Is Trump facing his own Falklands moment?

In early 1982, the UK Prime Minister, Margaret Thatcher’s position and her political future were under threat. She faced sharp criticism from within her government and the public following savage government spending cuts, a declining manufacturing industry and high unemployment. Then, the Argentinian military invaded the Falkland Islands, a remote and disputed UK protectorate in the South Atlantic.

Against the advice of many in her government, many of her close advisors and then US President, Ronald Reagan, Thatcher ordered a formidable military response to the Argentinian invasion of a British territory. The UK was victorious after six weeks of deadly and widely media-covered conflict that resulted in considerable casualties and large material losses on both sides but a surge in Thatcher’s popularity. Some even saw her actions as putting the ‘Great’ back into Great Britain.

Margaret Thatcher remained UK Prime Minister until 1990, making her the UK’s longest serving prime minister in the 20th century.

US President, Donald Trump, is facing sharp criticism and loss of popularity because of many domestic issues, notably for his response to the coronavirus pandemic and the uninspiring US economic and jobs recovery from the pandemic’s initial shock. Importantly for Trump, he is a long way behind his Democrat opponent in the opinion polls with the presidential election less than four months away.

Trump is blaming many others for his domestic failings and falling popularity, and is taking pot shots at China on a number of issues, most recently the Hong Kong National Security Law, territorial disputes South China Sea, Huawei and a longstanding trade imbalance.

In recent days, US Secretary of State Mike Pompeo, has ramped up the US rhetoric about the territorial disputes in the South China Sea between China and (non-US) nations who, nevertheless are US allies.

Trump is vulnerable to his own Falklands moment. This time the player is mightier (militarily and economically) and the stakes for the world much higher than in 1982.

The global reach and importance of the Big Three

The US is the world’s biggest economy and third most populous nation. China is the world’s second biggest economy and most populous nation. India is the world’s second most populous nation. Their economic, social, military and political activities have global significance, especially as each fights for its own perceived geopolitical importance.

The US, China and India have much in common in how they view and aspire to their respective national interests. How they behave internally and with each other have the potential to disrupt other nations and risk a world littered with geopolitical collateral damage.

Adding layers of complexity to the inter-actions and relationships between the US, China and India are their political constraints and political drivers (and personalities) of their respective leaders. The US and India have populist incumbent elected leaders who are very aware of, perform to and frame policy around their respective election cycles. China’s leader not only wears none of those labels but can (and does) frame long term policy without the restriction of election cycles.

In many areas of geopolitical influence, the US is in decline (not surprising given its isolationist trade policies in response to globalisation). It is resisting (or in denial of) that decline and its waning global geopolitical dominance, and fighting off its perceived challengers.

China is slowly catching up to or, in some cases overtaking, the US in its global economic, military and geopolitical influences, much to the frustration of the US.

The COVID-19 pandemic has added a layer of complexity to the direct relationships between and influences of the US, China and India. The coronavirus pandemic hurt China initially but China rebounded quickly. The US and India lag China in their efforts to contain COVID-19 and return their respective economies and global geopolitical standings to their pre-COVID positions – much of that lag and their sluggish and haphazard response to the pandemic can be laid at the feet of their populist leaders.

India has always taken a more introspective approach with international relations, compared to the US and China, but has always been assertive when it comes to its borders, especially those with Pakistan and China. Equally, China is also asserting itself with its borders, territories (currently focused on Hong Kong) and shipping lanes (currently focused on the South China Sea) while the US is shoring up its border with Mexico.

The US and China, in their battle to be the world’s number one in terms of economic, military and geopolitical influence, are seeking partners and allies. Other nations that take sides in such a battle will only increase the list of collateral casualties and further hamper the global recovery from the damaging effects of the COVID-19 pandemic. As difficult as it will be, not taking sides between the US and China will prove to be a nation’s strategy for survival.

Never poke an eagle or a (panda) bear

An increasingly relevant sideshow to the effects of, fight against and recovery from the COVID-19 pandemic is the November US Presidential election. Donald Trump has begun his re-election campaign using many of the same themes and ‘tools’ that got him elected in 2016, mainly bluster, bullying (anyone who disagrees with or argues against him), isolationism and consistent selection and redefining of facts and the truth. As a result, the US is facing the erosion of its status as the global superpower.

China seems to be taking the opportunity presented by Trump’s bluster, poor judgement, lack of leadership and isolationist moves to fill the global leadership gap left by the US, to show the world that China is the equal of (or greater than) the US as a global superpower and to tidy up what it sees as domestic matters. The World Health Organisation is just one battlefield between the US and China.

China is quietly but assertively absorbing the Trump Administration’s anti-China vitriol. At the same time, it is escalating the addressing of longstanding domestic matters, such as the integration of Hong Kong into the People’s Republic of China, the security of shipping lanes in the South China Sea (the recent sinking of a Vietnamese fishing boat), the security of its land borders (the escalating stand off on the India-China border) and the safety of its citizens overseas (China’s actions in response to the extradition proceedings of the Huawei CFO who is also the daughter of its founder).

The US and China, in attacking each other and the other’s perceived allies, in their battle to be the world’s biggest geopolitical influencer, risk spreading their animosity throughout the world. Rising tensions between the US and China have the potential to inflame and divide the world, with serious geopolitical, economic and military consequences for everyone, more so in this fragile coronavirus period.

Is the collapse in car sales the canary in the coal mine for the US economy?

Trends in car sales are a significant indicator of economic activity in all but some emerging market economies because of their linkage to household confidence and spending. For example, the growth in car sales in China have accompanied that country’s recent economic rise. China recently overtook the US as the world’s largest car market and is on track to overtake the US to become the world’s biggest economy.

Just released data on US car (auto) sales in April makes alarming, but not surprising, reading. Compared to April last year, US auto sales for Toyota were 54% lower, Subaru’s sales were 47% lower, Mazda’s were 44% lower, Hyundai’s were 39% lower and Kia’s 38% lower. Others, notably GM, Ford and Volkswagen, release sales figures quarterly, so their official numbers for April are not available although their sales for the March quarter were down by slightly less than the above-listed manufacturers and forecasts are for sales in May and June to be just as dire as in April.

This begs the questions – are US car sales and prices going down the same path as the US oil market went in April and what does that mean for the US?

Both US auto and oil markets have suffered a sudden drop in consumption and sales because of the responses by businesses, households and (State and Federal) governments to the COVID-19 outbreak in the US. Both have run into storage problems and costs because of the product pipeline, which is more alarming for the car industry because of its ‘just in time’ inventory management. Car (auto) manufacturing has collapsed to a trickle in the US, China, Japan and Europe.

A number of US oil production, drilling, exploration and supplier companies, led by the more vulnerable and leveraged, have folded or are staring down the barrel of bankruptcy. Given the expected drastic contractions in US economic growth, employment, business investment and household spending, I have two questions:
– are car prices in the US (and, by association, the rest of the world) heading down the same path as oil prices?
– are auto manufacturers in the US heading down the same path as companies in the US oil industry?

An affirmative answer to both questions will have severe explicit and implicit implications for households, businesses, governments, economies and future generations in the US and around the world.

Leadership needed in this crisis

Governments have shown leadership by announcing or implementing strong fiscal measures, many at an unprecedented scale and speed. Almost all nations have shut borders and put arrivals in quarantine but a (brave) few have locked down a city, region or the entire country. Effective strong government leadership, which I define as setting and implementing informed fiscal and public health goals with the compliance of the general population, has generally been achieved through open communication and either imposed (China) or compassionate (New Zealand) leadership.

China is an example of an enforced leadership that imposed drastic measures on a section of its population but openly communicated its actions, progress and results locally and globally. The leadership in New Zealand, on the other hand, showed compassion and openly communicated its reasoning, priorities and actions in response to the coronavirus threat and has earned the respect and co-operation of almost all the population in locking down the entire country.

Both China and New Zealand made mistakes along the way but admitted and learned from those mistakes. Having accepted and openly communicated the strategy of accepting short term pain for long term gain, they made hard decisions and look set to be among those emerging soonest and healthiest from the social, economic and fiscal storm in which the world finds itself. Yet, the leaders of some nations refuse to admit the size of the threat or in some cases, its very existence.

Many countries’ leaders, governments, media and people are still debating what to do or are openly in denial of the inevitable breaching of their border(s) by this unprecedented health and social threat. Most of those nations (both industrialised and emerging) are run by leaders who are no more than poster boys with egos and spin doctors, who think, speak and act out of self-interest and/or for political (or personal) gains and who seek only to reinforce or retain their power. They are leaders of nations in name only. They are not true leaders of their people, which is what the world needs now. They risk their nation and people suffering not only huge health, social and economic damage during and after the coronavirus pandemic but also isolation and loss of international prestige afterwards. One, in particular falls far short of his predecessors’ self-proclaimed title of leader of the free world.

To be a leader in the world, those at the top of the power pyramid in each country must show leadership in their own country, which means that they must seek informed advice to implement social and fiscal policies, and must view and interact with the world with an open mind and an open heart. And they must do it now!

‘Just in time’ is bad risk management, or just plain greed, in an interconnected and China-dependent world

COVID-19 is a smart coronavirus because it can spread quickly among humans. The speed of that spread has been helped by the interconnectedness of humanity through international air travel.

The speed and dramatic impact on the global supply chain and responses by financial markets, governments and central banks have also been due to the world’s increased interconnectedness, both physically and virtually.

That same interconnectedness also means that the whole world can learn of COVOD-19’s spread and score as they happen, provided there is a free and honest flow of information.

The supply chain effects have been complicated by China’s ascension as a major global player in manufacturing, a global dependence on single sources of ingredients and components and so-called efficient inventory management, i.e. ‘just in time’. The latter is proving to be a short-sighted cost saving that works very well in good times but fails in bad times. Poor risk management or greed, depending on your viewpoint.

China is now the world’s biggest manufacturer of steel, active pharmaceutical ingredients, medical supplies and motor vehicles, as well as industrial and consumer electronics. People can live comfortably if they delay the purchase of that new phone, car or TV for a few weeks but most pharmaceutical and medical supplies wholesalers and suppliers have only a limited supply of these essentials.

The hopes are that China’s manufacturing will resume soon and supply chains will move again. Now though, we are seeing forced isolations in other countries that could result in the same supply chain blockages that China is trying to clear up; forced isolations and supply chain blockages that will have drastic implications for the earnings and spending of the average business and household in countries that do not have the draconian ability to impose the same sort of control over and co-ordination of businesses and people as China.

For the rest of us, the threat remains for further restrictions on the supply to health professionals and individuals of vital items of medical and sanitary products – all because of someone’s poor risk management, or greed.

Be prepared for the indirect consequences of COVID-19

The COVID-19 coronavirus has become the dominant global news story and the prime driver of financial markets’ sentiment, volatility and direction. Only recently, have some of the short and long term effects been examined. I’m writing about some of the potentially dire consequences yet to be mentioned in mainstream media.

For some time, media have been reporting the number of people in China in isolation (quarantine) by official order. People stuck indoors are unable to turn up to work or go out and spend. Factories in China are running at well below capacity, if at all. There is also a shortage of truck drivers, port workers and officials to process both exports out of and imports into China. All of this adds up to a threat to key global supply chains, manufacturing capacity and household consumption.

Not only is China the world’s most populous and number one export nation but it also supplies key components and ingredients to manufacturers around the world. Key food imports have become stuck at Chinese ports (e.g. US and European pork, US and South American poultry and Argentinian beef) or held back at the country of export (e.g. New Zealand and Australia crayfish). Other imported goods are also stuck in Chinese ports, e.g. logs. Exports from China are also stuck at Chinese ports and warehouses.

Prices of beef, coffee, corn, crayfish, logs/timber and dairy products have fallen since the outbreak of COVID-19, more so recently, as producers seek alternative markets or simply want to dispose of surplus inventory.

Car manufacturers, from South Korea to Europe and the UK, are reporting two to four weeks inventory of Chinese supplied components and parts that are essential for vehicle assembly. Sellers of electronic consumables in Asia, Europe and the US are warning about low inventory levels of key components. Shipping companies are experiencing a sharp drop in traffic and demand. Construction companies in New Zealand and Australia are warning about an inability to source building materials from China.

Worryingly, China is the world’s leading supplier of active pharmaceutical ingredients (API) used in the manufacture of pharmaceuticals. India, the world’s number one pharmaceutical manufacturer, sources more than 70% of its APIs from China, which together with China’s pharmaceutical exports means that China’s APIs feed into almost 45% of the world manufactured medicines.

More than 10 years ago, the then (and still current) Chairman of India’s Cipla, one the the world’s leading producers of APIs and generic pharmaceuticals warned that “if tomorrow China stopped supplying pharmaceutical ingredients, the worldwide pharmaceutical industry would collapse.” If anything, the pharmaceutical industry’s reliance on China has increased substantially since that warning was uttered.

The COVID-19 coronavirus, in itself, may or may not be as deadly as the SARS coronavirus but, in the 17 years since the SARS outbreak, China has become a global economic powerhouse, a key player in the global supply chain and a significant consumer. Not only has the world become a much more connected place, both personally and virtually, but it is also highly dependent on China for many essential products and trade. This gives the human response to COVID-19, rather than the virus itself, the potential to produce the greater global harm.

We can do without the latest car, phone, computer or television but, consider the potential life threatening implications of a shortage of antibiotics, anti depressants and pain killers.

Almost all of that human response is outside our control but it is up to us to assess and manage COVID-19’s risks to the personal, family and business aspects of our lives.