No doubt you’ve kept a close eye on the volatile equity markets this week.
The bears are sinking in the claws as the market gives back its 2023’s gains.
But there’s another important story unfolding…
Over the weekend, US and Chinese delegates descended on Munich, Germany looking to patch up tensions over the suspected ‘Chinese spy balloon’.
Apparently, the meeting was prompted by US officials looking to repair their relationship with China.
This was the highest-level contact between the two nations since the ‘balloon crisis’ took place.
But the event quickly turned into an international mud-throwing contest…
Cordial round-table discussions were derailed with finger pointing and accusations (from both sides).
It all kicked off when US Secretary of State Antony Blinken fired his first shot claiming China was on the brink of supplying arms to Russia.
He went further and voiced a stern warning to leaders in Beijing, suggesting they face severe consequences if they were to ever supply Russia with lethal aid.
While a military alliance between Beijing and Putin would be a legitimate cause for concern, Blinken offered zero evidence that China is planning on sending weapons to Russia.
Whether it’s paranoia, an attempt by Democrats to appear assertive among US voters, or genuine concern, we won’t know…
But China’s representative State Councillor Wang Yi didn’t buy in.
He called out Blinken’s comments as wild accusations.
He also made a point of the balloon fiasco which seems to be backfiring on the US…
The Guardian recently wrote an interesting piece on what might be the real reason behind the balloon mystery:
‘A hobby group of balloonists reported their balloon “missing in action” over Alaska on 11 February, the same day a US F-22 jet downed an unidentified airborne entity not far away above Canada’s Yukon territory.’
If that’s the case, the US military deployed a missile costing AU$640,000 to destroy a $12 hobby balloon. That’s more than the median house price in Perth!
You can read the full story here.
Finger pointing, throwing mud, and fighting over balloons is something you’d expect from a three-year-old play group, not on the global political stage!
Such is the sad sorry state that international diplomacy has reached.
While it’s easy to laugh this stuff off, unfortunately for us, these buffoons yield enormous power…
Each verbal stoush is staged with careful planning that’s orchestrated to fulfill certain self-interests…be it boosting public appeal, sustaining political donations, or keeping citizens in check and distracted.
In fact, my colleague, Ryan Dinse, touched on this issue just this week in his Money Morning column, you can access that here.
Remaining impartial to political bluster is not just important for your state of mind, it’s helpful for your investments too.
But expect the rhetoric and superpower chest-beating to get far worse in the months ahead.
The last few days are setting the scene for what happens next…
On the back of the failed US-China meeting that was supposed to repair ties, President Vladimir Putin announced on Tuesday that he would suspend Russia’s participation in the nuclear arms treaty between Moscow and Washington.
Known as ‘New START’, the agreement was ratified by US and Russian leaders in 2011.
It seeks to limit the number of intercontinental ballistic missiles (ICBMs) and nuclear warheads each nation can hold.
Like the nuclear peace treaties before it, it’s forged relative peace between the two nations over several decades.
But Putin’s withdraw adds another layer of tension.
International diplomacy is in a sad fragmented state…
Strains are worse than at any time since the Cold War.
The key question to ask, where does it all end?
Last week, I wrote that both the US and China are about to embark on multitrillion-dollar nation building infrastructure programs.
For the US it’s all about repairing its crumbling utilities, roads, and bridges.
In terms of China, it means securing trade routes through Asia and Africa via highways, shipping lanes, and railways.
The reason…failing diplomacy means a collapse in supply chains.
To maintain economic dominance means controlling the supply of raw materials…the building blocks for modern civilisation.
But the China and Russia alliance already holds the upper hand.
If you’ve read my Daily Reckoning Australia articles from 2022, you will understand China dominates extraction and processing of numerous critical metals.
But you might not be as familiar with Russia’s important role.
In fact, geologically speaking, the vast Russian land mass is the most richly endowed region on the planet.
As one of the largest oil and gas exporters outside OPEC, it’s also the number one exporter of wheat and nitrogen-based fertiliser.
It plays a key role in global food and energy security.
But according to the World Economic Forum, when it comes to the supply of metals, Russia is a commodity superpower (emphasis added):
‘In terms of raw materials, Russia is the second-largest exporter of cobalt, one of the key elements used in making rechargeable batteries. It is also the world’s second-largest supplier of vanadium, which is used in large-scale energy storage and in steelmaking.
‘The country is the sixth-largest exporter of gold, accounting for 4.4% of the world’s supply, and the 10th biggest supplier of lead.
‘Russia accounts for 10% of the world’s supply of nickel, which is used to make stainless steel and vehicle batteries. The price of nickel soared by 250% in a day on fears that sanctions would hit supplies, and the London Metal Exchange even suspended trading of the metal because of the unprecedented price rises.
‘Russian exports of platinum account for 12.3% of global supply, and the country is the world’s fourth-largest exporter of tungsten.’
Russia is also one of the largest exporters of titanium, a critical metal used in steel alloy, critical for modern industry, particularly the aerospace sector.
It goes without saying, growing fragmentation between China, Russia, and the West places supply chains under enormous pressure.
As commodity importers, the US, Japan, Korea, and Europe are especially vulnerable to fragmentation.
With the recent fiasco in Munich, the urgency for developed nations to secure supply chains intensifies.
So far, Russian critical metals have escaped Western sanctions.
But rather than wait for bans or punitive tariffs, Russia may dictate its own fate by halting exports to the West…
It’s Putin’s greatest weapon.
But you can prepare your portfolio well before these shockwaves are felt by developed economies.
Certain Australian and Canadian miners are uniquely positioned to benefit from the fallout.
In fact, I’ve just recommended one to my Diggers and Drillers subscribers.
It’s an Australian-based producer focused on producing one very important critical metal…a commodity where Russia dominates supply.
Importantly, our pick will be ramping up production throughout 2023 and 2024, just as the West clambers for alternative supplies.
You can find out more here.
While we’re not there yet, each political stoush, like we just witnessed in Munich, brings us one step closer to a supply chain meltdown…
Prepare your portfolio for what comes next.
Until next time!
Take care,
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James Cooper,
Editor, The Daily Reckoning Australia
