Blain’s Morning Porridge – December 6^th 2023: Outrageous Predictions and why 2024 will be about China, elections, oil and conflict!

“The threat of China is not military. The threat of China is they can’t be intimidated. Europe you can intimidate.”

Saxo Bank’s Outrageous Predictions are great fun, but the reality is 2024 is going to be about Elections, Oil and Energy Prices, Conflict and how China plays these three forces. China will dominate 2024 – for all the wrong reasons.

My favourite moment of Christmas came yesterday morning! Saxo Bank’s Outrageous Predictions for 2024 are absolute crackers – and all the more so because they are entirely and utterly plausible. I’ve attached links to each one:

As oil hits $150, Saudi buys Champions League Franchise.

World hit by major health crisis as obesity drugs stop people exercising.

The end of Capitalism in the USA – As the budget deficit rises over 10%, demand for treasuries tumbles. Under pressure from the White House, Congress makes income from government bonds tax-free.

Generative AI Deepfake triggers a national security crisis – governments crack down and puncture the AI hype

Deficit countries form “Rome Club” to negotiate trade terms – as the global trade and financial system creaks, the largest deficit nations unite to negotiate new trade terms and face painful adjustment.

Robert F Kennedy Jr wins the 2024 US Presidential Election – Kennedy wins on back of public discontent with Trump or Biden – ushering in a whole new era in US politics.

Japan’s Lucky 7% GDP Growth rate forces BoJ to abandon yield curve control.

Luxury demand plunges as EU goes Robin Hood, introducing wealth tax – as people wake up to how little tax Europes billionaires pay, the EU implements a 2% wealth tax, sending shockwaves round economy and causing LVMH to tumble 40%.

Although the Saxo Outrageous Predictions are a bit of thought provoking fun, they should make you think. I am never quite sure if predicting something unlikely makes it more probable, or even less likely?

Interestingly, Saxo never commented on China.

Back in the real world – aside from how inflation, central banks, technological invention, and the madness of markets conspire to steer market sentiment through the year – I’m thinking 2024 will be about how China and 3 market forces are likely to inter-react through 2024 and keep markets guessing:

• Elections
• Oil Prices
• Conflict

Elections are set to dominate 2024:

• Most folk are focused on Tuesday 5^th November, the US election. Trump is leading the polls and could win a second term in office. Markets are trying to figure just how damaging that could be the US’s global hegemony, alliances, trade and the dollar. (I think we may just see some US political surprises in coming weeks.)
• In the UK there is no set date for a vote; we may see catharsis from a new government, but first we have the misery of waiting for the current one to give up.
• Across Europe rising populism (generally a mix of right-wing anti-immigration and left wing social promises) could well destabilise the efforts of the EU and ECB to lead Europe out of economic decay.

But the first big challenging vote of the year, and maybe the most important one, will come on Jan 13^th when Taiwan chooses a new President. The population have long been in favour of retaining their independence, while politicians knew that independence depended on accommodation with China. That changes if, as expected, Lai Ching-te of the ruling Democratic Progressive Party wins. He will continue to reset Taiwan’s current relationships – seeking international support, boosting defence, and stressing the island’s independence.

China’s Emperor Xi will have few options but to respond. That means an escalation of the current tensions to demonstrate the oft-repeated claim, and state ambition, that the seas of South-East Asia are a Chinese lake.

January will be an important moment. Xi will have considered a whole series of political, conflict and logistical calculations: Will the US risk an Asian conflict while Ukraine and Israel remain massive drains on war stocks? Will Biden be distracted by the potential butcher’s bill and the coming election? (I suspect that was the real reason Xi went to San Francisco – to make that call on Biden’s determination for himself.) Should China wait for Trump and try to do a deal? Does the People’s Liberation Army have the capacity to successfully invade Taiwan? Can China rely on other nations to support them, while Russia and Iran continue to destabilise the West? Can the increasingly fragile Chinese economy and debt load cope with the costs of war?

I suspect these calculations have already been made, and Xi will likely wish to avoid a costly and difficult invasion of Taiwan. The PLA is increasingly well equipped – but is probably not yet ready to fight both Taiwan and the US. He will have seen the humiliations inflicted on Russian forces (who share similar tactical doctrine) by better motivated and well-led Ukrainians. He is still consolidating his grip on the military – putting his chosen team in key commands (not necessarily a good thing having yes-men in positions of power). And he will be looking at the economy and wondering how it and the people would react to war with the West and the sanctions it would entail.

Xi will likely conclude this is a time for patience and the long-game. Other strategies present themselves – keeping the West unstable and distracted through the coming electoral cycle. Supporting Russia to wear out Ukraine on the battlefield, while exhausting the US and Europe in political wrangling and the costs of support is a better, less costly plan. It helps the west’s confidence in Zelensky is being undermined by stories of increasing domestic dissent – which will have been fuelled by Russian fake-news.

What’s the easiest way to distract and panic the West? Destabilise and push up Energy and Oil Prices.

Xi will be seeking to develop the growing alignment of the Oil States of the Middle East with China. They need to generate windfall oil profits – which chimes with China’s strategic aims. Xi will support higher oil prices (China will be receiving increasing Russian supplies at distressed prices via Kazak pipelines). Xi will seek to present himself as a peacemaker – but actively supporting Russia on the battlefield while facilitating Iran and North Korean to deliver weapons.

The longer Russia threatens and distracts the West the better. Europe is acutely aware of the risk Trump will withdraw the US from Nato. If Ukraine struggles or is forced to compromise, the next threat from Russia could be a move into the Baltics. Europe’s response will be confused and limited; right-leaning, anti-immigration and anti-Europe populists across Europe will question and obstruct any efforts to coordinate common-defence or a new round of economic bailouts as recession bites in 2024.

On one hand, China will be out there seeking closer relationships with Saudi and the Gulf, asking them to partner in BRICS and the Belt & Road. On the other it will be actively supporting Russia to distract the West. All the time it will be sharpening its weapons to deal with Taiwan when the time is opportune.

Yep… 2024 could turn kind of bleak.. Next week, if I find the time (lots of lunches) I will try to make sense of the Chinese economy. Its weakness could be the key issue holding Xi back.

Five Things To Read This Morning

FT                                Moody’s cuts China’s credit outlook to negative

WSJ                             How Long Can the “Magnificent Seven” Stocks Hold the Line

WSJ                             The US Can Afford a Bigger Military. We Just Can’t Build It.

BBerg                          Taiwan’s Big China ETF Bust Shows Extent of Financial Decoupling

BBerg                          It’s Too Dry for Southern Spain’s Once-Thriving Avocado Industry

Out of time, and off to do whatever needs done now..

Bill Blain,

Market Strategist – Author of the Morning Porridge