Introduction

This newsletter is slightly longer than usual because of the key geo-political events that are unfolding and impacting on investment opportunities.

Geo-political - Overview

The US continues its forever wars (e.g., Vietnam, Cambodia, Laos, Somalia, Afghanistan, Iraq, Libya, Palestine, Syria, Lebanon, Yemen, etc.) and coups (Chile, Argentina, Iran, Ukraine, etc.) which have caused so much death and destruction since the end of World War 2 (WW2). The US has lost every one of these wars, and they did not achieve their stated objectives. Most of the world (Global South) is tired of the US hegemony and are breaking away through economic initiatives such as BRICS.

In Australia, politicians from both major parties are in lock step with the US position on nearly every topic with slight differences between the two major parties. Australia is very much out of step with the rest of the world’s position on global events.

President Trump is in a hurry to remake America, as he recognises the 1st 100 days of a presidency is when change can be driven through and his effective term is 2 -3 years, as the last year he will be a lame duck president, although he will probably continue to use executive orders.

Despite the Republicans controlling both houses of Congress, President Trump has signed 100 executive orders in 100 days. In his 1st term (4 years) he signed 220 which is not that different to his predecessors.

The US democracy model was not built around executive order power; they were meant to be used on an exception basis and historically have mostly been used at the end of a presidency, when a President would use this power to address criminal conviction injustices, although presidents have arguably abused this power with pardons for family, friends and major donors.

A quick comment on AUKUS. It is not well reported that this agreement requires Australia to take all the US and UK spent uranium and dispose or store it in Australia.

Tariffs

President Trump’s tariffs come into effect from 2 April 2025 with Australia not immune. Although not well reported President Trump is seeking tariff symmetry rather than an asymmetrical situation. We will watch and see whether this occurs, and it does not apply to China (See below America 1st Investment Policy).

There has been an interesting development on tariffs which at the time of writing this newsletter have not been reported in Australian media. President Trump has introduced, via executive order secondary tariffs on Venezuela. How do secondary tariffs work?  If China buys oil from Venezuela, then Chinese goods sold to the USA incur an additional 25% tariff on top of the existing tariffs and those starting on 2 April 2025. This secondary tariff is designed to crush Venezuela that is already heavily sanctioned. Why? Its sin according to the US is the lack of democratic reforms and corruption. There are countries around the world that are not democracies and there is corruption which the US does not sanction. Saudi Arabia is a prime example.

America 1st Investment Policy, Bans and Sanctions

On 21st February 2025, the White House, published America 1st Investment Policy. Simply, it says China go home as your funds are not welcome here. This is having a major impact on world capital flows along with tariffs, sanctions and bans that are having a significant impact on world trade flows.

In previous newsletters (see newsletter dated 14 December 2023) we have discussed the ineffectiveness of trade sanctions and the bans being imposed by the US and China on each other. Below we discuss the impacts of reciprocal sanctions and bans.

An important starting point is recognising that China controls most supply chains in the world (see Newsletter 20 September 2024). The US has effectively banned the Chinese companies of Tencent (which is in social media, gaming, smartphones, payment systems and eCommerce) and CATL (which is a major producer of batteries and energy related technologies) by putting them on a list of companies that the US alleges is helping the Chinese military. In response, China has put 28 US companies, including the major US defence contractors of Lockheed Martin, Boeing, Raytheon on their export control list. This means these companies are restricted from buying any dual use goods which have both civilian and US military applications.

What does this mean in a practical sense?  The answer is in examining the upstream supply chain and the products used. The Chinese bans will have deep effects because western countries, including the US military are dependent on China for semi-conductors and other items. 

It is reported by Govini (US Defence advisor) that 40% of US defence systems and infrastructure components come from China. Govini says that in the new US Ford Class aircraft carriers and the F18 fighters require over 6,500 and 5,000 Chinese semi-conductors respectively. Across the board the US military requires Chinese components in missile systems, data links, propulsion and aircraft frames, etc.

In addition, China has export bans on the following critical minerals:

1. Tungsten – used in ballistics, aircraft engines and missile guidance systems

2. Antimony – used in explosives

3. Gallium – used in weapon grade semi-conductors

4. Germanium – used in satellite systems, semi-conductors and night vision equipment.

What does this all mean? If Raytheon is on the Chinese banned dual product use list, then the US cannot build Tomahawk missiles as they can’t use Chinese semi-conductors and antimony. China and Russia produce 90% of the world’s processed antimony.

The West needs to stop and consider where these forever wars, sanctions, bans and tariffs are taking the world, and do so in the context of the matters discussed below. 

Geo-political – Russia/Ukraine

The solution to the Russian/Ukraine war on the table is very much the same that Ukraine signed and the then UK Prime Minister Boris Johnson talked President Zelensky out of 3 years ago. The difference now is that Russia plans to annex the territory it has captured.

A key sticking point is that the West is looking for a ceasefire while Russia wants a peace agreement (not a ceasefire) with security guarantees, including no NATO. This is consistent with Ukraine's Declaration of Sovereignty, adopted by its parliament in 1990, which declared it had the "intention of becoming a permanently neutral state that does not participate in military blocs and adheres to three nuclear free principles.” (art. 9). At that time Russia was very pleased with this declaration because it meant no NATO, and it was like the 26 October 1955 Austrian parliament’s declaration of permanent neutrality, which is now embedded in its constitution.  

Russian diplomats often refer to US Secretary of State James Baker’s famous “not one inch eastward” assurance about NATO expansion in his meeting with Soviet leader Mikhail Gorbachev on 9 February, 1990. This was part of many assurances about Soviet security given by Western leaders to Gorbachev and other Soviet officials throughout the process of German unification in 1990 and on into 1991. These assurances have proved to be false as NATO continued its march east.

When discussing this war, folks understandably refer to the Russian wars with some of its old Union of Soviet Socialist Republics (USSR) satellite states, e.g. Georgia, Chechnya that occurred in the aftermath of the fall of the USSR, as demonstrating Russia’s desire to expand and take back the territories lost when the USSR collapsed.  A different interpretation is that it was part of the transitioning into the post-Soviet era, as some in those states wanted to be separate (“separatists”) and other citizens desired to be part of Russia. This is a lot like the Donbass region where Russian is the dominant language and many want to be part of Russia, because of actions taken by the Ukraine government, e.g., in September 2020, the Ukraine government banned the teaching of Russian in schools which created significant dis-content.

Irrespective of the above, Russia is Europe’s eternal neighbour, so a peace agreement with security guarantees for all parties is necessary.

Russia does have genuine concerns about Germany that it has fought 2 world wars against. These concerns are not acknowledged by the EU. Twice in the last 100 years, Germany has invaded Russia, and in WW2 approximately 42 million Russians died. According to Ivlev, Soviet State Planning Committee documents put the Soviet population at 205 million in June 1941 and 169.8 million in June 1945. Considering the 17.6 million births and 10.3 million natural deaths, leaving almost 43 million in war-related losses according to this research. No other country in WW2 incurred such high levels of casualties (around 15-20% of its population).  These are extraordinary figures and provides an understandable reason for Russia’s desire to have no NATO in Ukraine, and especially no German peace keeping troops.

In newsletter dated 29 November 2024, we referred to the ballistic missile agreements that the US has walked away from which along with the above are more examples of agreements being broken which all add to Russia’s suspicion and lack of trust of the West, and particularly the US. The Russians are seeking verifiable and penalty clauses in any future agreements.

At a geo-political level, as with investing it is important to consider all the facts and look at issues from the other side’s perspective. The above comments reflect this and should not be considered as supporting President Putin, rather recognising that Russia has legitimate concerns.

Geo-political – Middle East

President Trump’s position on the Middle East is the polar opposite to that he holds for Russia/Ukraine. The US/Israeli hegemony strategy (see Newsletter dated 15 January 2025 on the comments by General Clark) in the Middle East continues without interruption.

The Gaza and Lebanon ceasefires were in name only as Israel never withdrew from Lebanon and the attacks on Gaza never stopped, as did those on the West Bank. The brief pause allowed Israel to invade and occupy nearly a quarter of Syria with the fall of the Assad regime.  With the ceasefire in Gaza formally ending, Yemen has re-entered the fray, saying once again it will not stop attacking ships in the Red Sea, until Israel stops its genocide in Gaza. The recent US bombing of Yemen appears to have resulted in killing civilians, not the targeted Houthi leaders.

Iran is very much in the US/Israeli crosshairs. President Trump in his 1st term walked away from the Joint Comprehensive Plan Of Action (JCOPA) and now has written to Iran seeking a new deal. Iran complied with the JCOPA and for 12 months after President Trump walked away, it now enriches uranium to 60% which is well over the level contained in the JCOPA. From Day 1 neither the US, nor the UK, Germany and France complied with their obligations under the JCOPA after it was signed when President Obama was in office, so why should Iran trust the US?

Despite President Trump saying he wants peace all his top advisors appear to be war mongers and are making unreasonable demands on Iran, e.g., demanding Iran to give up its defence capabilities. What country will do that? This is an unrealistic requirement and seems to be setting the scene to justify attacking Iran. The US appears to truly believe that Iran is weak, and their defence capabilities were destroyed from a single Israeli attack last year. This is miscalculation on the US part.

As recently as last week, the new US National Central Intelligence Director, Tulsi Gabbard said that there was no evidence that Iran was building a bomb which is consistent with the Iranian Supreme Leader’s fatwa which bans the development of nuclear weapons. Logic dictates that if it took the US 2 years to develop the atomic boom during WW2 from scratch that 80 years later with so many countries, (e.g., UK, France, China, India, Israel, Russia, North Korea and Pakistan) having the bomb, it would not take the Iranians 20 plus years to build a nuclear bomb.

In 1994, US President Clinton entered in a nuclear agreement with North Korea aimed at preventing North Korea building a nuclear bomb which it did not have at that time.  The US did not hold up its side of the agreement, the result of which North Korea today has a nuclear bomb. This is a valuable lesson that the West is ignoring in respect to Iran.

Iran also feels threatened by the US. Its neighbours Iraq and Afghanistan have been invaded by the US, and with its neighbour Pakistan, the US has conducted bombing and assassination campaigns. Pakistan also has nuclear weapons, as so does Israel. The best deterrence to a nuclear attack is to have a nuclear weapon. Iran may decide to drop the fatwa as a defensive measure which all could have been avoided if the US had not walked away from the JCOPA and learned from the North Korean experience.

Macro-economic

The US Department of Government Efficiency (DOGE) is just another name for austerity.

At the most recent media briefing by US Treasury Secretary Bessent said they were trying to land the plane (not crash it which are our words), however austerity is more likely to do so, as it will result in a higher budget deficit as the budget automatic stabilizers will kick in, i.e., as tax revenues fall with unemployment rising welfare payments increase. This combined with increased prices because of tariffs and the US Federal Reserve approach of inflating the real value of the debt away means a major balancing act in preventing the plane from crashing. Higher budget deficits potentially lead to higher bond yields. We have observed that over the last 2 years as the 10 year yield of US treasuries gets close to yielding 5%, equity markets sell off. Watch this space!

It is interesting to see the back lash against DOGE run by Elon Musk. Tesla shares have crashed by 53% from December 2024 and X shares (formerly Twitter) have fallen 71% since Musk purchased it. We understand that Elon Musk companies have USD700 million in US government contracts which have not been cut by DOGE. You can draw your own conclusion.

As mentioned above, the US is introducing secondary tariffs again on Venezuela which if expanded to other oil producing countries, e.g., Iran, will have a huge impact on China who imports nearly all its oil from Saudi and other gulf states, Russia, Iran and Venezuela. The impact would then flow through to most of the other countries in the world and would plunge the world into recession, if not war as China will not allow its future to be dictated by the US.

Investment Capital

In our last newsletter we looked at trade flows to provide insight into where the world from a macro-economic viewpoint may be heading. In this newsletter, we will discuss the world from a capital flow perspective.

The mid to late 1700s marked beginning of the industrial revolution which transformed economies from being agriculture and handicrafts based into economies with large-scale industries, mechanisation of manufacturing and a factory assembling line approach allowing for mass production, and it was a major reason for the lift in global living standards. At its core was efficiency improvements.  Since that time, we have seen revolutions in different areas, coal, gas, oil, electronics, internet, battery and now robotics and AI.

These revolutions have changed industries and created new industries, and capital has followed.

The Industrial revolution started in the UK, moved to the USA and specifically in the Northeast, then to the mid-west (motor town) and then to California (Silicon Valley), and as it moved investment capital has moved also. More recently with higher input costs, (i.e., labour, raw materials) in the USA, capital has flowed out into the developing world, e.g. China, India etc. This resulted in huge trade surpluses for the US and its forever wars that support the US Military Industrial Complex and because of it has the world’s reserve currency created enormous wealth. 

Over time as the US has spent more than it earned (budget deficits) and as capital shifted to lower cost of production countries, the US transitioned from having trade surplus’ to trade deficits. On the flip side, those countries that now had surplus’ in US dollars invested in America, e.g., US treasuries, equities, property, etc.. These countries are no longer willing to fund the US trade and budget deficits, and the US National debt.  We have made this point before in newsletters.

Capital has been moving out of the US as better investment opportunities have appeared, e.g., Warren Buffet was an early investor in Build your Dreams (BYD) and this has accelerated with President Trump releasing the America 1st Investment policy. There have been major capital outflows as the Chinese and other investors have left the US. This capital has moved into Europe, Asia and precious metals.

China and Western Media

We regularly write about China because it is now leading the world in so many areas. It is an economic powerhouse, and it will be a major force in the world in the coming years whether readers like it or not.

Western media is now starting to wake up to China after publishing misleading and negative comments for many years. The South China Morning Post recently analysed western news stories about China. It found that in 2019, 70% of stories were negative on China. In 2025, this has fallen to 40% with stories and most of the other stories taking a more nuanced perspective. This changing western media reporting on China is important as it will assist the West in changing its perception of China. The same needs to occur for Russia, Iran and many other countries. What do you really know about these countries other than the negatives which the media focus on? Better understanding will lead to better global outcomes.

For example, western media continues to portray Russia as it did during the Soviet era. This either reflects a misunderstanding or propaganda. Since the end of the Soviet Union, Russia has emerged as a very conservative and religious country that has adopted capitalism, and is nationalistic like all countries. Russia’s conservativism can be seen in its intolerance and negative views on LGBTQ with bans on pride parades and arbitrary arrests on LGBTQ activists. Whereas western counties have passed anti-discrimination laws and are much more tolerant of diversity even with the recent backlash against ‘wokeism’.

Australia

We are heading into an election on 3 May 2025. Given that the Federal Budget measures will not be passed by Parliament before the election there is little point commenting on them, as Labor may not win, or there could be a hung Parliament, so the budget measures may never become law or will be amended in the Senate, if as expected independents and the greens hold the balance of power.

As usual we are more than pleased to discuss as we see emerging investment opportunities.

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.