going up the escalation path with no party willing to pull back, because they do not wish to be labelled an appeaser or weak. Each party wants to establish escalation dominance as a deterrence over the other. This is happening with Russia/Ukraine and Israel/Iran, as so-called red lines are continually crossed with further escalatory steps.

It is reported that US Secretary of State, Blinken has not spoken to the Russian Foreign Minister, Lavrov in over 12 months. Furthermore, it is reported that the Russian Ambassador to the US, recently left Washington DC and has not been replaced because the Americans did not speak to him in 7 years. In 2019, the USA walked away from the Intermediate-Range Nuclear Forces Treaty with Russia which has come back to haunt the US with Russia using its previously untested Oreshnik hypersonic missile against Ukraine this week. This is an example of escalation dominance. The Oreshnik cannot be shot down because it can travel at Mach 5 carrying 3-6 nuclear war heads and would have been covered by this agreement.

Dialogue even with your “enemies” is important as the Cuban Missile crisis of October 1962 showed there was simultaneous contact across different governmental levels during the crisis. Following the crisis steps were taken by the USA and Russia, including missile agreements to prevent crises in the future. 

It is concerning that Russia, and the USA are not communicating directly with each other and there are fewer “checks and balances” in place that are designed to minimise the risk of “stumbling” into war.

Changing World Order

US hegemony is coming to an end as BRICS and Global South countries are finding their voice and flexing their muscles, e.g. South Africa’s action against Israel in the International Court of Justice (ICJ), where previously they could not influence because their economies and military were weak. Now they are using western designed institutions against the West, and the implications are starting to flow through at a geo-political level and BRICS is having macroeconomic impacts across the globe. It is impacting Australia. It is for this reason we explore this phenomenon in more detail. 

United Nations: Global Rules Based Order

The world’s rules-based order is a set of global rules and structured relationships based on political, economic, and liberal internationalism and military agreement/protocols that apply to all countries and the idea is for the West to lead by example, thereby encouraging other countries to join and adopt the rules.The criticisms of world’s rules-based order are:

1. Selective adoption. Countries have over many years have selectively accepted those rules which they want to adopt. For example, India, Israel, Pakistan, and South Sudan have not signed the Nuclear Non-Proliferation Agreement.

   
   

2. The framework is outdated. The world rules-based order was formulated and sponsored by the US and its allies after World War 2 (WW2) with the United Nations (UN) at its core. The framework is a relic of the power structures at the end of WW2 and does not reflect the world some 75 years later. In recent times, the calls for major reforms have grown louder, notably removing the veto power of the permanent members of the UN Security Council which they understandably are resisting. Another change tabled is for India to join the Security Council as a permanent member given its the world’s most populous country and has the 4th highest Gross Domestic Product (GDP) in the world. Similarly, there are no permanent representatives from either the African or South American continents on the Security Council, while Europe is overrepresented with UK and France being permanent Security Council members with veto votes.

   
   

3. The West has applied nearly exclusively the rules to Global South countries or non-US allies, and not to themselves.

   
   

4. The West does not lead by example, opening the door to calls of double standards and hypocrisy.

   
   

5. There is no effective mechanism to implement decisions of the UN.

   
   

International Court Of Justice (ICJ)

Since inception, the ICJ has considered 194 cases where most disputes have been between neighbouring countries. South Africa’s ICJ intervention in the Israeli action in Gaza is a first, as South Africa is not directly involved in the war. This is an important test of international law and the rules-based order and do not be surprised if more Global South countries follow South Africa’s lead on taking on western countries through the ICJ system.  

International Criminal Court (ICC)

Until the indictment of Israeli Prime Minister Netanyahu and former Defence Minister Gallant, prosecution by the International Criminal Court (ICC) have been of non-US/western countries personnel. The reaction of the US and some of its allies to the arrest warrants by threatening sanctions (see Hague Invasion Act) that the US will apply to ICC members, as Trump did in his 1st term, etc., is adding to the breakdown of the world’s rules-based order. The Global South are challenging the double standard and hypocrisy in a variety of forums, including when holding press conferences with visiting diplomats. Twenty years ago, undiplomatic language would never have been used.

The US that is not a signatory to the ICC, although it actively assisted the ICC in gathering evidence for the arrest warrant of Russian President Putin, whereas the US is again threatening the ICC institution and its judges and their families.

It is important to recognise that the arrest warrant for Putin is for the war crime of “unlawful deportation of a population - removing children” is very different to the alleged war crimes of Netanyahu and Gallant. They are charged, inter alia with using starvation as a method of warfare, as well as crimes against humanity.  As with the ICJ actions, these arrest warrants are an important test for international law and the world’s rules-based order. The US has indicated it will not act on these arrest warrants, as did Mongolia when Putin visited. These are two more examples of undermining the world’s rules-based order. 

Role of social media

Social media, e.g., TikTok is live streaming the death and destruction in Gaza and some of these streams have been used in both the ICJ and ICC proceedings and is replacing mainstream media as a source of news for many across the globe. There are now thousands of YouTube channels receiving hundreds of thousands to millions of views on a specific video.  Before social media, folks generally accepted media reports and government press releases on face value. This is no longer the case as politicians from both political persuasions have a long history of lying, e.g., Tonkin Gulf incident and Weapons of Mass Destructions (WMDs), and endless media bad behaviour, e.g., News of the World UK phone hacking incident, means there is little community trust in both politicians and the media, as they undermine democracy and the world’s rules-based order. 

The Global South consider western media as inward looking, lacking in balance, and telling lies which are all valid criticisms as WMDs and many other events have showed. Consequently, the citizens of western countries are frequently ill informed and have no real understanding of the facts and importantly how the Global South feels about the US and western hegemony.

The double standards seen in the West’s attitude to Israel/Palestine compared to Russia/Ukraine has been fully exposed. Previously, it was clouded in the West’s double speak, the veil has been pulled away. As outlined earlier, historically, the Global South had no weight behind its voice, this has changed and is best illustrated by South Africa’s referral to the ICJ of Israel. Twenty years ago, this would not have occurred. 

BRICS

BRICS is the result of the failure of the world’s rules-based order.  Originally, it was to be a loose arrangement, however it is evolving into a competing forum to the Group 7, International Monetary Fund (IMF) and some UN agencies. BRICS countries are growing at around 4-5% per annum, whereas G7 countries are about 1-2%. G7 represents approximately 1billion people in the world, whereas BRICS represents nearly 50% of the world’s population, and the IMF is forecasting much higher economic growth for the BRICS countries and developing countries compared to G7 countries. BRICS countries and those in the Yuxi Circle are the fastest growing in the world. What is the Yuxi Circle? Yuxi is a city in China and out of all the cities in the world  (more than 1,500 worldwide were examined), over 55% of the world's population are within 4,000kms or 6 hours plane travel of Yuxi. 

BRICS summit which western media barely reported on continues to grow in importance. Some key takeaways: 

1. 36 countries attended

2. 24 Heads of State

3. The Secretary General of the United Nations attended for the 1st time

4. Turkey (a NATO member), Malaysia and Azerbaijan have all submitted formal applications to join.

5. In the short term do not expect the US or one of its allies to either ask or be invited to join.

As reported in newsletter dated 20 September 2024, China is now dominating global supply chains and its trade with Global South countries is on the increase. Its holding of US treasuries (funding US national debt and budget deficit) continues to fall, and the increasing US national and budget deficit is keeping upward pressure on bond yields.  

US President-elect Trump

Equity markets have jumped up because of the “Trump Bump”; however, when reality sets in and his policies of higher tariffs and more sanctions are considered in the light of day the euphoria will die down. President Biden has increased tariffs, and it appears that Trump plans to go further down the protectionist route by increasing tariffs, whereas not reported in western media was China embracing free trade having recently announced the complete removal of tariffs on African goods and at the same time Russia has announced a USD20 billion in debt forgiveness for African countries. These steps by China and Russia are obviously to build on the relationships already developed through the “Belt and Road” initiative and Russia’s promise to maintain grain supplies to Africa.

Germany

US sanctions on Russia has had significant blow back on European Union (EU) countries and they are also increasing tariffs on Chinese Electric Vehicles (EVs). The German car industry is in trouble. Why? In part because the US blew up Nord stream 2 pipeline (see Biden media conference). Biden said, if Russia invades Ukraine, the US will close Nord Stream down and as the pipeline was 70-80 metres below the surface, specialist diving and explosive skills were necessary to do so. Nord Stream was a source of cheap Russian energy for Germany. With energy prices doubling, inflation and cheaper Chinese cars, German companies are in trouble. It is reported that Mercedes Benz, VW and BMW are losing money globally, except in China. Its rather ironic that President Biden who ordered the destruction of Nord Stream 2 that has assisted in wrecking Germany’s economy was recently awarded German’s highest Order of Merit award for improving transatlantic relations.

Central Banks and Gold

Gold has no counterparty risk and is the oldest currency. We first reported in our newsletter of 18 June 2021 that central banks were buying up gold and this continues to be the case. India has gone one step further by repatriating 102 tonnes of its gold reserves from Bank of England. Early this year India moved 100 tonnes back. Although no official reason has been given for the repatriation, it appears to be in direct response to the US and EU confiscating Russia’s reserves held in US and European banks.

Impacts for Australia

The changing world order and split into a multi-polar world has longer term economic implications for Australia which will in part be determined by its relationship with the US. China is our major export partner with trade at $123 billion annually, then its Japan at $80 billon, South Korea $41 billion, India $31 billion and Taiwan $24 billion. On a product basis, the major exports are coal $109 billion, iron ore $88 billion, gas $67 billion, gold $18 billion and wheat $10 billion.

As these figures show, energy and agriculture products are our major exports with China being our largest export customer by some margin. With China leading the world in electrification, battery technologies and renewables and its preference to deal with Global South countries (see earlier comment on the removal of tariffs on African products) means its reliance on our energy products in the long run will diminish. Equally, the Chinese Belt and Road initiative (Peru has just opened the largest port in South America which was built by China) is securing its food requirements with other countries. Again, this shows Australia is no longer a preferred supplier. We all need to monitor developments closely as it will impact on Australian based investment choices.

Australian economy

Inflation continues to have a hold on the Australian economy as reflected in the Reserve Bank of Australia (RBA) decision to keep interest rates on hold at the November 2024 meeting. Housing data appears to show a slowing of the property market and until the figures confirm this has occurred, the RBA will leave rates on hold as the residential property market has been in overdrive for the last few years and the RBA wants to take the heat out of it. The RBA board does not meet again until February 2025 by which time the figures we believe will reveal a slowdown. Central banks in Europe and other countries have reduced interest rates due to economic weakness.

Despite the Federal budget surplus there continues to be a structural deficit problem with the budget, given the high level of reliance on commodity prices. Neither Labor nor the Coalition appear willing to address it.

The Australian Securities Exchange (ASX) key metrics show the market trading at a Price Earnings Ration (PE) of 21 which is above the long-term average of 13-14. Reversion to mean is inevitable.

We thank you for your support in 2024 and look forward to it continuing in 2025.

We wish all our readers a very Merry Christmas and a safe and happy New Year.

General Advice Warning: Any advice or information provided is general advice only and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any General Advice provided, you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If you wish to discuss the contents of this newsletter, please do not hesitate to contact us.