Submitted by Eric Peters of One River Asset Management Entangled "Do you understand quantum entanglement?” I asked the Aussie investment analyst, a recent engineering graduate. “No one understands it,” he replied. “You’re in good company, Einstein didn’t understand it either,” I said. “He called it spooky action at a distance,” said the analyst. Some subatomic quantum particles are entangled - when you separate them and change the spin of one, it reverses the spin of the other, instantaneously, impossibly, as they communicate faster than the speed of light. “I’m fascinated by this phenomenon,” I said. “I look for things in markets that don’t quite make sense,” I told the analyst. “They provide a glimpse of a reality we do not yet understand. Just like quantum entanglement tells us we do not yet understand reality. The abrupt Q4 decline in US stocks didn’t quite make sense. QT and rate hikes were nothing new. So does it mean we’re entering recession despite so much fiscal stimulus? Or does it mean inflation is on the rise? Or might it mean that we’re on the cusp of an anti-capitalist political revolution? All three? I don’t know, but it means something." China “The US is our greatest ally,” said the CEO of one of Australia’s largest superannuation funds. “And China is our biggest customer,” he continued. “That’s an increasingly difficult line to walk.” 30% of Australian exports head to China. “And it’s particularly difficult to manage without adept politicians.” Japan is Australia’s next biggest buyer, a distant 2nd, accounting for 10% of total exports. “We’re a pimple to China, they’re an elephant to us.” Under pressure from America, the Australians joined other allies in banning Huawei 5G technology last month. Canberra cancelled the visa of billionaire Huang Xiangmo for links to the Chinese Communist Party, and for pursuing Chinese interests through political donations. Then China introduced coal import quotas and quality controls, and its largest port doubled custom clearance to 40-days for Australian shipments. In the power struggle unfolding between the US and China, Australia faces profound risks. Not long after Beijing clamped down on capital outflows, Australia’s overpriced real estate market rolled over. Sydney prices are down 10%-20% from the highs. Melbourne a bit less. Yet the cranes still spin, completing boom-time projects, lifting supply, in an economy leveraged to assets price increases. The RBA responded by adopting a dovish stance, but like every global central bank, they have limited room to cut rates, having never found the opportunity to lift them from record +1.50% lows hit in August 2016. “There is so much focus today on what divides nations. But it’s vitally important to remember what connects us,” continued the CEO. “The Chinese buy our iron ore, our coal, our gold. They send their children to university here, earning world-class degrees, buying condos.” And 7,760km north, President Trump walked out on Beijing’s pawn, Kim Jong-Un. As America increasingly questions what connections it shares with a nation it increasingly sees as its principal adversary: China. Trump Cards “One common factor connects the fall of every Chinese Dynasty,” explained the CIO in Asia. “Their leadership ran short of food for the people.” Most of China’s land mass is naturally nonarable. Much of its fertile acreage has been degraded by erosion, salinization, acidification, industrial effluent, sewage, excessive farm chemicals and mining runoff. This leaves just 11% of Chinese land that can be farmed. 75% of rivers are severely polluted, one-third of those are too toxic to be used for irrigation. The remainder are drying up due to overuse. The US has 6x more arable land per capita, and annual water resources are 9,400 cubic meters per capita. China’s annual equivalent is 2,200. Consequently, US industrial farms produce pork for $0.57 per pound versus $0.68 in China. The Chinese consume half the world’s pork. They prefer US pork to domestic production; our food safety laws are superior. US pork exports surged from 57k metric tons in 2003 to 2.3mm in 2016 ($5.7bln). As the Chinese grow more affluent, this demand rises. And no one know this better than Beijing.