Desperately seeking safety: Why Australia could benefit from America's woes

Australia Broadcast Center

7 hours ago

What's more frightening?
The rapidly escalating horror in the Middle East as Tel Aviv and Tehran trade missile barrages or the sight of America descending into authoritarianism with soldiers on the streets of Los Angeles and military parades in Washington.
The world suddenly has become a much more dangerous place as uneasy parallels have begun to emerge between recent events and those of a century ago.
Global superpowers once again are jostling for domination as America actively tries to disengage from trade and defence alliances that have governed the global order for eight decades.
A brutal three-year-old war is raging on Europe's doorstep while, in Africa, there are more armed conflicts than at any time since World War II.
Meanwhile, in Asia, a nuclear armed hermit king is in control of South Korea while China quietly readies itself to flex its military might and reassert itself as the pre-eminent force in a new world order.
Safety has become an elusive prospect. And not just from a physical perspective.
Money has suddenly found itself looking for alternatives to traditional safe havens as the United States brings down the shutters, demanding local companies bring their foreign investments home and as its financial strength begins to fray.
America remains the world's biggest economy with the deepest pools of capital, making it the centre for global finance, if only because there is little alternative right now.
But the clumsy attempts by President Donald Trump to rectify its trade imbalances, the reckless fiscal policies, his complete lack of consistency on almost everything and the nation's descent into authoritarian rule has diminished America's reputation, perhaps permanently.
Growing unrest on the streets at mass arrests and deportations, the administration's undermining of the legal system, the media, the bureaucracy, learning institutions and the scientific community has shaken faith in America's reputation as "The Land of the Free".
The new US president wanted a new world order. But this may not be exactly what he had in mind.
Israel's assault on Tehran last week did not come as a total shock.
Since 1992, Israeli Prime Minister Benjamin Netanyahu has repeatedly claimed that Iran was on the cusp of building nuclear weapons.
With Gaza now in ruins, an increasingly hostile attitude from many western governments towards Israel and US talks scheduled with Tehran, the attacks on Iran ordinarily would have been considered ill-timed to say the least.
But Tel Aviv used the latest report on Iran's nuclear program by the International Atomic Energy Agency as a convenient trigger to escalate hostilities.
Shortly after the attack, the White House claimed Israel acted alone without any US involvement, an admission that would have seemed inconceivable just a short time ago and sent markets into a spin.
Here's how global money markets should have reacted.
Fearing the worst, money should automatically have flowed out of global stock markets and into the ultimate safe haven, US government bonds which essentially are IOUs. It's a safe bet because if the US government can't repay its debts, then no-one can.
Demand for bonds sends bond prices sharply higher and yields, or market interest rates, lower. It's a win win. Punters can breathe a sigh of relief and Americans get cheap debt.
The second big impact would be a dramatic lift in the greenback. That's because global investors need to buy US dollars before they buy US government bonds.
For decades, that's been the traditional flight to safety drill. Usually, it didn't take much for that to occur as US government debt has been considered the ultimate risk free investment.
So entrenched is the strategy, that it has even been the go-to shelter when America has caused the market meltdown in the first place, such as during the global financial crisis.
Instead, here's what went down on Friday.
Predictably, oil prices soared on the prospect of supply disruptions. But the US bond market barely blinked. And the US dollar, which has shed almost 10 per cent this year, rose by just a smidgen.
If ever there was an illustration that America's reputation as the global reserve currency and the leader of free market capitalism has been tarnished, this was it.
Suddenly, there seems to be nowhere left to hide.
Gold has been an obvious shelter from the storm. It began gathering pace last year, accelerating into the US election and has shot ahead this year, as the graph below shows, hitting new records again this week.
While it doesn't deliver a yield or dividend, gold has one great advantage; it is politically neutral and is recognised universally as a store of wealth
In recent months, platinum has ended up on the safe haven radar, overtaking gold in the rush to safety. Price rises have been spectacular.
But there have been surprises. Ever since April, money has been flowing out of America, looking for alternative hiding places.
Government bonds in other recognised havens have found favour, such as Japan and Switzerland. Now there is a possibility Australia may be on the radar.
Usually, we are considered the opposite, especially by currency traders.
Given our status as a commodity exporter — minerals, energy and food — global financial traders love to bet on the Aussie dollar. If iron ore, coal, oil or wheat prices shift, so does our currency.
That makes it one of the most heavily traded and volatile currencies out there. And given our reliance on China as a trading partner, global currency traders use the Aussie dollar as a yardstick for China's economic performance.
Australian bond markets, however, are a different kettle of fish altogether.
Our government debt is low compared to that in the US, the UK, Japan and much of Europe which makes us a safer bet.
In fact, we are one of just 11 countries with a triple A credit rating alongside Canada, Denmark, Germany, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland.
If more foreigners shift to our government debt, the Australian dollar could end up gaining ground and perhaps losing some of the volatility with which it has been associated.
Stocks normally are considered anything but safe. As a shareholder, you stand last in line should anything go wrong with the company into which you've put your hard earned.
But so far, they have avoided the shake-out we saw in April when Donald Trump imposed his Liberation Day tariffs.
They have in fact recovered all that ground and are pushing back into record territory, which has many analysts perplexed, claiming stocks are overvalued and ripe for a fall.
And then there is the Commonwealth Bank. Australia's biggest company by far, it seems to have broken free of the normal valuation shackles and continues to soar ever skywards.
On some measures, it is the most expensive bank stock in global history. Unaffected by tariffs, with a stranglehold on the Australian market, it last week broke through the $180 a share barrier although it since has edged lower.
Why? Global investors are reducing exposure to the US and looking for safer alternatives. Successful Aussie banks are on the list.
Any port in a storm.