The Ukraine Crisis and Safe Havens

The long-awaited military crisis in the Ukraine is now with us. It is clearly not good news but at least markets are moving in totally predictable ways.

And so, as has happened for centuries in a time of crisis, investors go for gold and the yellow metal looks strong. Its new rival as a safe haven – Bitcoin – was hammered. Part of the reason for its decline is that the Canadian truckers’ blockade of the US- Canadian border caused the Canadian government to take control of the assets of many of the truckers, including their bank accounts and cryptocurrency investments. They didn’t touch gold.

In this crisis much of the cryptocurrency swirls around the former Soviet countries and the Canadian experience made the crypto people nervous.

We will keep watch to see if the crypto fall gathers momentum. If it falls sharply, it will trigger big losses in major US institutions. After previous big falls the institutions have moved in to support the cryptocurrency markets to avoid announcing big losses. There is less certainty in any military crisis that a major buying campaign can be repeated.

Gold looks safer in this crisis but remember that, if inflation is still roaring (as is likely), when the war crisis eases this will put pressure on interest rates and gold.

And I don’t think inflation is going to go away. The labour market in Australia is extraordinarily tight and we are seeing a big decrease in apprenticeships which, in due course, will increase the price of building a house.

But, in the meantime, the gold bulls are on top of the world

And, of course, bond prices represent a similar phenomenon to gold. Despite inflation, bond prices are rising and yields are falling, particularly in the US. The scramble for US treasuries occurs in most military crises, so once again the pattern is well established. Like gold, when the crisis eases inflation, higher interest rates will return to the top of the agenda.

Linked to the rising gold and bond prices is the further advance in oil prices, particularly as Russia is such an important supplier of oil and gas. Oil demand has been exceeding supply for some time and if sanctions on Russia hit supplies, then prices will rise further.

Some of the flows into bonds and gold comes out of the share market so naturally shares fall – as normally occurs in these sorts of crisis. My guess is that this will be a drawn-out affair because Putin will try to exhaust the west. His main weapons will be cyberattacks and trying to use Facebook and other social media sites to increase division in western societies. It is a time when long-term investors batten down the hatches. 

The Sydney Factor

Meanwhile in the interim reporting season we have seen some surprise results among retailers and, to some extent, banks. We are seeing differences in culture in corporations and communities come to the surface

All retailers are being affected by shortages of labour and supply chain issues. But there are some other important factors involved, including the impact of the COVID clampdowns in Sydney in the December half year. These really caught the people of our largest capital off guard and Sydneysiders slashed their spending more than those in places like Melbourne, where a different culture and past experiences enabled Melburnians to better adapt to the new shutdowns. This caught out a number of retailers. 

There is a second force that is more dangerous longer term. Most of the big retailers have a buying culture based on an element of superiority. They say: “We are big buyers and you suppliers must adhere to your contracts irrespective of circumstances or you will be punished”. And that culture of superiority often found its way into China.

But now the tables are turned and there is a shortage of supply so retailers who have treated Chinese suppliers aggressively are having trouble getting supplies and have to pay much higher prices. Smaller retailers who have had to develop close relationships with Chinese suppliers for a long time were less impacted because they had friendships and contacts that the larger retailers didn’t have.

And with local suppliers, supermarkets and other big retailers have traditionally treated their suppliers harshly and don’t listen to cost-increase claims. But in times of shortages the prices are put up and again the big retailers have had troubles managing this environment. The current half year will be important to see if they have overcome these difficulties. In the current half year “the Sydney factor” is no longer with us, but all the other forces remain.

We will see more clearly which retailers can manage them and which cannot. Keep your eye on Bunnings and the big supermarkets.

Business Bankers

Culture also plays a role in banking. You may remember that last November I wrote a piece based on the old Castrol advertisement that “oils aint oils”. In that commentary I set out that the National Australia Bank was the best placed to handle the new environment because they had a relatively small amount of their profits in housing but strong profits in business lending which is where the growth will take place. NAB was a standout in the latest reporting season. The Commonwealth Bank also did well but underneath the surface performance there were cracks because the housing market is very much becoming a commoditised area and the Commonwealth is the biggest.

Both the ANZ and Westpac ran into all sorts of bother. These are banks that were once strong business bankers and they have let their business bank operations slip and they are having difficulty with their systems and cultures in the housing market. Both say they will learn from their mistakes.

Finally, there is the racehorse that is our largest company BHP. BHP is beautifully trained to race on a dry track because its iron ore and copper operations are well managed and are enjoying buoyant conditions. But if the track becomes wet because iron ore has fallen sharply in price and/or – less likely – copper follows suit, BHP no longer has the diversity it once held.

A key part of its diversity was its oil and gas interests, but these have been transferred to Woodside. BHP shareholders own about half of Woodside but the remaining BHP company no longer has that buffer. As long as the track is hard, and the iron ore and copper prices stay strong, then BHP shareholders will have a wonderful time. There is no need to panic but the big Australian no longer has the breadth and diversity that once characterised its operation and shareholders need to be aware of that. And BHP shareholders also need to be aware of the Chinese Communist Party's intervention in the iron ore market of attempting to curb trading with the aim of lowering the price.