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  • Gerard Kavanagh

JJR Tolkien


As Galadriel said in the introduction of Tolkien's "The Fellow of the Ring":

“The world has changed. I see it in the water. I feel it in the Earth. I smell it in the air. Much that once was is lost, For none now live who remember it. ” That is the perfect synopsis for the regime change that is ongoing globally, and at the macro and micro levels of investment. As we highlighted in yesterday's blog commentary via an FT Alphaville (FTAV) commentary:

"But FTAV feels on slightly safer ground in saying that the tech industry itself has been slower to grasp how much things have changed. (Until recently it reminded me a little of visiting Dubai in late September 2008, and being told by an enthusiastic developer that they were definitely building a skyscraper even taller than the Burj Khalifa, despite the recent collapse of Lehman. A year later the developer Nakheel needed a state bailout and the site remains a sandpit to this day.)" But let's step back and have a look at the macro forces at play, and we have championed the great Russell Napier and his work (he after all detected the sea change first) to help explain the regime change (more volte-face) that is ongoing. So we return again to his latest commentary: If China is no longer in our friend group, what does that mean? (https://www.thestar.com/business/2022/05/09/if-china-is-no-longer-in-our-friend-group-what-does-that-mean.html) "Do you know who your friends are? That is now one of the most important questions any saver needs to answer. It sounds like a simple question for an individual but it’s a bit more complicated if you are a modern state. Let Janet Yellen, U.S. Secretary of the Treasury explain what a friend is and why that matters for the United States and for you: “We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage. So let’s build on and deepen economic integration and the efficiencies it brings on terms that work better for American workers. And let’s do it with the countries we know we can count on. Favouring the friend-shoring of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy as well as to our trusted trade partners.” — Janet Yellen speech at the Atlantic Council April 13, 2022 In case you are wondering Janet Yellen mentioned only two countries during her speech — Russia and China. She made it clear that the United States, Europe and other countries have issues “about the practices that China has that negatively impact our national security and human rights concerns.” In other words, at this stage China is not a friend. While we work out where we will be “friend-shoring” to, it is fairly clear where we will be “friend-shoring” from — China. “Friend-shoring” may sound innocuous, particularly if you are a friend of the United States and Europe, but it entails a shift in trade and money that will profoundly change the global trading system, the global monetary system and the course of the 21st Century. “Friend-shoring” suggests the developed world will be buying less from China. Perhaps slowly at first and then quickly, as productive capacity is built in friendly states, the developed world will do less business with China. China is the world’s largest export nation so this move really counts for China. It is likely to lead to a deterioration in the country’s external accounts even if it responds, as it is already, by seeking to produce much more of what it needs at home. China launched just such a policy, with the catchy title of “internal circulation,” in May 2020. In her speech Yellen hoped this was not the end of what has become a not so beautiful friendship — “I would like to see us preserve the benefits of deep economic integration with China, not going to a bipolar world, but clearly that’s a danger that we need to address.” Currently we are heading to just such a bipolar world and the deeper the relationship China forges with Russia, the faster we will get there. Just about everything that has happened in economics, finance and investment over the past 30 years has resulted from the emergence of the Chinese economy and its deeper integration with the global economy. That emergence pushed down consumer price inflation and interest rates and China’s mass purchase of U.S. treasuries, as part of its exchange rate manipulation program, freed up U.S. savings to bid up and add ever more gearing to U.S. assets. These economic and financial forces emanating from China have driven the price of assets generally higher for a generation. Now, whether through China’s move to “internal circulation” or the developed world’s “friend-shoring,” we are moving to a very different world and potentially even a bipolar one. In such a world neither goods nor services flow between the two blocks. The developed world will be short of a myriad of products, the production of which has shifted to China. China will have to engineer a massive domestic consumer boom if it is to keep its factories going having lost its overseas markets. Much higher inflation and a developed world capital expenditure boom, as capacity is built to produce what we no longer buy from China, are just two key impacts for investors in this increasingly bipolar world. The flight of financial capital to China to build productive capacity lasted more than a quarter of a century but it is now over. In a world of “friend-shoring” that capacity, even if foreign owned, is likely to be in the wrong place at the wrong time. As foreign and even local Chinese capital realizes it is on the wrong end of “friend-shoring,” it is likely to move to the exits. That entails selling Chinese assets. This can be slow if you own plant, machinery and equipment. But it is rapid if you invest in Chinese equities and bonds.

According to the Institute of International Finance foreign portfolio, investors pulled $17.3 billion (U.S.) of capital from China in March this year alone. This data is easily tracked but the size of lending by foreign bankers to China is not available on such a timely basis. It is likely that foreign bankers are not rolling over all their loans to Chinese entities and the repayment of such debt on maturity could represent a further significant foreign capital exodus from China. According to China’s Net International Investment statistics foreigners now own $2.1 trillion of Chinese portfolio assets. If investors consider that “friend-shoring” undermines the value of their Chinese investments then there is a lot of liquid foreign capital that can be removed quickly from China. This will put downward pressure on the Chinese exchange rate and, if this is resisted by the Chinese authorities, likely upward pressure on the Chinese interest rates. That the developed world and China have been contemplating divorce for quite some time is no secret to regular readers of this column. Investors should see Yellen’s speech as the equivalent of a declaration that the developed world and China now have irreconcilable differences. Just how messy this divorce becomes will shape the rest of this century. Savers need to make sure they are on the right side of this new bipolar world, prepare for inflation and also prepare to invest in those industries in the developed world that have suffered the most from Chinese competition. “Friend-shoring” is bringing back industries to the developed world and friends of the developed world that you thought had gone forever. Some companies will benefit from selling the “picks and shovels” necessary to build that new capacity while others will benefit from outsized returns as they own the existing capacity. Professional investors are ill-equipped to deal with this shift conscribed as they are to sticking closely to the stock indices that are full of the companies that benefited from the forces of the old regime. It is time to seek out active managers for your savings who understand that the world has changed and while price is what you pay value is what you get." We conclude today's blog commentary as we did yesterday: The FIX00 project has old dogs at the helm, and we have lived through investment regime changes before and thrived. Experience is hard earned but invaluable. The FIX00 biz model IS consumer-facing.

The FIX00 project IS cash and asset rich, it can weather the storm. The FIX00 project is a FCF business model. The FIX00 products are digital/real-world stores of value - they are literal and figurative shelters from the storm. FIXOO products are portable and, as history has proved time and again, that has added merit in times of trouble. We're here for the long term, we herald true disruption to an extremely lucrative closed and antiquated business model, that is the upside. There is serious downside coverage given the products we are offering, they are not volatile but are REAL (and proven) stores of value. All aboard the Digital Ruby train ...... Whoo, Whoo .......


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