Prepare for war, as probabilities rise above 50%

Christopher Joye

Coolabah Capital

In the AFR today I write that long-time readers of this column have been hearing about the drum-beats of war between China and the US for the best part of a decade. Back in May 2020 we gave a detailed private seminar to hundreds of our wholesale clients assessing these risks and advised that the probability of major power conflict in the Indo-Pacific had lifted to as high as 50 per cent. Excerpt only (click here to read the full column):

While none of our geo-political advisers had quite such a pessimistic perspective (they tended to be in the still-elevated, circa 25 per cent camp), most are now handicapping war as a toss-of-a-coin prospect. In fact, one of our most accurate foreign policy advisers said yesterday that the conflict probabilities have lifted above 50 per cent. A "tell" in this regard is the combatants probing the contours of the cyber-security battlespace much more aggressively than they ever have before.

The prospects for war are actually higher in the next five years than the period thereafter because of how successfully the Middle Kingdom has closed the military capability gap with the US. Every day President Xi delays, his potential adversaries in a battle over Taiwan—which would undoubtedly include the US, Japan, Australia, and the UK—are now investing enormous effort to prepare for war and once again expand the capability gap. Sadly, the wider Australian community has yet to come to grips with these morbid contingencies.

The first time non-readers of this column would have heard the drum beats of war was when the home affairs secretary, Mike Pezzullo, sensibly sounded them during the week. Presumably with the blessing of government, he warned that “as free nations again hear the beating drums and watch worryingly the militarisation of issues that we had, until recent years, thought unlikely to be catalysts for war…let us continue to search unceasingly for the chance for peace while bracing again, yet again, for the curse of war”.

This followed a similar warning from the minister for defence, Peter Dutton, who cautioned that the spectre of major powers battling over Taiwan “should not be discounted”. At around the same time, the federal government has subordinated defence’s glacial procurement processes in favour of urgent capability decisions, including, amongst others, the ability to manufacture missiles locally and upgrading Australia’s military bases to ensure they are operationally ready for the advent of war. Expect much more news in this vein as our government radically ramps-up its otherwise anaemic defence spending.

Anyone telling you not to worry about the risk of war frankly does not know what they are talking about. The one thing we can do to reduce the chances of conflict erupting is by massively increasing the costs of our largest trading partner crossing the Rubicon.

Experts agree that in any conflict over Taiwan, China will consider targeting strategic military assets located in Australia with its long-range land and submarine-launched ballistic missiles. Facilities like Pine Gap are, for instance, essential to the Western war-fighting machine. The homeland is, therefore, absolutely in the cross-hairs.

At dinner last night I asked some friends how well their portfolios and businesses were prepared for the outbreak of war. There were laughs and smiles—they assumed I was joking. They had never seriously considered it.

Along similar lines in May last year I asked the CEO of one of Australia’s largest resources companies whether his team had evaluated a downside scenario whereby the federal government banned his business from selling critical war-fighting inputs, such as iron ore, natural gas, and coal, to China in the event a conflict erupted. The CEO in question responded that neither he nor his team had ever contemplated this idea.

We’ve been actively thinking-through and forward-planning for these risks for years and have a clear vision of precisely what we would do. I would encourage all my readers to do the same. You cannot simply rely on the assumption that war will not happen: ask yourself the question, what are the personal and financial costs that you will wear if you are wrong?  

Read the full column here.

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Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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