Just before the pandemic hit, I was flying to Japan.
Over a glass of red wine, I watched the HBO miniseries Chernobyl.
It was spellbinding. Especially since the 1986 disaster had been the news focus at the crest of my teen years.
Along with the reforms of Gorbachev, the nuclear catastrophe of Chernobyl helped seal the fate of the Soviet Union.
By 1991, it had dissolved its constituent republics. Countries like Ukraine gained full sovereignty.
There is a potent scene in the Chernobyl series. A bright yellow robot, named ‘Joker’, is sourced from democratic West Germany to clear radioactive rubble from the roof of the damaged plant.
Joker working at Chernobyl. Source: Xataka
First, it’s embarrassing that technology must be brought in from the West.
Then the Soviet engineers seem too afraid to admit to the Germans — and thus the world — how much radiation is on the roof.
The robot does not survive it.
A decade or so after the Soviet dissolution, we were in central London…
The streets and high-end shops seemed flooded by wealthy Russians.
As the country opened and split, many fortunes were also there for the taking.
Move forward to 2020, Japan…
I’m at Universal Studios in Osaka and see a different phenomenon.
Many of the prosperous families enjoying dinner at Hogwarts are from China.
Two years on in 2022…
I wonder if China has just had a mini-Chernobyl moment?
The Communist Party relied on their own locally produced vaccine. They refused to accept Western mRNA vaccines. But it seemed the Chinese vaccine was less effective when the virus mutated into variants like Omicron. And lockdowns across major cities have now sucker-punched economic growth.
Has central planning failed China as it did the Soviet Union?
On top of vaccine failure is regulation of technology firms, slowing their growth. Then there are demographic challenges from a rapidly ageing population – due in part to the former one child policy.
Meanwhile, a brain drain of the best tech workers and entrepreneurs continues.
For the first time in many years, it now appears the United States will grow faster than China.
The world needs China to grow…
Beyond economic competition, China represents a massive market.
Growth in that market benefits nearly every country.
Further, the huge industrial machine that makes up Chinese exports provides the global economy with many cheap finished and input goods.
Some of these goods and inputs now face tariffs and reshoring from a wary America (and others).
It would seem communism is destined to fail in the long run. Economies eventually do better when they’re free and open. In spite of the booms and busts along the way.
Covid 2020 was a bust.
Then there was a recovery boom on the back of prolific central-bank-ignited money.
Now inflation threatens that boom.
As does the decline of freedom in countries like ours. Sometimes, it seems here that compliance staff numbers are growing faster than productive teams.
That has long-run potential for stagnation and stagflation. Not productive growth.
Implications for investors…
- Inflation could be here for quite some time.
- The blunt tool of interest rate hikes will harm high property markets.
- It will also harm listed stocks with high rates of debt and marginal pricing power.
- Large, open economies like America may be able to trade through this.
- Smaller China-focused exporters like New Zealand could struggle.
It’s time to diversify. Invest defensively. And, where possible, help recover the hurdle of inflation from strong dividend-paying, recession-proof companies.
June Event — Investing for Inflation: Value and a Little Speculation?
We’ll be covering this topic and more at an upcoming event this month.
It’s with STANZ — the Society of Technical Analysts of New Zealand. And it’s free to attend via Zoom, or in person as a guest of STANZ and Wealth Morning.
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)