Happy New Year!

Introduction

Since our last newsletter, a lot has occurred on both the geo-political and macro-economic front. It is important to follow these events as they will have short and longer-term impacts on the investment world.

Geo-political – Middle East wars

The Middle East wars continue unabated with the fall of the Assad regime in Syria changing the dynamics of the region and Syria is a mess with so many different players, e.g., Israel, US, Türkiye, and the Kurds all controlling areas. 

On 17 January 2025, just 3 days before President-elect Trump’s inauguration, Russia and Iran are signing a comprehensive cultural, economic, and military strategic agreement. This agreement along with the Shanghai Cooperation Organisation (North Atlantic Treaty Organisation (NATO) equivalent for China, Russia, etc.) will be factors in whether the USA (and Israel) attack Iran, because these agreements bring Russia and China into play which 4 years ago was not the case.

Some history on the Middle East is enlightening and provides pause for thought. In 1998, the US Congress passed the Iraqi Liberation Act 1988. This Act declares that it should be the policy of the United States to remove the Saddam Hussein regime from power in Iraq and replace it with a democratic government. So, 13 years before the US invaded Iraq, the US policy framework was set in place and 9/11 attack on the twin towers in New York provided the excuse to invade Iraq. The former Head of NATO, General Wesley Clark claims that within days of 9/11 that in a meeting in the Pentagon he was advised there was a 5 year plan to invade Iraq, Syria, Lebanon, Libya, Somalia, Sudan and Iran.

All these countries, except Iran have been at war since then and are failed states. In addition, over 20 years, the US spent USD9 trillion on the Afghanistan war to remove the Taliban and then to hand it back to the Taliban.

We are all aware of the false claims of Weapons of Mass Destruction (WMDs) that underpinned the Iraq war; however, most folks have never heard of Operation Timber Sycamore. Consistent with President Bush’s 7 country war plan, in March 2011, President Obama approved Operation Timber Sycamore to bring down Assad which has now occurred. In a highly confidential email from Jake Sullivan (at the time was working as a senior adviser to the then US Secretary of State, Hillary Clinton) to Hillary Clinton says “ See last item – AQ (Al Qaeda) is on our side in Syria. Otherwise things have turned out as expected.” 

This will surprise most folks that the US went from hunting down and killing Al Qaeda members, including Osama Bin Laden to supplying arms and funding them and despite there being a USD10m bounty on the former Deputy Leader of Al Qaeda, Ahmed al-Sharaaand (nom de guerre - Abu Mohammad al-Julani)  and now de facto leader of Syria to supporting Al Qaeda. In a contradictory situation, the Central Intelligence Administration (CIA) was funding him while at the same time the US Department of Justice were seeking his arrest. The US is now openly embracing him even though at the same time it is being reported that Christians are being now being murdered in Syria.

It has now been revealed that as recently as November 2024, Jake Sullivan (now National Security Adviser to President Biden) has tabled a plan to attack Iran. War with Iran seems inevitable, unless Trump who advocates for peace takes a different route as part of his plan to remove the “deep state”.

Why has the US embarked on never ending wars in the Middle East? Is it truly to democratise them or is for controlling global energy as part of its hegemony strategy? The Middle East is the energy centre of the world, and a war with Iran which could bring in Russia and China effectively meaning a global war. 

It also means those countries and regions that are energy deficit will suffer a major recession, notably Europe, UK, Japan, India and China, although the latter 2 will rely more on cheap Russian oil and gas, if Iran’s supply is severely disrupted and who has indicated it will shut down the Straits of Hormuz, if attacked. In such a scenario Europe, UK and Japan will become even further dependent on relatively more expensive US oil and gas forcing up living costs.

Geo-political – Ukraine war

The world awaits the new Trump regime and whether a deal can be done. Russia’s position on ending the war is well documented, as per the Minsk Agreements. Namely, the Ukraine is not to be a member of NATO with security guarantees and the Russian speaking Donbas region to have some level of autonomy. History shows that Russia must be involved in important European geo-political decisions, if long term peace is to be achieved.

Geo-political – Pendulum swings

After many years of liberalism, the pendulum has swung back to nationalism. In the European Union, voter dissatisfaction with high levels of immigration, increasing compliance and increasing living costs has resulted in changes in Governments with a move to the right. In France, there has been four different prime ministers in one year, no budget and a slew of unfinished bills. In Italy, there has been 2 Prime Ministers in 12 months with a shift to the right with the election of Meloni as Prime Minister. More recently, there has been major political upheaval in Germany with the collapse of the centre/left government forcing early elections which are scheduled for 23 February 2025. In Moldova, the pro-western party won the elections in November 2024.

At the end of 2024, the pro-Russian breakaway Moldovan region of Transdniestria was left without Russian gas supplies that transited through neighbouring Ukraine after the transit deal expired between the warring countries and Kyiv refused to extend it. This is adding to the confusion and tensions in this region.

Just before Christmas, the President of Korea attempted to introduce marital law and then was deposed by the government. This action and the subsequent failed attempts to arrest him has highlighted the wide political divide in South Korea.

Global South countries across the globe are finding their voice and are not willing to have colonial powers continue to “dominant” them, as they also embrace nationalism. Not receiving any western media attention is that Ivory Coast is the latest West African nation to expel troops of former colonial power after Mali, Burkina Faso and Niger. In November 2024, within hours of each other, Senegal and Chad also announced the departure of French soldiers from their soil.  France has now been kicked out of more than 70 percent of African countries where it had a troop presence since the end of its colonial rule. The French remain only in Djibouti, with 1,500 soldiers, and Gabon, with 350 personnel. These developments are part of the wider structural transformation in the region’s engagement with Paris amid growing local anti-French sentiment, especially in coup-hit countries. After expelling the French troops, military leaders of Niger, Mali and Burkina Faso have moved closer to Russia and China, and the BRICS block. See below: Global South – Value Adding. 

The fall of Canadian Prime Minister, Trudeau reflects voter fatigue after 10 years and a likely move to the right at their next election. 

It is apparent that there is much political jockeying within the US and by many countries in readiness for President elect Trump taking the reins again on 20 January 2025. It appears he has learned from his 1st term and is preparing to hit the ground running on Day 1. Specifically, he understands that that he has only 2 years to effect the changes he desires, because if history repeats itself, the Republicans will lose control of the House of Representatives at the mid term elections, and constitutionally Trump cannot stand again so his last 2 years fall into lame duck territory. 

Falling birth rate, increasing infertility and aging population

There has been significant attention across western countries on immigration levels and as mentioned above the backlash is one reason for the shift to the right. 

Although its not a popular opinion we believe the anti-immigration view is misguided because unemployment levels in the western world are low by historical standards and the demand for skilled labour is high. This gap can only be filled by immigration. Why?

1. Falling birth rates.  According to the Lancet across the global Total Fertility Rate (TFR) has more than halved over the past 70 years from around 5 children for each female in 1950 to 2.2 children in 2021. Over half of all countries and territories (110 out of 224) are below the population replacement level of 2.1 births per female.

2. Aging population. In Australia, it is forecast that by 2063 for every 5 workers in Australia there will be 2 older non-working Australians. 

3. Infertility. There is an increasing trend of infertility across the global, especially in developed countries. Infertility is a real and growing issue which affects approximately 1 in 6 couples who hope to conceive. The worldwide fertility rate has been decreasing at a rate of nearly 1% per year from 1960 through 2018. One reason for this decline is plastics, specifically micro and nano-plastics.

The combination of falling birth rates, aging population and increasing infertility will in the medium-term impact on economic growth unless new ways to improve productivity, e.g., Artificial Intelligence (AI) are developed, and high levels of skilled immigration are maintained, and folks put off retiring. This may be politically unpopular and contrarian view, but the facts speak for themselves even if there is a short-term housing crisis.

Macro-economics

In newsletter dated 14 December 2023, we outlined that money supply was growing as the US Federal Reserve was increasing its balance sheet driving up inflation. It reached USD 9trillion and since then, the US Federal Reserve has been reducing money supply with its balance sheet now at around USD 7trillion. This is reflected in the falling inflation figures. At the same time in our newsletters (see newsletter dated 1 May 2024) we predicted that US yields would rise. The US Federal Reserve has reduced the Federal Funds Rate by 1% in 2024 and at the same time 10 Year US Bond yields have risen by 1%. The key 10 year US treasury yield curve is no longer inverted. Why have yields risen? As outlined in newsletter 20 September 2024, yields have increased because bond investors are demanding a higher return to reflect the risk. We see this trend increasing as BRICS related countries continue to cease holding US treasuries.

Although money supply is contracting in the US, inflation pressures remain particularly if Trump introduces tariffs which will make imports more expensive, subject to the USD appreciating. In anticipation of the Trump Presidency, the US dollar has been appreciating against all major currencies which is making US exports uncompetitive while imports cheaper. If the US dollar remains high, and tariffs are increased, and oil prices climb to over USD80 per barrel there will likely be a slowdown in the US economy later in 2025, once the impacts flow through. It is recognised that this slowdown may be pushed back if there is an increase in fiscal expenditure to hold off a recession.

Bitcoin and crypto currencies

Bitcoin has shot through the USD100k mark, but now back at the USD95k level, as Trump has embraced crypto currencies. There is talk that the US will create a Strategic Bitcoin Reserve which has helped super charge its price, although US Federal Reserve Chairperson, Powell has poured cold water on the suggestion. Time will tell.

Global South: Value Adding

There is an important trend occurring across the Global South. Historically, resource rich commodity countries in Africa, Asia and South America exported the raw material and Western countries manufactured, marketed and distributed the end product. This is changing with Global South countries through Chinese loans are value adding (manufacturing) and selling product directly to buyers, e.g., China. Some examples include:

1. In Asia, Indonesia has the largest known nickel reserves in the world and controls 50% of the nickel market and over the last 10 years has moved from exporting the raw material to refinement and value adding, so its exports have more than tripled in 3 years.

2. In Africa, Ghana is now cultivating, processing and selling cocoa directly to China, cutting out the middlemen and commodity exchanges.

3. In Central America, Colombia is processing and selling coffee directly to China, and as with cocoa circumventing commodity exchanges.

This trend of cutting out the middleman is picking up speed and Global South countries are reaping the rewards. Australia can learn from this trend rather than just being a supplier of raw materials.

Australia

Brazil, the current chair of BRICS in early January 2025, announced that our nearest neighbour, Indonesia has become a full member of BRICS.

From a geo-political perspective Australia should take stock of the wider implications and assess how ties which are strong can be improved, including trading ties given Indonesia’s low trading partner ranking of 14. Indonesia will soon be building and exporting Chinese cars with Build Your Dreams (BYD) setting up a factory in contrast to Australia that no longer has a car manufacturing industry.

China is Indonesia’s major trading partner just like another 100 countries across the globe. Indonesia is now by GDP, the 16th largest country in the world (Australia 13/14th), and with a population of 285 million is the 4th largest in the world.

In the 1st half of 2025 there will be a Australian Federal election. As the country moves into election mode both political parties will be promising “goodies” while claiming they will be funded. The Reserve Bank of Australia (RBA) will be watching closely for the likely impact of these promises on the economy, and they may have an impact on whether the RBA decides to reduce interest rates. We note that a few months ago media economists speculated that interest rates would be reduced in February 2025, they have moved their predictions out to May 2025. At this point in time, we are inclined to the view that there will be no change, as the RBA will wish to assess the unemployment rate, Consumer Price Index (CPI), house price movements, trade flows and any Trump policy changes impact before making any decision.

On the positive side of the ledger, unemployment remains low, house prices appear to have stabilised, and a lower AUD will improve the balance of trade, as exports should do well, although on the flip side imports, e.g. oil and overseas holidays will be more expensive. The stock market continues to be buoyant (and consequential “wealth effect”) and overvalued according to a range of historical metrics.

We are positioning portfolios for the increase in global debt and the possibility of higher inflation and war.

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.