Big PictureEconomicsMacro Trends
Finance Alice in Wonderland meets economic reality
5 Oct 2021
1 month(s) ago
About a quarter of superannuation funds' assets are held offshore, mainly in the US. That worked well while financial manipulation dominated the real world of economics and business. But there a warning signs that the tide is turning.
The Australian stock market and banking system look comparatively sound, provided the housing bubble continues. But this is a sharp contrast to what is happening elsewhere in the world.
To quote WB Yeats, the signs that the “centre cannot hold”, loosing “mere anarchy” upon the world are accumulating. The biggest alarm bell is in the energy markets. Looks like the Alice in Wonderland climate change push has just hit the real world. Electricity bills in Italy rose 30% last week, energy prices are soaring in Brazil and India, and Europe’s energy crisis is forcing factory closures as Reuters reports:
“Front-month gas futures are now more than six times more expensive than at this point last year, as the region struggles to import enough gas to refill its depleted storage ahead of the winter peak heating season ... there is already a worldwide shortage, which is also pushing up prices in Northeast Asia and North America.”
A German power plant closed because it ran out of coal. Here is a graph of European gas prices:
The Chinese have been shutting down power supply for similar reasons. Rabobank says:
“The Chinese government has reportedly given state-owned energy companies a directive to secure winter energy supplies at all costs in response to recent shortages. The last time oil prices were this high was back in early October 2018, right before prices crashed in the fourth quarter of that year, although the setup is much different this time.
“This is a potential game-changer for energy markets and is likely to kick off a panic buying spree such as we saw in toilet paper and other household items in the early days of the pandemic and even more recently in the UK’s ongoing supply chain crisis.
“Further to that end, the oil markets already have the herd of systematic traders on the bid-side of the market, as well as inflation-driven macro flows, and with plenty of room for those positions to grow. In addition to the speculative interest, the world’s biggest commodity importer is now going on a historic buying spree. As such, this buying is a strong tailwind for oil, as supply certainly trumps price in the near-term.”
Then there are the growing signs of strain in shipping and the global supply chains. Another Rabobank report says:
- It is impossible to ignore the current shipping crisis and its impact on global supply chains
- A common view is that this is all the result of Covid-19. Yet while Covid has played a key role, it is only part of a far larger interconnected set of problems
- This report examines current shipping market dynamics; overlooked “Too Big to Sail” structural issues; a brewing political tsunami as a backlash; possible Cold War icebergs ahead; and the ‘ship of things to come’ if maritime past is a guide to maritime future
- The central argument is that while central banks and governments both insist inflation is transitory and will fall once supply-chain bottlenecks are resolved, shipping dynamics suggest they are closer to becoming systemically entrenched
- Moreover, both historical and current trends towards addressing such problems suggest potential global market disruptions at least equal to the shocks we have already experienced. Many ports will get caught in this storm.
The massive damage done to the real economy by the ‘pandemic’ shutdowns has been papered over by financial manipulation: mainly central banks printing money with their ears pinned back. That Alice in Wonderland illusion has become reality, at least for a time. But back in the real world of economics, business and people, things are starting to look much more alarming.
In an interconnected system it is impossible to predict what might be the trigger. It is like trying to pick which butterfly will flap its wings and set off a hurricane. But financial hurricanes could be in the offing.
There are other storm clouds such as inflation, whihc is starting to look anything but transitory. If it continues interest rates could rise, unravelling the massive asset inflation bubble. The probable collapse of Cinese real estate company Evergrande could finally prick that countries' banking Ponzi scheme.
On the plus side, the average valuations of local shares is about half the level of the US market and they are underpinned by strong tax advantaged (franked) dividends. Australian banks are also underpinned by a high level of deposits from local savers, which reduces their exposure to overseas fund raising.
But the same cannot be said internationally, which could be hugely significant for managed superannuation funds, which typically have about a quarter of their assets invested offshore, mainly in the US and the US stock market.
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