The headlines provide a hyperbole yet offer us little contrast. The news may be both instant and dramatic but give us little context. With our current era of instant news, with every flavour and colour you require, effective understanding of subjects can often be difficult. We all have our own bespoke and selective news telescope, with China being a current example.  

Everyone has heard the somewhat unhinged and inconsistent comments from President Trump on China and President Xi, but we also know of the serious trade issues around subjects like the ‘theft of intellectual property’ (albeit my childish bias against including Trump and ‘intellectual’ within the same sentence). However, the last weekend has seen the true colours of the Chinese communist party, with their views on Hong Kong. This is a stark contrast to the deafening silence from our own ‘kowtowed’ foreign secretary Mr Raab, on upholding our responsibilities of our treaty with China over our ex-colony.  

The erratic and inconsistent behaviour of the leader of the world’s largest economy, merely affirms to the Chinese that they should steer their own direction. There is a long list of concerned nations, now increasingly worried by Chinese power, from those effected by their claims on the Paracel Islands, to Kashmir where some 30% are held by the Chinese. Even the supposed generosity of the Chinese, with their development loans in Africa and Sri Lanka, have changed from a perfect partnership of non-colonial investment, to an increased cost with a clear attitude of neo-colonialism.

So, is China the bad guy here?

Time for some perspective. China’s economic growth has been relatively recent, and their political strength has a long and important history. The 19^th century was a period of Chinese weakness and is often referred to as the ‘century of humiliation’ by the ‘great powers’, where several opium wars raged. Now however, Chinese economic power is on the rise, even despite current Covid-19 related conditions. China will see this as a time to reset its position against the now weakened ‘Western Powers’, assisted greatly through the ignorant incompetence of President Trump. His most recent reactions and comments serve only to remind me of the bellicose rhetoric of the 1950’s and 60’s, at the height of the Cold War. Maybe we are now seeing the start of a Sino American Cold War, one which could do greater and longer lasting damage to the global economy than our current pandemic. This past week in Hong Kong, the Beijing authorities have clearly shown their view, that while Hong Kong remains a different system for the moment, it is still Chinese territory, but territory that is behaving in a damaging and dysfunctional manner.  

Are the roles now reversed? Our government appears cowed, as it is us who are now the grateful recipients of the much-needed opium of Chinese investment. Fear of losing it, brings out the sweats of a desperate and forlorn addict. The question we must therefore ask, is what should we be doing? Firstly, we should move away from the dependence of such financial opium. Secondly, distance ourselves from these long-distance trade supplies and thirdly, look for such development and investment locally, or dare I say Regionally.

And finally… it was recently reported that a certain Ms Moermans in Belgium was desperate for a McDonald’s. However, even though there was one just 500 meters away, her mother said that they couldn’t go during the lockdown. They didn’t have a car to use the drive-thru, which was the only public access available.

The imaginative and patient mother had a bright idea: if you needed a car but didn’t have one, then build a car. They built their ‘vehicle’ from cardboard boxes and had a ‘license plate’ reading ‘COVID-19’. Once they got it out the front door (it was too wide to fit easily), people in more conventional cars honked and encouraged them. After mother and teenager reached their destination, a police officer questioned their presence in the drive-thru and “burst out laughing [when she] realized that we were inside a cardboard car”, Ms Moermans said. McDonald’s employees quite rightly sold them their meal. Apparently, they had never served a “happier meal”.

My apologies…

Have a good week and please keep safe and well.

Justin

 Image source: Richard Simkin- Anne S.K. Brown Military Collection

These are not apocalyptic horsemen, but they are three things that we need to be aware of over the next few years, in both our economies and our own finances.

Debt – Throughout the world, government debt is already ballooning as countries struggle to manage their way through this economic crisis. This has been, in effect, the financial equivalent of a heart attack. With this unfortunate metaphor, you may succumb to it, you may recover from it, but you will certainly be damaged by it. The question that we must address for nations, companies and individuals is how do we survive it and how do we minimise the damage?

For countries with ‘reserve’ currencies like the USA, Euroland, the UK, Japan and now China, they can make their own debt and even buy it through the mystical magic of quantitative easing. Therefore, financing whilst still costing money for them, is easier to achieve. If, however, you wish to finance your country’s trade position, you may need to borrow in another currency and thus find yourself exposed to the vagaries of for example, the US$ against your own currency. The worst example of this, is often the serial defaulter of Argentina. Life after this economic heart attack is going to see a huge increase in government debt and alongside some negative interest rates, investors will likely find this very unappealing.

This of course, will also apply to companies and private individuals. The good news, is that interest rates are so low that the cost of finance will seem almost a bargain. However, unless that debt is there to achieve something, like an investment, takeover or expansion, then weaker companies can end up as just a rotting albatross around their necks. These companies are merely kept alive because the banks don’t want to suffer the cost of foreclosure and subsequently need to write off even more debt – here you have the Zombie Companies!

Default – Defaulting debt for nations will be common during this economic heart attack but will hit those developing countries and emerging economies hardest, as they already work incredibly hard to attract new investments, even prior to Covid-19. Struggling companies will mirror this, as they might look to ‘restructure’ themselves at the cost of shareholders, bondholders and of course, their employees. As investors, we need to be aware of these weakened beasts. Some may have to fail, but this is even more reason to make sure that there is new money available for the existing and stronger businesses to get through this crisis. This then, is the unpleasant but realistic world of a wild economic Savannah.

Deflation – we need to be careful here in terms of definition. The term of ‘dis-inflation’ is often used. That is still inflation, but at a lower level – the balloon still fills with gas but at a slower rate. Deflation is where the balloon starts to shrink as the air comes out of it. The result is that values fall, prices fall and of course earnings and jobs fall. Although governments never say it, they actually like inflation, well some inflation… Why? Because over time it erodes the value of the debt. When you have deflation, this cannot happen and thus it becomes far more painful. The trouble is, trying to encourage inflation can absolutely be a dangerous thing.

Therefore, to manage our way through this economic recession and avoid depression, we need to be aware of the three ‘Ds’. The first two, are inevitable but can be manageable albeit with personal as well as corporate pain. The third is an economic virus, for which we have found no reliable vaccine. The most effective way of avoiding it is through clear international economic leadership, co-ordination and management. Sadly though, when we look around the world, the US leadership appears missing ‘in-inaction’, the EU is losing Merkel, and Chinese trade issues are not helping. Any volunteers?

And finally… All disasters can throw up opportunities, no matter how odd they can seem.

Reuters have reported that the dismayed staff at the Ronttosrouva bakery in Helsinki, found that as a result of the virus, all their orders were cancelled last month. At the same time, panicked consumers began to panic buy what they regarded as vital supplies, including loo rolls for some reason. This sparked the idea of a loo roll cake made of oat batter, passion fruit mousse and covered with white fondant.

The first five cakes sold within an hour, and thereafter the cakes became a social media hit. The bakery has now had hundreds of orders and has even been able to hire two extra people.

Like any good sponge cakes, I can only assume that they have two layers, so two-ply Loo Cakes must be a mark of quality.  The owner said, “For us, it’s a game changer and I am relieved because I know all my employees are safe for months now.”. This is how you avoid a wasted opportunity and take advantage of an opportunity of waste.

Have a good week and please keep safe and well.

Justin

Image source: fishpond.com

 We have all been brought up with globalisation as the great economic revolution of the past few decades, along with the unstoppable rise of those emerging giants of India and China and the dynamism of global trade. What a load of tosh… So, my apologies as I divert you towards a short history lesson.

All of us have heard of or read about the Silk Road, if only from that wonderful work of hysterical faction of Marco Polo apparently discovering China (which must have come as a big surprise to the Chinese).The Silk Road, as a description of trade routes to the east, had been around for centuries. We know that Rome traded with southern India, and even had some naval power in the Indian Ocean. It seems that from about the fourth century BC, both the Greeks and Romans became aware of a Kingdom of Seres, or the Kingdom of Silk. By way of a side story there was some record that the first Romans to set eyes upon the fabulous silken fabric were the legions of Marcus Licinius Crassus (he of the First Triumvirate with Pompey and Julius Caesar). It was said, that at the disastrous battle of Carrhae, near the Euphrates River in 53 BC, the soldiers were so startled by the bright silken banners of the Parthian troops that they fled in panic.

In fact, there was little direct contact between the Romans with the Chinese, although the Romans certainly loved and valued silk. In fact, they knew so little about it, that some thought that it grew on trees. By the second half of the 1st century, the Han’s general Pan Chao had supressed much opposition, and in 97 he decided to directly contact the Roman Empire (Da Chi’en) by sending an ambassador, Kan Ying. Kan Ying set off to the West along the Silk Road with obligatory gifts, but sadly only got as far as the Parthian Empire in Mesopotamia and the old enemies of Rome.

The Parthians saw no reason to help and thus, dissuaded him from sailing to Rome, after which he gave up and returned home. As far as the Parthians were concerned, they were not going to give up their excellent economic position of being the profitable trading bulwark between the two.

In fact, the first direct contact between Rome and China only happened in the second century after the Roman Empire defeated Parthia and their control extended briefly to the Persian Gulf. In AD 166, the first Roman envoy was sent by the Roman emperor Marcus Aurelius, from the Persian Gulf and successfully arrived China. Trade thus followed, albeit not huge at first, but here was one of the first examples of true globalisation. So… suck on that Marco!

Anyway, back to today. Globalisation has certainly been damaged by the effect of the pandemic, but that doesn’t mean it will be doomed. Economies around the globe following a virulent and painful recession will (subject to co-ordinated economic and political action) start to grow again and that will, in due course, involve greater levels of trade. However, the effect and impact of the economic catastrophe that has been created will leave an indelible mark. The benefits of low-cost production linked into long trade routes has been proven, but that is only so long as those routes remain open. The fear of any repetition of such a similar breakdown, will mean that companies will try to ‘de-risk’ their supply lines and make them shorter.

So, does that mean we start making iPhones in Ipswich, or Primark’s ex-Bangladeshi t-shirts in Pontypool? The answer is unlikely- well certainly not at those costs or conditions. What it does mean, is that the search for sourcing will be shortened. As an example, we thought we could buy loads of dodgy PPE kits from Turkey, or alternatively, maybe we start to make them ourselves?

What is the effect of this? The answer will be new business opportunities as companies look to restructure and secure themselves from further such risks. This will mean, new investment and new initiatives, most of which will not be in London or the South East, but rather in the regions- or even Regionally!

Let me add in another area currently looking bombed out but with a potentially exciting future- leisure and tourism! Why? Well I for one, am not going to be queueing for hours at crowded airports to get on a crowded plane, but I will be very happy to go to those wonderful domestic holiday sites which have often been so ignored in favour of trendy tourist fashion fads.

So, globalisation isn’t dead, but globalisation has been challenged, thus in its place is the opportunity for localisation to really grow and benefit our damaged economy and our understandably bewildered population.

And finally…

Is it just us that suffer during periods of isolation and lockdown? Well, no- it appears that many of those creatures we may have taken for granted may be missing us as well.

A Japanese aquarium that closed during the coronavirus outbreak is asking people to make video calls to their eels, so the sensitive creatures remember humans exist and don’t pose a threat.

The aquarium, housed in the landmark Tokyo Skytree tower, has been closed since the start of March and its inhabitants have become used to a largely human-free environment during the two-month calm. The aquarium has said that this was having some unexpected downsides.

“Creatures in the aquarium don’t see humans, except keepers and they have started forgetting about humans” it said. “Garden eels in particular disappear into the sand and hide every time the keepers pass by.”. This then causes problems for keepers trying to check on the health of the animals.

So, they have come up with an answer: “Could you show your face to our garden eels from your home?” it requested, calling the event a ‘face-showing festival’. It seems that the Garden eels are very sensitive and wary by nature but 300 of them living in a tank at the aquarium, had become used to humans and rarely hid in the sand when approached by visitors. Thus, in a bid to reacquaint the eels with humans, the aquarium is setting up five tablets facing the tank housing the delicate creatures, with eel enthusiasts asked to connect through iPhones or iPads via FaceTime.

Once the video calls start, people are supposed to show their faces, wave, and talk to the eels. But given the tender nature of the animals, callers are asked not to shout. Soft singing may be allowed and given that this is the weekend of the VE celebrations, possibly a rendition of ‘Eel meet again’ might be appropriate- but given that it is in Japan where VE commemoration is a minority issue, it is probably not.

Have a good week and please stay healthy and safe.

Justin

Image source: Karandighi (cleanpng.com)