Entering 2023 – A Geo-Political and Economic Outlook

Where to start? The war in Ukraine (Europe), energy and interest rates will likely dominate the rest of this decade.

Interest Rates

Without further ado, here is a chart of the 10/2 US Treasury yield spread just posted elsewhere:

 

Click on the link to open the image in a separate window.

 

The 10/2 year spread has long served as a recession indicator and it hasn’t been this negative since the interest rate shocks of the 1970’s. Further reading here: https://ycharts.com/indicators/10_2_year_treasury_yield_spread?fbclid=IwAR3aA1o5mhQu9qPK2VjI20953X3-tcMp9ruVW0rC31NZ8qhHcq-7C_Xv_Bo

The FDIC has been gearing up to prepare for potential bank failures. I hear the shadow banking system (think FTX) is causing system instability with the potential for a shock that leads to potential crisis. My outlook has always been that cryptos are a dry run for Central Bank Digital Currencies (CBDC’s) and with the US Fed and the ECB beta testing their potential new digital offspring, 2023 may surprise as the year CBDC’s are introduced into western economies. China has already released a digital Yuan with limited success as Chinese consumers are big users of digital apps like WePay etc.

Link to FDIC Nov 22 group discussion as follows. Watch 1:20 to 1:40 for some illuminating discussion by System Resolution Advisory Committee: https://fdic.windrosemedia.com/index.php?category=Systemic+Resolution+Advisory+Committee

War in Ukraine

Nothing quite describes the state of European defence like the following excerpt from EuroIntelligence:

We have heard from news reports that the UK government is considering sending Ukraine its third-generation battle tank, the Challenger 2. Sky News talks about 10. Spiegel has the number at 12. For Ukraine, battle tanks are critical in their quest to reconquer Russian-occupied territories. The significance of the UK’s rumoured delivery is that is has brought out into the open a debate in Germany especially about whether it should send its Leopard 2 tanks.

Neither Germany, nor even Poland, are willing to act alone because most of our Leopard 2 tanks are effectively dead cats. If the Leopards are sent, it would be a joint European operation, where each countries picks the few Leopards 2 tanks that work. There are 3600 Leopard tanks out there. Greece has the largest number of them. Germany and Spain have around 330 each, and Poland and Finland around 200-250. 

The Polish government has come up with the only realistic idea: for European countries to assemble a joint fleet of Leopard 2. Even Poland is wary of unilateral moves, because the delivery of offensive battle tanks would clearly constitute a major escalation. Another possibility is for European countries to supply older Leopard 1, but these tanks, too, have similar technical problems. Quality problems abound in German-made military hardware, but we would caution against blaming the suppliers.

**This is what happens when you subject military spending to extreme cost pressures.** (author emphasis)

So Europe is likely unable to scrape up enough heavy counter-offensive weaponry to retake the Donbas, let alone fight a pan-European war against Russia. The US Navy Secretary had the following to say recently in regards to arming Ukraine (click on the image for the original link):

Del Toro replied, “With regards to deliveries of weapons systems for the fight in Ukraine…Yeah, that’s always a concern for us. And we monitor that very, very closely. I wouldn’t say we’re quite there yet, but if the conflict does go on for another six months, for another year, it certainly continues to stress the supply chain in ways that are challenging.”

Not only are key US officials questioning America’s industrial output and capacity to supply Australia with nuclear submarines, admissions of depleted weapons stockpiles are also being made. That is to say, the US has been upholding Ukraine’s defence to-date in the face of European weakness, but is starting to deplete its own war fighting capabilities. China is no doubt following the situation closely. Putin digging in Russian heels to ensure the war drags is probably a strategic aim given the poor outcomes in 2022. 

Energy

You’ve gotta laugh about it or you’ll cry… 

https://www.telegraph.co.uk/news/2023/01/03/matt-cartoons-january-2023/

To understand probable outcomes for the Australian energy market outlook, one need only observe the state of Europe:

In Germany, coal now makes up 31% of the German electricity market, up from 8% in 2015. It is an understatement to suggest that shutting down nuclear energy might have been a policy error, while the Swedish investigation of the Nordstream pipeline explosion is tight lipped, leading to Russian suggestions that the West is hiding something. It is rumoured that the Royal Navy blew up the pipeline on orders from the US. Regardless, it was lunacy to suggest that Putin would destroy his primary energy bargaining chip with Germany and the EU.  

The chaotic policy outcomes generated by Greens in Europe further weaken Europe’s economic outcomes. Without cheap energy, the German industrial powerhouse will be reduced to an economic backwater by the end of the decade. Australian’s are already feeling the pain of electricity costs, with policy in Canberra devoted to “cheaper” renewables, this pain is not likely to alleviate anytime soon. 

So What Outcome for Collectables?

Recent contact with an American numismatist has proven both an enjoyable communication and enlightening in information. Big ticket Australian pre-decimal coins were recently flipped by Heritage Auctions, but as related to me “the bidders and winners were not coming from Australia”.

This is the crux of my understanding of this particular asset. It holds its value ON PAPER if no one is willing to part with cash in exchange for said asset. Thus the smart move is to maintain a pile of cash in reserve while holding physical assets that WILL NOT disappear when a bank run or systemic failure occurs.

So while I have to pay rent to keep a roof over my family’s heads, the asset class I hold is owned and secured against claimants like the bank in the event of their financial distress. This is the primary reason I have not purchased a house since returning to Australia in 2017.

Some links to recent HA.com sales of Australian pre-decimal gold coins as follows: 

Got Gold?

Those in Top End Coin’s private Facebook group were alerted two weeks ago to gold setting up in a number of global currencies, with the likelihood of price increases moving forward. That has indeed occurred (XAUAUD is $2752 oz at present). In AUD gold is working through final resistance before blue skies overhead WITH A STRENGTHENING AUSTRALIAN DOLLAR! Once AUDUSD turns over and global currency flows return to the USA, domestic gold price increases will likely be seen in multiple currencies including AUD; it’ll be a weakening currency play. Price target is $3000 – $3300 AUD.

Gold is a hedge against political uncertainty; not against inflation. This should alert you to possible price outcomes in the next 1-3 years. Don’t panic and keep on buying (gold, that is).

Stay safe this year.

Les