“Give them bread and circuses and they will never revolt”

Juvenal (Rome circa 100AD)

Lots to talk about today. While everyone is watching the entertaining distraction of the Olympics and debating about the gender of athletes, the elites are quietly gearing up for a potential WW3 as the world goes through a series of great changes that have been unseen in a century. A great war has marked every change in the world order. The end of the Dutch Empire was marked by The Napoleonic Wars, and WW2 marked the end of the British Empire. We’re yet to see what the end of the US Empire brings. The sweeping current of history has its own cycle which we can’t control. We can only go along for the ride and play the cards that we’ve been dealt.

Perhaps the most interesting aspect of this is the conspicuous absence of reporting in the mainstream media. However, nothing hides from the asset markets, and their signals are pretty clear.

The TLDR summary is as follows:

The share market was crushed yesterday, with Japan’s Nikkei experiencing the biggest two-day drop in history and a top-to-bottom decline of 28%, the S&P 500 seeing about a 9.5% decline, and the ASX200 seeing about a 7.8% decline.

Yesterday, the stock markets lost $2 trillion in total. The only things that have gone up are gold and military-industrial-complex shares. Someone knows something is up, it seems. We won’t know the effect on Australian property prices until next month, but if history is any indicator, they will be unaffected by this news. More on that later.

The share market crash has largely come from two things.

The first is the unwinding of the Japanese Yen carry trade. Put simply, on Friday, the Central Bank of Japan raised interest rates for the second time in 17 years. Carry traders have gotten used to borrowing Yen at near-zero interest rates and using that money to buy US Treasury Notes and tech stocks for an easy return.

Those $4 trillion in borrowings are now a lot more expensive.

At the same time, US unemployment figures deteriorated from 4.1% to 4.3%, triggering the Sahm Rule, which suggests that the US was already in recession. This rule has predicted every recession since 1953, and it greatly increased the odds of a rate cut.

Up until last week, a global fund could borrow at close to zero and earn 5% in super-safe US government bonds or 16% in the US Nasdaq for a bit more risk.

So, in a single afternoon, borrowing became much more expensive, and potential returns simultaneously shrank. This triggered a selling event as the loans became more expensive to pay back as the Yen strengthened against the USD.

The second is the potential for the US to enter yet another war. The Hamas political chief Ismail Haniyeh was assassinated in Iran – widely believed to have been carried out by Israel after the IDF first killed his children and grandchildren. What has been largely unreported is that he was one of the key figures in peace negotiations between Israel and Palestine, which included a hostage exchange and the proposal of a two-state solution.

This has drawn Iran into the conflict (arguably the most powerful military in the Middle East, including the US), which has promised retaliation. This has the potential to spill into a wider conflict with lines drawn across the world.

On one side, we have Israel (which requires US support) and potentially NATO countries. On the other side, we have Palestine, supported by Iran and likely Russia and Turkey (which is also a NATO member).

In the background, we have China, which has largely stayed out of the conflict. However, it has also brokered peace deals between the old enemies, Saudi Arabia and Iran. This has weakened the old ‘alliance’ between the US and Saudi Arabia. The Saudis have already refused to renew the 50-year-old petrodollar agreement with the US, an agreement that assured the legitimacy of the USD as the global reserve currency. For more details, refer to this blog.

The Fed is holding an emergency meeting today. They’re probably warming up the money printer. Their bond market has now priced in a 60% probability of a rate cut, which means that they think something is broken. More often than not, the deepest declines in the US share market have come after the Fed cuts rates. Something to think about.

As always, more printing means a rise in asset prices in the long run, but more potential pain is coming for shares before they enter a V-shaped recovery. We’re still living in Opposite World, where bad news for the economy means good news for asset markets.

Ok, onto domestic matters.

The RBA meeting today left rates unchanged, as widely expected, and when the media conference is held, they will likely soften their tone—especially with the US getting closer to a rate cut and the fact that we’re likely to enter our sixth quarter of a (per capita) recession. If not, they will probably be jawboning and talking tough in order to prevent consumers from driving an inflationary spike. The Bank of England, European Central Bank, and Bank of Canada have already begun cuts, so we’re moving in the right direction.

For what it’s worth, the futures market is now pricing in five rate cuts in the next 18 months.

As always, each boom in property prices has been preceded by a rate cut, and we don’t expect the final leg of this cycle to be any different. We are full steam ahead for the remainder of this cycle, and a quick look at investor loan demand shows that the smart money is already in the market.

My previous analysis of the effects of wars that Australia has been involved in shows that in virtually all cases, prices have risen throughout the war. Again, I don’t think wars are favourable for property prices other than property tends to be a defensive asset. It’s more that the property market simply shrugs off the effect of war.

That’s about it from me today.