View From The Couch - 07/Aug/2022

Six Problems Over Which To Lose Sleep 

As the war drags on in Ukraine, we're starting to see all kinds of problems poking their heads over the horizon. These problems were latent problems of the world, but thanks to the war, they have become blatant problems of the world. 

No.1 with a bullet for the Europeans is what they're going to do for heating in winter. Too many European countries are dependent on natural gas from Russia. This used to be a vague hypothetical problem, but this northern winter, it's going to be very real, front and centre. There are no easy answers for this because it's not like there are substitute sources, and it's not like there's an alternative fuel to replace it. 

No.2 is the grain export problem. Both Russia and Ukraine were major exporters of grains. Now those exports have been hampered by the war. The last time there were major issues with food in North Africa, it brought about the Arab Spring. That is to say, if you're a dictator in North Africa and your country is dependent on imported grains for food, then this is not a good situation at al. 

No.3 on the list is fertilisers. Russia is the biggest exporter of potash and now that's off the market. Agricultural inputs are pretty unforgiving so growers the world over will make changes to what they plant next year which means globally speaking, we might not have enough food sometime soon. China would be in the shit if that happens because, they are major food importers. And as with the dictators sitting on a hungry population in No.2 above, Xi Jinping's China stands to be in trouble the most over this problem, when it has the problems of its own (more on that below at No.6). 

No.4 is crude oil. We've already seen the oil prices sky rocket and with it inflation. While the immediate peak has passed, oil is going to remain high because Russia was the largest exporter of crude just before the Ukraine invasion. now with sanctions, Russia theoretically can't sell their oil. In practical terms, they're probably keeping their pipelines open to North Korea, but if they stop the oil pipelines, that's it. The pipeline is dead. Meanwhile the world without oil can try and accelerate towards alternative fuel sources but are we geared towards accomplishing that? If we're relying on China to produce the cheap solar panels going into the future, we might be in for a rude shock. 

No.5 is the new model of war that America seems to be trialling in Ukraine. After spending 20 years fighting in Afghanistan, trying to bolster any kind of state there only to see it fall in a week, it is clear the Americans were leery of fighting anywhere to bolster any state. If you add in the chances of a nuclear war, America has had the best reason not to engage in direct fire with the Russians. That said, unlike the Afghans, the Ukrainians have fought hard to keep their state and sovereignty, which has given the world a window to operate. What the Americans have opted to do is give arms to the Ukrainians to fight their war, but have decidedly kept their troops out. This may work well for Ukraine and in the end if they do defeat Russia, it will have worked very well with America. Because success in this model means America will have a new way of managing their wars - they don't send troops and ships, they just send the weapons. It signals a retreat from Pax Americana. 

No.6 is China. China probably deserves an entry all of its own but it can be broken down into three components. The first is political. The concentration of power Xi Jinping has managed to accrue makes China a dictatorship with no checks or balances. China might make the unfortunate call to invade Taiwan and if they do, it would be because one person wanted it, and not necessarily the polity of China. The second is its management of Covid where it is still in the Zero Covid method that was more common before there was the vaccine. China is still doing these because their Sinovax doesn't work. The third component is the property bubble bursting. It's so bad there have been bank runs. China is not going to be the growth engine of the world economy as it has been for the last 30 years. It's probably not even going to stay as the underpants factory of the world. Globalisation is retreating and the combination of the above three component problems mean it is leaving from China the fastest. In this global context, the rise of Xi Jinping, unreformed-Maoist-Totalitarian, is most unfortunate.  

View From The Couch - 27/Jul/2022

EVs With Lithium Batteries For Everybody?

What's been on my mind a lot in recent weeks is this notion that our automotive transportation is going to change over to a fleet of EVs with Lithium batteries. Electric vehicles to begin with are commodity-metals-intensive. They use a lot more copper cable than an ICE vehicle would, and they use things like raw earth magnets for the motors. A quick back-of-the-envelope calculation tells you that if you wanted to replace very gasoline/petrol ICE vehicle with Lithium battery EVs, there wouldn't be enough of a Lithium supply to fill the need. 

I hold shares in some Lithium mines in Australia so I'm biased - I think if the world decides EVs with Lithium batteries, I'll stand to make some money in the mid to long term. Yet the little environmentalist in me is a little uncomfortable with the prospect of crappy manufacturers filling the world with crappy lithium batteries in their crappy electric vehicles. It's the stuff of nightmares just as bad as global warming. Maybe the whole world should have a deep think about whether this is indeed the way we want to go in terms of vehicles. There's no point replacing one catastrophic global problem with another one. 

Toyota is apparently the world leader in patents for batteries. So you would think Toyota would be leading the way with EVs but they are not. If you listen to the corporate communications coming out of Toyota, they seem to think hydrogen fuel cells are a better option than Lithium batteries. Indeed, they're pretty big on hydrogen in general. It stands to reason that if we could connect up the hydrogen economy to renewables, and ran vehicles with hydrogen fuel cells, we would be lessening the overall impact of lithium mining on the world. 

Of course, Elon Musk thinks Hydrogen fuel cell vehicles are a mind-bogglingly stupid idea. He's very deeply invested in Lithium batteries. All I'm saying is, there are real arguments for not going entirely with Lithium battery EVs. 

End of Globalism

There's a bit of talk lately about the end of globalisation. The salient argument being, America has been withdrawing from the world, and as it withdraws, it is leaving power vacuums on the world's high seas. The eventual picture maybe that there will be a free trade blocs built around NAFTA, EU, and CPTPP. Only liberal democracies need apply - because those blocs can and would trade with one another, but it deliberately leaves out China, Russia, Pakistan, Myanmar, the Middle East, and Eurasia, as well as Africa. 

Of course, the Middle East will likely hang on as long as oil is needed, but if the world moves on to running vehicles and planes without fossil fuels, the Middle East will likely lose its purchase on the economic relations involving these blocs. It's remarkable really - especially for us Gen-Xers because our generation was the one that felt globalisation was this inexorably, irresistible economic force that would wash away tariffs and protections and lower our standard of living (instead it imported deflation from China and we ended up with ore stuff than we need for dirt cheap, but that's another story). Naomi Klein was all over this space with her books and the big protests in Seattle in the late 90s was in opposition to globalism. Now we find less than a generation later that globalism is surrendering to history, and that our world is going to move back to trading blocs of the sort that existed pre-World War II. 

It's a bit sad that America's withdrawal from Afghanistan has been interpreted as America's weakness rather than loss of interest in global affairs. The invasion of Ukraine and the sabre rattling by China in the South China Seas is all a little disconcerting misreads. It's not the America is weak now; it's more that it doesn't care what the rest of the world does to beat itself up. It's still invested in the status quo, and more importantly, it will look after its allies. That said, it feels a little weird that we have to start building institutions like the Quad and AUKUS to fill in the power vacuum. 

In an ideal world, Russia and China come in from the cold instead of trying to impose their will on their surrounding countries. Nobody really shares in the grand vision of a Great Russia or a Great China if it means their sovereignty gets compromised. There is some level where the onus is on Russia and China to play nice instead of play these dominance games. The long term prognosis for both those countries is not good thanks to their ageing demographics. They are going to need more friends in the future, not less. Making the whole world your enemy is not proving to be a good move by Russia. You kind hope China gets the message but alas it's run by another dictator. 

If globalisation really is in retreat, you would think it would stop these countries dead in their tracks and make the reconsider their place in the world. The history where Russia had few friends or China had few friends were not good for either country. 

View From The Couch - 11/May/2022

The End of Globalism

Not so long ago - well it doesn't feel that long ago - Globalism seemed set as the way of the future. There would be more coming and going of goods and trade and ideas and education. Like it or lump it, we were all set to compete on a global stage and there was no escaping its tendrils as goods and services put together with global supply chains and global transportation made its way around the world. Globalisation looked like the kind of end point of history that say Francis Fukuyama might approve of; even allowing for these pockets of global players who didn't quite fit into the club of liberal democracies. You could argue Russia was coming along ever slowly towards seeing things the way the west sees them, and even China under the CCP seemed to prioritise making money over ideological purity thanks to Deng Xiao-Ping-ism.

Now in the wake of the Covid-19 pandemic, the bellicosity of Xi Jinping's China, and the Russian invasion of Ukraine, some things have come into very sharp focus. The first thing on the list is that China under Xi - so China since about 2012 - has been a really crappy participant in the global order. The second is that Russia has also been a crappy participant in the global order. And between the two of them, their contributions have lessened to the point of making the first world wonder whether there is any merit in extending the welcome mat to these countries. 

To be sure, China is a big market that seemingly promises future growth except for the gigantic property bubble that has just popped. Russia, for its part is  tremendous exporter of oil, gas, wheat and fertilisers - so much so that the sanctions to remove Russia from the global markets is in a sense flirting with mass starvation scenarios. 

It's kind of amazing things have come to this, but the last decade has been to put it mildly a shit show for globalism. It is no wonder it is in retreat. For a while there, globalism looked so locked in, the people protesting against it in the late 1990s looked like ideological crazies. Now, globalisation is forced to being rolled back by the simple reality that you can't do business with countries with dictators like China and Russia. It may profit you in the short to mid term but in the long run, they're sure to screw you over. In that sense, there's not much daylight between Saddam Hussein and Vladimir Putin or Xi Jinping. 

The End of Deflationary Pressures

For some time we've been in this weird loop since the end of the Global Financial Crisis around March 2009. Governments have spent lots of stimulus money in the hopes of stoking inflation but all these quantitative easing and printing money did not lead to the kind of inflation they taught in schools. Part of the reason is that as the world went global, so did the money, so all the money printed by the US Fed or the RBA seemed to just flow out into the wider world and did not come back as inflation.

It's a complicated area but the bottom line is that even faster than the US was printing money, China had been exporting deflation to the world through its cheap labor. I think I've covered this phenomenon somewhere in the past so I'll skip going into it here. Suffice to say China's labor costs have been going up over the last decade, and so there probably has been less deflationary pressures that China was exporting, leading up to the Covid-19 pandemic. If the last 30 years of gentle economic growth for the first world was founded on Chinese manufacturing being so cheap and easy, that context is coming to a rapid end. 

Worse still China is the most indebted nation in history both in absolute terms as well as per capita, and for political reasons of the CCP needing to stay in power - or perhaps it's just Xi who needs to stay in power - they have blown up their property bubble. We have no idea how this is going to play out in global markets. Judging from the ructions of April and May, global markets do not like what is going down in China. Markets might approve and accept the US Federal Reserve raising interest rates, but it does not like the figures coming out of China. The supply chain issue that we have come to understand isn't just about the fact that China is in lockdown across its most productive cities. It's the fact that China itself has become this gigantic counter-party risk in the last few months. 

Some of the manufacturing the Chinese had been handed by foreign corporations is now being on-shored back to those very foreign shores. The reason we're seeing such stubborn inflation in the first world is simply because the deflationary pressure China brought to the world economy has been cut out of the loop. This means we can expect inflation to keep rising, and for interest rates to keep rising until those inflationary pressures are tamed. In turn this means we will be having that recession we had to have back in 2008-2009 that we didn't quite get because China took on the greatest debt in history to keep the punch bowl swirling. All of that, on top is about to get unwound out of China. 

Brace yourselves. This ride is going to be a bit rough.

Can Global Capitalism Even Be Fixed?

I'm sure people will make every effort to revive it, but right now, the forces are arrayed against it. 

  

Doubting The Economists

You Sort Of Wonder About These Economists

This article has economists warning the RBA against going further with lowered interest rates. And it's pretty weird because the underlying assumption seems to be that eventually interest rates will head back to what have been historic averages.

Merrill Lynch senior economist Alex Joiner said that households who take on too much debt in the low rate environment could be caught out once rates rise. 

"Inevitably rates will move back to a more normal level and that is when we see the debt servicing ratio-income used to service debt, moving higher - households they will be much more sensitive to upward moves in interest rates," said Dr Joiner. 

Mr Montgomery noted in a website post on independent publishing service, Cuffelinks, that eventually "the price of those assets (stocks and property) will be pushed way too high," said "After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much."

Basically, they're worried about asset bubbles. They're the same economists who weren't worried that property market was bubbling, not that long ago. It is true that if you borrow money and buy high  in an asset class, you stand to lose a lot of money when prices go down (like, duh). Yet it doesn't seem like that is what is fuelling the ASX; it's the yield of the shares that, even at 3%, sit higher than the 2.6% offered on term deposits. I'm sure the elderly with their nest eggs would rather not be there, but they're forced to be there for the yield. If the RBA cuts rates some more, it's not going to change that calculation. The point at which they had to take that risk came a long while back; way back when the RBA and these economists were busy denying there was a bubble in property.

Go Figure that one out! They suddenly noticed everything is looking a bit peaky rather than say, rosy? 

The problem is that in the long term, we are likely headed for a ZIRP regime in Australia because once the mining boom is truly finished and run its course, and commodity prices fall to historic norms - which is more inevitable than interest rates in Australia - then we won't have an economy worth investing in, which will reflect itself in the low to zero interest rates. ZIRP is - in extremis - the capitalist end game where winner takes all. This is what is not understood by this current Federal Government, which is quickly losing revenue and unable to make the cuts it wants to make on ideological grounds and not on practical grounds (and won't compromise either, which is an even worse story). 

Yes, in theory a lot of people would be in trouble if they borrowed money and thought interest rates would never go back up to say, 6-7%. but we haven't had the kind of economy to justify 6-7% interest rates since when Kevin Rudd was PM the first time around. we'd love that kind of economy compared to the post-GFC "new normal".  Worse still, the RBA is never going to raise interest rates just to scare off speculative investors when it thinks it needs to cut to stimulate the economy. I mean, when has that ever happened? If it's true the RBA won't be raising interest rates to scare off speculators, then it's only going to raise the rates if the figures are genuinely looking like the economy is overheating. For that to happen, unemployment needs to drop to under 5%. Again, that hasn't happened since Kevin Rudd was PM the first time around, and it would be a nice problem to have. 

You can only conclude these economists have got it ass-backwards. The Bust - the mining bust that follows the boom - has already set in. The economy is sliding downwards in growth and facing deflation. The Federal Government is crazy, clueless and crap. Industries are closing or declining and unemployment is rising. Older people have been forced to stick their term deposit nest eggs into shares (for dividends) and property (to collect the rent in cash) - the only two ways that pay better than the term deposits. Credit can hardly expand any more. China can't buy any more because they've crashed against the debt limit too. For various reasons the economy is already in much worse situation than say, even 2 years ago when Julia Gillard was still fending off Kevin Rudd the second time around. 

The markets might look bullish today, but it's against a stark backdrop of a long term secular bear market. Nobody is getting out unhurt; but for the older generation, they have to be in it just to pay their way in retirement. In that scheme of things, cutting the interest rate again is hardly the problem. The real problem is that we have a boatload of problems and this Fe'ral government hasn't go a plan except tax the poor and punish the poor and spread the misery amongst the poor. 

Importing Delfation

Nobody really talks about it much but you can get some amazing things at Daiso. Yes, the chain store that sells Japanese designed generic stuff for $2.80 each. From kitchen utensils to handkerchiefs to pens to hammers, they sell all kinds of things for $2.80 each. And it's not all crap; in fact far from it. 

I bought a kitchen knife from Daiso about 3years ago and it sees daily use. I compare it to the $25 (pre-GST I might add, English steel with 25year guarantee) thing I bought in the mid-90s and have to report that the Daiso knife is probably even more useful as the day-to-day kitchen knife. Forget the hundred dollar Global knife, this thing rocks. So essentially the kitchen knife cost has dropped 90%, if you're willing to use a Daiso knife. Bowls, ditto. Plastic containers, the same. Crystal glass wine glasses, handkerchiefs, LED torches, glass jars, the list goes on and on. Unless you're hooked on branding for your goods, you can outfit a house on $2.80 stuff from Daiso and get decent use value. Heck, I even got a pair of ebony chopsticks. Ebony! For $2.80!

Which all goes to show how much produced goods have been commodified. True, one can show off with one's Global knife set but everything one paid above $2.80 is suddenly suspect as marginal value. Yes, the Global is sharper and more durable. Yet I can sharpen the Daiso knife and when its edge is totally spent I can go get another one for $2.80. The value added on the Global knife has got stiff competition if all one does is slice vegetables, peel some fruit and cut up bits of meat. Getting value out of the value added in the Global knife is going to take serious skill and dedication. Which is fine if you're a chef, but I'm just not one of those guys. 

They haven't yet started selling electric guitars at Daiso, but even electric guitars have collapsed in price thanks to manufacturing in South Korea, China, Indonesia and Vietnam. You can get an archtop for $500. Think about that, and the price tag on a Gibson ES-175 (around AUD$5500) and you can see it's 90% down. They're building cars in India to be sold for $2000.00. They're still crap but it won't be long before they perfect it and it would be road-worthy here, and suddenly it would be 90% down on the Toyota or Ford or GM offering. Eventually you'll get a choice of a branded car with all kinds of extras or something for 10th of the price that gets you from A to B and not much style. It's not that far into the future, and it's going to kill branding. 

So deflation for goods is everywhere thanks to globalisation. It's pulverised our manufacturing sector in Australia. It's going pulverise a lot more. When I go out on weekends I see lots of people shopping furiously. But if they're buying bargain goods in huge quantities, I can see how retail would be having a difficult time, trying to grow profits. Margins would be flattering and you'd have sell a truckload of stuff before you made good profits. But that's just a problem for today and tomorrow. 

Here's what I can't figure out. What happens if China crashes, and the excess capacity for production dries up? Would that wind up the Globalised market in such a way as to deny us these cheap goods? If so would inflation suddenly kick in? It may well do. Or maybe China with all its state interventions never crashes, in which case everything is just going to keep deflating. That just doesn't seem feasible though, does it? Can we really have a world economy that produces more and more for less and less profit? In any case, I watch the Daiso effect of deflation with a certain amount of trepidation. The picture it paints about the globalised world of paper slim margins is quite frightening. 

The World Wide Cinema

Hollywood's Stake In It

Here's The Economists' take on the globalisation of distribution as seen from a Hollywood perspective.

The success of a film outside America is not purely a marketing matter. As foreign box-office sales have become more important, the people who manage international distribution have become more influential, weighing in on “green-light” decisions about which films are made. The studios are careful to seed films with actors, locations and, occasionally, languages that are well-known in target countries. Sony cites the foreign success of “The Green Hornet” (Taiwanese hero, Austrian-German villain) and “Resident Evil: Afterlife” (Japanese location) as evidence of that strategy.

Big noisy spectacle travels best. Jason Statham, the close-cropped star of many a mindlessly violent film, is a particular Russian favourite. Films based on well-known literature (including cartoon books) and myths may also fare well. Films that trade on contemporary American cultural references are about as popular abroad as an oil slick on a NASCAR track. (Note to our non-American readers: NASCAR is an American sport involving fast cars.) Comedy travels badly, too: Will Ferrell and Adam Sandler provoke guffaws at home but incomprehension abroad. As the market swings away from America, funny films are less likely to find financing or broad distribution anywhere. “You won’t see us doing a lot of comedies,” says Brad Grey, head of Paramount Pictures.

The growing internationalisation of the film business suits the biggest outfits, and not just because they can afford explosions. The major studios’ power lies not so much in their ability to make good films—plenty of smaller operations can do that—but in their ability to wring every possible drop of revenue from a film. With their superior global marketing machines and their ability to anticipate foreign tastes, they are increasingly dominating the market. For everyone else, there is a chance to win a gold statue.

World cinema is the catchphrase for films not dominated by Hollywood structure, or made outside of Hollywood structures, but that may well change as Hollywood's reach goes even more global. If they start buying up distribution channels in non-English speaking countries, it's going to impact on those local cinemas much more than in the past. After all, they're competing for every disposable dollar going towards the screen, around the world.