Friday, 9 September 2022 — Burradoo, Australia

By Brian Chu Editor, The Daily Reckoning Australia

[7 min read]

Dear Reader,

It’d be an understatement to say that the last two years have been confusing.

Very little has made sense.

Governments and central banks have irreversibly wrecked the global economy by crippling the supply chains and jamming trillions of dollars into the system.

That’s like clogging your pipes with cement and then pumping water through them at high pressure.

Either the pump breaks or it’s the pipes. But you can be sure it’ll leave a big mess.

On one hand, the government stimulus meant that households and businesses were busy piling the extra liquidity into various asset markets. On the other, a decline in business activity meant that there are less goods and services circulating in the economy.

This has resulted in inflation at levels unseen for more than a generation. Cash was increasingly worthless unless one invested it somewhere. Thus, you saw markets rally hard in literally everything.

It was apparent that this couldn’t continue. Central banks initially talked down inflation for a couple of months last year, calling it ‘transitory’. Then they changed tack and said it’d last a bit longer as it seems that words fell on deaf ears. Their rhetoric became more ominous as it translated to a clearer message that interest rates would rise and the central banks would begin to reduce the currency supply.

The markets started to retreat last November. Those chasing the rally gradually saw that the bubble was sagging. Each sell-off was followed by a weaker rally.

In hindsight, you could see that November 2021 marked the top of the rally arising from the central planners stemming from the damage caused by the Wuhan virus-induced economic shutdown.

The Federal Reserve kicked off the rate rise cycle in March this year, accelerating its pace.

The era of easy cash is clearly over.

So are we heading for further declines?

For sure!

Bracing for impact

The Reserve Bank of Australia (RBA) has followed suit with other central banks in raising interest rates. The latest 0.5% rate rise on Tuesday brings the 24-Hour Cash Rate to 2.35%. The last time it was at this level was in 2015.

In a matter of five months, our interest rate rose from 0.1% to 2.35%. For many households with a mortgage, this would add thousands of dollars to their monthly mortgage payments.

Throw into the mix higher prices for daily needs, utility bills, and filling up the car.

The amount of disposable income that a household can set aside for savings and investments is clearly going to shrink.

Businesses are facing similar problems. The cost of doing business and paying salaries and wages is rising fast. The minimum wage has increased to $25 an hour recently, and even that isn’t enough to attract people to work. You may have noticed that many businesses are putting up signs telling customers to be patient as there is a shortage of staff to serve them.

This is a clear sign that the economy is teetering on the brink.

To make things worse, our government has also announced that it cannot afford handouts without causing the RBA to keep raising rates.

This could mean our stock market could see its gains from the stimulus-driven binge over the last two years wiped out in the coming months.

Let me show you the ASX 200 Composite Index [ASX:XJO] since 2016 in the figure below. I have also included the 20-day, 50-day, and 200-day moving average trend lines:

You can see the markets have rallied strongly for more than 18 months after hitting a low in March 2020. Since its all-time highs in July 2021, it tried twice to break past that level and failed. The resulting dip has also taken it lower.

Take a look at the ASX 200 Index figure above again.

It was trading at 5,000–6,000 in 2015. Now it is in the 6,500–7,000 zone.

While one cannot simply use the interest rate history to deduce the fair value of the equity markets today, we can at least say that we aren’t close to the bottom of the market.

And should things get more difficult thanks to the central banks raising rates and governments standing back to let things fall, you don’t want to be caught in the plunge.

Finding your own lifeboat

Don’t expect anyone to bail the markets out this time.

Especially when those who reached out a helping hand did so to weigh you down further with debt or inflation.

And when you think about what the World Economic Forum has been saying about The Great Reset (I warned about it here) and how central banks want to introduce their own digital currency to track what you do, you should start joining the dots.

They lured the world in with massive amounts of debt over the last decade. Now imagine if they collapse the markets in one fell swoop, causing people to lose everything that they had worked for. A central bank digital currency that plugs itself into their system of tracked payments, a health passport, and personalised carbon footprint could mean the end of liberty as we know it.

Sounds unbelievable?

They’re not really hiding it. They just make it sound hip and trendy for you in terms of saving the planet, defeating the evils of capitalism, and living in a shared economy.

Anyway, if this worries you and you want to plan ahead, we have a solution for you. You’ll hear more about it in the coming days.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Since we’re ‘checking in’ on various disasters this week, let’s turn to Russia.

From ABC News:

‘Russia has choked off the supplies of cheap natural gas that the continent depended on for years to run factories, generate electricity and heat homes. That has pushed European governments into a desperate scramble for new supplies and for ways to blunt the impact as economic growth slows and household utility bills rise.

‘The crisis deepened when Russia's state-owned exporter Gazprom said the main pipeline carrying gas to Germany would stay closed, blaming an oil leak and claiming the problems could not be fixed because of sanctions barring many dealings with Russia.’

It’s been seven months since the first wad was shot in the Russo-Ukrainian war.  

And the news from the front still comes almost directly from the Ukrainian press releases. Here’s International Business Times with ‘news’ that could have been written six months ago:

1. ‘Russian soldiers are losing morale after realizing they may not win the war, says a Ukrainian official
2. ‘Russians are also reportedly struggling with resupplying troops with missiles
3. ‘Ukrainian authorities say soldiers with Russia's 127th Regiment refused to participate in the war
4. ‘Morale is steadily decreasing among Russian soldiers as Ukraine continues to pound occupied regions in the south in its counteroffensive operations, a Ukrainian official said Monday.’

Maybe the reporter should have asked a Russian official? But they never do. The reporting is entirely one-sided, always flattering the Ukrainian cause.

And what the Ukrainians failed to mention is that their latest counteroffensive is almost certain to fail…and that the Russians are winning the war.

‘Imaginary wealth’

Here, we have no dog in that fight. But we try to connect the dots. And almost everything is connected.  

Arch-villain, Vladimir Putin gave us a hint:  

‘The economy of imaginary wealth is being replaced by the economy of real and hard assets.’

Replaced? We doubt it. But repriced? Almost certainly.

Ukraine’s serious generals counselled against the Kherson campaign. They saw it as a trap. Russian planes control the air. It would be very hard for Ukrainian forces to sustain a drive into Russian-held territory against attack from Russia’s air force and long-range artillery.

But word on the street is that the Zelensky Government needed to show its European and American enablers that it was still capable of delivering victory. So the attack went forward.

‘Never interrupt when the enemy is making a mistake’, Napoleon had said. The Russians appear to be letting the enemy advance…so it can be cut off and destroyed at their leisure.

Of course, we get our news from the media — just like everyone else. But we’ve learned that if you really want to know what is going on, you have to look a little deeper. Like panning for gold, you have to swirl the news around, separating out the implausible gravel, and hoping to spot a few nuggets.

We only bother because the war bears heavily on the price of energy…which leans on other prices…and ultimately plays a major role in what is likely to be the biggest, most costly mistake ever made by an educated elite…which we will come to later.

Elite propaganda

Reviewing the record of the last seven months, the first thing that washes out is the Western media’s creation myth: ‘The war is solely the result of Moscow’s brutal invasion; the Ukraine is as innocent as Heidi’.

Not for nothing are the southwestern steppes, bordering Russia, known as ‘The Ukraine’; it means ‘border area’ in Russian. Its present borders are of recent vintage, dictated by three Soviet Union leaders — Lenin, Stalin, and Khrushchev. And its most easterly provinces are inhabited in the majority by Russian speakers who apparently would prefer to be a part of the Russian Federation rather than a government dominated by Ukrainians. The Kiev Government, after an ethnic and political cleansing led by the US in 2014, has been trying to bring them to heel ever since.  

Once ‘The Ukraine’ feds were firmly in thrall to NATO and US, they built up the largest army in Europe, with 500,000 soldiers, more than France and England put together. This was a direct challenge to Russia’s version of the Monroe Doctrine and made Mr Putin very uncomfortable. A huge, hostile army, armed with NATO missiles, grew like a cancer on his southern flank. He must have felt that it was time to get out the knife.  

And then, the cannons opened, and the Western press closed ranks to protect the Ukraine. Zelensky is an actor. (Among his most notable performances, he once pretended to play the piano with his penis.) He is far more media-savvy than Putin. And the Western media — little more than the propaganda arm of the elite — went to work misinforming the public. Every report told us how the Russians were losing the war.  

It was all so familiar. As in Afghanistan, Vietnam, and even the Second World War, reports to the public — and to the US president — were always the same. ‘We’, whoever we were, were winning, and more money and weapons would bring a final and complete victory. In almost every case, the updates were lies. And whatever help the US provided to Ukraine was mostly stolen or wasted. The Grayzone:

‘“The weapons are stolen, the humanitarian aid is stolen, and we have no idea where the billions sent to this country have gone,” a Ukrainian complained.’

As in all of the US’s post-Second World War military adventures, the deeper the US went, the more disastrous the results. And already, the war on the steppes is looking more and more like a Sicilian feud, with caskets needed for all the participants.

While the military and financial aid mostly went into corrupt pockets, the sanctions proved either ineffective…or they backfired. From The Economist:

‘The trouble is that the knockout blow has not materialised. Russia’s GDP will shrink by 6% in 2022, reckons the IMF, much less than the 15% drop many expected in March, or the slump in Venezuela. Energy sales will generate a current-account surplus of $265bn this year, the world’s second-largest after China. After a crunch, Russia’s financial system has stabilised and the country is finding new suppliers for some imports, including China.’

Weaponised money

More and more countries are realising that if they want to be safe from US mischief, they need to get out from under the dollar-based international money system. They are looking for alternatives and finding them. Almayadeen.net — ‘Russia moves from SWIFT to more secure mechanisms: Official’:

‘“The unreasonable blocking of all Russian customers by the largest international card payment systems has increased the priority of expanding the geography of using Mir cards. We are actively working on it,” he said.

‘“Negotiations with Azerbaijan, Bahrain, Egypt, India, China, Cuba, Myanmar, Nigeria, Thailand, and other countries are at different stages,” the top Russian diplomat said.     

‘He recalled that the Russian payment system is now available in Abkhazia, Armenia, Belarus, Vietnam, Kazakhstan, Kyrgyzstan, Tajikistan, Turkey, Uzbekistan, South Korea, and South Ossetia.’

Where does this lead? The Financial Times takes a guess:

‘Since the 15th century, the last five global empires have issued the world’s reserve currency — the one most often used by other countries — for 94 years on average. The dollar has held reserve status for more than 100 years, so its reign is already older than most. 

‘South-east Asia’s largest economies are increasingly settling payments to one another directly, avoiding the dollar. Malaysia and Singapore are among the countries making similar arrangements with China, which is also extending offers of renminbi support to nations in financial distress. Central banks from Asia to the Middle East are setting up bilateral currency swap lines, also with the intention of reducing dependence on the dollar…So don’t be fooled by the strong dollar. The post-dollar world is coming.’

A post-dollar world? Where does that leave the country, whose wealth is based on issuing more and more dollars?

Darned if we know. But we’ll try to figure it out before tomorrow.

Regards,

Bill Bonner,
For The Daily Reckoning Australia