A new arc of autocracy

Delivered on By Justin Pyvis

Good morning! Yesterday ScoMo announced plans to spend over $A10 billion “to meet the facilities and infrastructure requirements for the future transition from Collins to the future nuclear-powered submarines over the next 20 years, which includes, but is not exclusive to, the east coast submarine base”.

Australia’s existing submarine base is in WA on the Indian Ocean. According to ScoMo the ramp-up in military spending, specifically on the Pacific Ocean – the timing of the announcement and official options of Brisbane, Newcastle or Port Kembla have been criticised – is needed because:

“Australia faces its most difficult and dangerous security environment in 80 years… A new arc of autocracy is instinctively aligning to challenge and reset the world order in their own image. Events are now lifting the veil. Perhaps the scales are beginning to fall from the world’s eyes also.”

Clearly a not-so-subtle dig at China, which along with Russia no doubt forms a major part of the autocracy “arc”.


Reading the tea leaves

Daily % change

AUD/USD

73.2

-0.3%

AUD/CNY

4.63

+0.7%

AU Bond

2.20

+5.7%

US Bond

1.75

+1.6%

ASX200

7,039

-1.0%

S&P500

4,215

-2.6%

Brent (bbl)

123.2

+4.3%

Gold (oz)

1,998

+1.7%

Iron ore (t)

167.7

+6.9%

Bitcoin

37,656

-2.0%

Ethereum

2,480

-2.9%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 had fallen another -2.63% as fears about the global inflation surge intensified following further talk of sanctions against Russia.

The price of Brent crude oil at one point spiked over $US139 per barrel – just $US8 from its all-time high in 2008 – after US Secretary of State Antony Blinken said that the US was “now in very active discussions with our European partners about banning the import of Russian oil to our countries, while of course at the same time maintaining a steady global supply of oil”.

The US Congress last night agreed to pursue bipartisan legislation that “will send a clear message to Putin that his war is unacceptable and the United States stands firmly with our NATO allies”, by suspending trade relations with Russia and imposing a ban on Russian energy imports.

A flight to safety saw the gold price surpass $US2,000 per ounce for the first time in 19 months, palladium hit an all-time high while iron ore, copper, nickel and aluminium all spiked. Wheat also continued to surge, hitting the daily upward limit for a sixth consecutive session to reach nearly $US13 a bushel.

Locally, the ASX200 fell -1.02% as concerns about further sanctions against Russia sent markets lower across the region. A notable mover was Qantas (-7.93%), which as a major oil consumer was hit hard by the spike in prices.


Food for thought

Central bank currency reserves can be rendered useless in an instant.
Central bank currency reserves can be rendered useless in an instant. Source

The Wall Street Journal recently published an article by Jon Sindreu that looked into Russia’s central bank and its $US630 billion war chest of reserve assets, accumulated to insulate the country from a currency crisis.

Unfortunately for Russia’s government, most of those reserves were in the form of foreign currency and were promptly frozen after its invasion of Ukraine. Other than its gold holdings, “these assets are someone else’s liability—someone who can just decide they are worth nothing”.

Russia is now accumulating “$US20 billion a month due to exports of oil and gas, which the US and the European Union want to keep buying”. But Russians can’t buy much with it, making the dollars equivalent to “worthless computer entries”. At some point soon it:

“…would be rational to stop accumulating them and stockpile physical wealth in oil barrels, rather than sell them to the West. At the very least, more of Russia’s money will likely shift into gold and Chinese assets.”

In the longer-term, the US dollar’s status as a “safe haven” currency might be forever compromised. While it’s difficult to predict exactly how global financial system might adapt:

“Even nations that aren’t sanctioned may want to diversify their geopolitical risk. It seems set to further the deglobalisation trend and entrench two separate spheres of technological, monetary and military power.”

For investors, Sindreu concludes that “For once, the old trope may not be ill advised: buy gold. Many of the world’s central banks will surely be doing it.”


Chewing the fat


Bits and bytes

🕵️‍♀️ UK intelligence claimed that “Russian forces probably made minimal ground advances over the weekend. It is highly unlikely that Russia has successfully achieved its planned objectives to date.”

🏡 “NSW Premier Dominic Perrottet says 2,000 homes have been deemed uninhabitable by the record floods that have devastated the state.”

⛈️ It’s raining hard again in Sydney – at least 20 main roads have been shut and NSW Transport advised people to “Avoid any non-essential travel… Impacts will continue through the rest of this week.”

📜 Russia said it will stop its invasion “in a moment” if Ukraine ceases military action, changes its constitution to enshrine neutrality, acknowledges Crimea as Russian territory, and recognises the separatist republics of Donetsk and Lugansk as independent states.

🙊 Russia’s government will jail anyone caught disseminating “fake news” – i.e. anything that goes against the official narrative – for up to 15 years. It also blocked access to Facebook, Twitter and several major international news sites.

🧐 Gotta crack down on that fake news. Police in Moscow “are stopping people, demanding to see their phones, READING THEIR MESSAGES, and refusing to release them if they refuse”.

📈 “The US economy added back the most jobs since July 2021 in February [+678,000 vs +423,000 expected], with job growth accelerating even in the already-tight labour market.”

🦟 Heavy rains on the east coast and a surge in mosquitos this summer has led to Japanese encephalitis being declared “an incident of national significance”, after several people were hospitalised with the life-threatening virus.

💳 Mastercard and Visa suspended their operations in Russia “following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed”.

😣 Consumer confidence in New Zealand fell 16.4% in February from a month prior after Omicron broke through the nation’s hard border.

🖼️ “Ukraine plans to become the first developed country to issue its own collection of non-fungible tokens, as it looks to capitalise on a flood of crypto donations to back its war against Russia.”

✋ Russia’s government called the sanctions imposed on it by Western nations “economic banditry”, that will require “a corresponding response”.

🏏 Australian cricket legends Rod Marsh (74) and Shane Warne (52) passed away over the weekend.

🤪 President of the Philippines, Rodrigo Duterte, said people should “watch out for Putin” because “he is suicidal… So if he gets embarrassed by this conflict, he will lose it”.

✈️ Russia’s flagship airline Aeroflot will halt all international flights except to Belarus because of “circumstances that hinder operating flights”.

📉 China set its annual growth target for 2022 at “around 5.5%”, which would be the second-lowest rate since the 1990s (the lowest was 2.3% in 2020 following China’s mass pandemic lockdown).

⚔️ China’s military budget will grow 7.1% this year to around $US229 billion and the government is committed to “resolving the Taiwan question in the new era”.

💰 Denmark’s government will increase its military budget to 2% of GDP by 2033 (currently 1.35%), claiming “Putin’s pointless and brutal attack on Ukraine has heralded a new era in Europe, a new reality.”

🤔 Former US President Donald Trump joked (we hope) that the US should use F-22 jets with “the Chinese flag on them and bomb the shit out” of Russia. “And then we say, China did it.”