$156 billion steamroller heading for your investments

Saturday, 16 October 2021 — Albert Park

[3 min read]

Last week, I talked about China leading the Central Bank Digital Currency (CBDC) race.

But while a digital yuan is an interesting potential gamechanger, there are things far more worrying for Australian investors.

Yesterday, The Rum Rebellion’s Greg Canavan published his latest research.

It’s called ‘Divorcing the Tiger, What the Australia-China “forever split” means for your wealth’. You can read it now by clicking here.

What Greg does is answer one of the most important questions facing Australian investors right now: What happens when your biggest economic ally becomes both an economic and geopolitical foe?

One of the consequences Greg’s research envisions will be in the iron ore markets in 2022.

China’s so far slapped $20 billion worth of Australian exports including wine, beef, seafood, and timber.

But iron ore, worth $13 billion A MONTH to Australia ($156 billion a year), has so far remained untouched.

If that’s China’s next weaponisation, the implications for Australia — and your investments — are huge.

Greg will take you through the iron ore boom that cushioned us from the initial impact of the pandemic. He looks at what a freeze in that market might look like in 2022.

Then Greg goes through how you should position your wealth for a structural change in our relationship with China.

This is a really big sea change.

The mainstream is only reporting a small part of the bigger picture.

If you want to learn more, I encourage you to read ‘Divorcing the Tiger’ this weekend.

And speaking of changes…

The US Fed isn’t so sure inflation is transitory after all.

This week, the Fed released the minutes for their 21–22 September meetings. It showed that besides planning to reduce stimulus as early as November, they’re also worried about inflation.

As they noted:

‘[M]ost participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed.’

Also ‘some participants’ had concerns that high levels of inflation could affect the long-term inflation expectations of households and businesses.

Inflation breeds inflation. If you expect prices to go up in the future, you buy now — ahead of price rises. It’s why expectations can play a big role in inflation.

US inflation in September came in at 5.4%, the highest in 13 years.

Inflation has been picking up on bottlenecks in supply chains along with higher demand because of the economy reopening. But also due to higher food prices, higher rents, and energy prices.

The big question is when will the Fed start increasing interest rates. My guess is that with debt at such highs, they won’t be in a rush to do it unless inflation really gets out of hand.

But the Fed isn’t the only one worried about inflation.

This week, US President Joe Biden tried to calm high inflation expectations and ease supply chain bottlenecks by announcing the Port of Los Angeles will be open 24/7 to reduce backlogs ahead of the busy period, saying:

‘With holidays coming up, you might be wondering if the gifts you plan to buy will arrive on time. Today we have some good news: We’re going to help speed up the delivery of goods all across America.’

Shortages are hitting everywhere though. Even Apple is struggling.

Here’s Bloomberg:

‘Apple Inc. is likely to slash its projected iPhone 13 production targets for 2021 by as many as 10 million units as prolonged chip shortages hit its flagship product, according to people with knowledge of the matter.

‘The company had expected to produce 90 million new iPhone models in the last three months of the year, but it’s now telling manufacturing partners that the total will be lower because Broadcom Inc. and Texas Instruments Inc. are struggling to deliver enough components.

‘The technology giant is one of the world’s largest chip buyers and sets the annual rhythm for the electronics supply chain. But even with strong buying power, Apple is grappling with the same supply disruptions that have wreaked havoc on industries around the world. Major chipmakers have warned that demand will continue to outpace supply throughout next year and potentially beyond.’

Shortages in semi-conductors are affecting everything from smartphones to electronics and car sales. It’s why some countries are already looking at producing their own semiconductors, instead of relying from supply abroad.

If something has become clear during the pandemic, it’s that countries are looking to diversify their supply chains and manufacturing more.

That trend will likely intensify as tensions between the world’s factory — China — and the US increase.

The world is deglobalising, and that will bring higher inflation.

Best,

Selva Freigedo,
For The Rum Rebellion