It is this latter imperative that explains the need for the party to relentlessly reach outwards, constantly surveilling for any individual, entity or nation-state that could undermine its primacy. It requires nothing less than subordinating the international order to a subservient or passive posture that dares not question or counter whatever the party wants to do.
As this column has argued for years, the inevitable clash between these two business models – democratic capitalism colliding with closed authoritarianism, exemplified by the competing interests of the two largest economies on the planet – dramatically increases the probability of major-power conflict.
Naive public
When I asked Professor Hugh White about this eight years ago, he handicapped war between China and the US at a 10 per cent probability over the so-called forward planning horizon.
The tiny minority of foreign policy and security experts who saw this coming at that time now put the likelihood closer to 20 to 30 per cent.
My own best guess is that the chance of a low or high intensity kinetic conflict of some kind between China and the US is around 25 to 50 per cent. We ain't going to be exporting much up north if that happens.
This is why it has been so impressive to see Prime Minister Scott Morrison and his Foreign Minister front up and honestly communicate these risks to an otherwise naive public.
Most folks extrapolate linearly from their immediate past. If you lived between the late 1800s and mid-1900s, global war was a constant. As an artifact of the stabilising influence of capitalism vouchsafed by a single global hegemon, it has been absent since that juncture.
We need, therefore, to be much more hard-headed in sketching out the disturbing distribution of future states of nature.
Mine looks "bi-modal", spanning one peak denoting a slightly lower probability of major power conflict juxtaposed against another higher peak which is more benign, where the Middle Kingdom experiences gradual multi-decade decline as she slowly loses the long-term economic and information war.
This latter point is a crucial insight. An epiphany in Washington in the last 24 months has been that the US and the West have been unwittingly engaged in an information and economic war waged by "the party", as Richard McGregor famously coined it. The problem is they did not know it.
Now, however, there is a universal consensus that it is time to fight back in non-kinetic terms, which is why we have seen the trade war, tariffs and an aggressive economic decoupling that will continue for years.
This decoupling is rapidly extending to other like-minded Western states and will inevitably spawn the emergence of two distinct global trading blocs: a poorer Sino-led system involving Belt and Road nations (developing countries in Africa, south-east Asia, Eastern Europe and, bizarrely, Victoria) jostling against the open, democratic order.
This really does give me tremendous pause – I have had many sleepless nights worrying about downside risks that could quickly materialise.
For some time now this column has argued that Australia should capitalise on the global chaos and aggressively seek to attract top talent and capital fleeing authoritarian Asian states and the COVID-19 dramas rippling through the North Atlantic.
Rising interest
Accordingly, I can only applaud the decision of the Prime Minister and Treasurer Josh Frydenberg to ramp-up their efforts to secure both the best brains in the business and those with the fattest wallets through new residency options.
Anecdotally, there has been a significant uptick in interest out of North Asia, America, the UK and Europe in both expats seeking to return home and new migrants searching for a better way of life.
This influx of world-class human capital and cash could be a key ingredient to helping shore up Australia’s recovery. As the Prime Minister says, we are, after all, the world’s most successful immigrant nation.
Talk’s cheap, money buys houses and you can’t smoke glory. So for all the chat above, I like to revert back to simply explaining what I am doing in my own portfolios.
After net buying $937 million over late February and March, we have net sold about $900 million during April, May, June and July.
I have taken profits every single month since the once-in-a-lifetime opportunity presented by the record blow-out in credit spreads in March, which was always going to be crushed by extreme central bank policies.
And we’ve had zero issues with liquidity – in fact, our trading volumes in the first six months of 2020 were our highest ever and 2.5 times greater than the preceding six months.
Having said that, we are sticking to unquestionably strong businesses with implicit or explicit government guarantees and negligible internal credit risk.
NAB hybrid
We own only one non-financial corporate exposure right now: a senior bond issued by Optus, which is wholly owned by Singtel that is 50 per cent controlled by the Singaporean government.
With the big banks prudently deferring or reducing dividends, one current deal I like a lot is NAB’s new unlisted hybrid, which was launched on Thursday. (I will be investing).
Unusually for a bank, NAB has been generous with the credit spread, which has been set at 4 percentage points (or 400 basis points) above the quarterly bank bill swap rate.
That’s a 4.1 per cent yield for an investment-grade, BBB- rated security with an expected call (or repayment) date of five years, which is short for a hybrid these days.
In December 2019 NAB issued $500 million of unlisted hybrids to a handful of insto investors with an expected maturity that was twice as long at 10 years on a more miserly 375 basis point spread that was regarded as very attractive at the time.
Beyond the better spread, the key difference on this occasion is that NAB has appointed a large number of brokers to support secondary liquidity and to bring in a more diverse investor base, which will include big institutions, family offices, councils, charities and many sophisticated high net worths.
On the ASX right now five-year major bank hybrids are trading on far skinnier spreads of less than 350 basis points above bank bills, which implies that this new wholesale unlisted deal is offering more than 50 basis points per annum in additional return.
The 400 basis point spread also looks appealing compared to pre-COVID-19 spreads, which were about 270 basis points for a five-year major bank hybrid.
Further up the capital structure, the major banks’ senior bonds are comfortably trading inside their pre-crisis levels, and I expect the hybrid market to eventually follow suit.
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Why the risk of a major-power conflict is rising - The Australian Financial Review
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