Hedge Clippings | Friday 28 June, 2019
 

All eyes will be on the G20 Summit being held in Japan over the next couple of days, but in particular on the outcome - if any - of the discussions between Presidents Trump and Xi as they continue their arm wrestle over tariffs. At stake is the potential to ramp up the battle, which could lead to a full-scale trade war, which would not only damage both the US and China, but also the global economy.

Neither leader is going to want to be seen as the one giving ground, and given their domestic politics and economies, neither can probably afford to. However, history is littered with wars that shouldn't have been fought, and wouldn't have been save for the intransigence of at least one of the parties involved. Common sense and "for the greater good" might well be the best solution, were it not for the individual egos of Trump and Xi.

Having said that, based on a combination of the premise that "people behave the way they're allowed to" and "that's what you get if you reward bad behaviour", over the past 30 years the Chinese have been allowed to operate by their own rules almost with impunity. Along the way they have stolen a march (along with a huge amount of IP) on US and Western companies' technology, and the US and the West have happily let them do so as they swarmed around the honeypot of over a billion (previously out of reach) consumers.

China profitably exported deflation to the world, thanks in part to their incredibly low labour costs, and deliberate over production, but also as US and other manufacturers happily lowered production costs by relocating their production. At the same time they turned a tin ear to issues such as social justice, democracy, bribery ("it's the local taxation process"), IP theft* and pollution (if it's not in our back yard, it's not our problem). Meanwhile resource rich Australia, as a major beneficiary, wasn't prepared to spoil the party, and still doesn't really want to.

And now back to interest rates: The RBA meets again next week, with markets expecting a further easing. If that eventuates either the RBA is panicking, or they can see some serious problems ahead. Not that we think there aren't problems ahead, but the cut just gone seems to have stabilised residential property prices, and with (hopefully) tax cuts to come in early July, one would assume they'd pause to review before cutting again.

As we've mentioned previously, setting monetary policy based on an inflation target of 2% doesn't seem to work, particularly when rates are so low that the effect of further cuts is not only limited, but leaves no room or fire power if the above-mentioned trade war escalates and results in a global recession. Meanwhile, ultra-low bond yields have pushed asset prices, and equities in particular, to eye watering levels. We're reliably informed that globally there are $13 trillion of government bonds on issue which carry a negative yield, whilst Austria has just issued a 100 year - yes, one hundred years - bond at a yield of 1.1%, down from 2.1% two years ago.

We've used the boiling frog analogy before - ultra easy money has driven debt fuelled asset prices, and seen a gradual turning up of heat or pressure on the global economy which sooner or later (and possibly sooner rather than later) is going to end in tears.  
  
*Hedge Clippings is not without guilt, happily playing golf (albeit not well) with a Chinese-made $100 knock-off set of "Callaway" clubs. Maybe the stubbornly high handicap is IP karma? Or possibly lack of talent and application.