Switching the Points

One of the very important outcomes of the SCO (Shanghai Cooperation Organization) conference held on 31 August – 1 September was the deal made between Moscow and Beijing about constructing and completing by 2030 the Power of Siberia 2 pipeline (the Power of Siberia 1 is already in operation), which will run through Mongolia. The pipeline will be built by Gazprom and it will provide the Middle Kingdom with natural gas extracted – among others – from the same fields which up to quite recently supplied Europe with this resource.

The consequences of this move are neither to be overlooked nor underestimated. Waging a crusade against Russia, Europe deliberately and purposefully cut itself off from Russian gas. Long before the conflict in Ukraine broke out, the leaders of the Old Continent for years kept complaining about the continent’s dependence on Russian gas. For years they they would make the cooperation for Gazprom ever more difficult. Then came the war in Ukraine and an eruption of Russophobia. Europe turned its back on Russian gas while the United States made sure that no one would think about reversing course: as we know the supply pipelines – NordStream and NordStream 2 – were sabotaged.

Europe is still purchasing some Russian gas through middlemen, but generally the Old Continent has switched to American LNG, which is more expensive as it requires shipment, liquefaction, and vaporization. The Russia-China deal will make it impossible for Europe to return to purchasing Russian gas: the Chinese market will swallow up any quantities of it. We are witnessing an epic change: the two NordStream pipelines are about to be replaced by the two Power of Siberia pipelines, redirecting immense amounts of gas from Europe to Asia. Simultaneously, since the Power of Siberia 2 will run through Mongolia, it is Mongolia that will greatly benefit from the Moscow-Beijing deal rather than Poland or Ukraine, through which the pipelines Yamal and Druzhba/Brotherhood run. Russian gas was supplied to Germany and Italy. It was cheap, cheaper than its American alternative, and so both these countries benefited from it a lot economically. All of this is in a complete reversal. What was done during the SCO session is like switching the railway points: the tank cars full of gas that used to be headed for Europe will all soon be headed for China.

Just as over time European and Russian economies will diverge one from the other, those of Russia and China will become closer and closer. The pipelines supplying Europe were in operation for decades, long before the collapse of the Soviet Union. With them gone, a new economic alliance between Moscow and Beijing will be forged. We can only wonder what European leaders think about this change. Sure, on the face of it they are still belligerent, but are they in their heart of hearts? If they are clever enough, they must be smelling a rat. The war that they had hoped to win is going sour, the sanctions that they had thought would coerce Russia into submission backfired, while the economic situation of the Old Continent is deteriorating with every month. Still, once they all invested so much hatred and scorn into Russia, they simply cannot put into reverse. Such is human psyche. They must wage their crusade to the bitter end.

The Captain or the Helmsman?

President Donald Trump wants the FED to lower the interest rates. The FED’s board is made up of governours who have the authority to either raise or lower the interest rates. The governours are nominated by presidents, and consequently, the parties that rally behind them. It so happens that democrats have more governours than the republicans. Since the FED does not want o lower the interest rates, President Donald Trump resorted to exerting pressure on one of the governours who are of democratic persuasion. Obviously on the advice of the members of his closest circle the president decided to dismiss one of the governours – Lisa Cook, who was appointed to this FED position by President Joe Biden. To be able to dismiss a governour, the president needs to have a valid reason – a cause as it is legally referred to. The president’s lawyers maintain there is cause enough, the lawyers from the opposition contradict. As usual, when it comes to legal matters, much depends on interpretation.

Now we do not want to delve into the case concerning Federal Reserve Governor Lisa Cook as such. What appears to be of greater importance is the mechanism of wielding power in the United States in particular and, generally, anywhere in the world.

A country’s leader – who may go by the name of president, prime minister, monarch, secretary general – has a job of managing and guiding the country. To do this job successfully, he needs to have a vision, a plan, and… wiggle room. We are not going to decide whether the interest rates ought to be higher or lower. What we are concerned with is whether you can be a successful leader of a country without having sufficient influence on the country’s finances. In the general election people choose their leader. Theoretically at least, they choose their leader on the basis of the promises that a candidate for office makes. Now the candidate running for office may of course be mendacious – having no intention of delivering on his promises – but let us assume that we are dealing with well-meaning candidates. Once elected to a high office, the successful politician needs to have real power or else he will not be able to deliver on what he promised, irrespectively of his good intentions.

On the flip side we have a mechanism enshrined in law – a constitution – statues that safeguards the proper balance of power, the famous checks and balances. We have such mechanisms because we fear to entrust full power to an individual or a group of individuals who might – as not infrequently happens – turn out to be socio- and psychopaths. But, the same checks and balances on the other hand hamper a well-meaning leader from discharging his duties in terms of fulfilling the promises that he made.

The refusal of the FED to lower the interest rates might be dictated by a couple of factors. One, the FED governours might be right from the economic or financial point of view. So far, so good. Two, those FED governours who are from the opposing party might simply want to act in spite of the president’s wishes, just out of malice. That’s bad enough. Three, the FED governours might want to please others than the president or the be ulk of the citizens of their country. That’s pretty bad. Who do the FED managers want to please? The FED’s shareholders. If for whatever reason the shareholders want the rates to be high or low, the FED will act accordingly. Sure enough, for public consumption the governours will frame their financial policy in terms of aiding the country’s economy rather than pleasing their shareholders. In any of the three cases the FED finds itself on a collision course with the President of the United States.

The question arises why the country’s leader cannot decide on financial matters? The answer is: because it is the law of the land to have a central bank that is independent or semi-independent of the country’s authorities. Indeed, the FED was established in 1913 and at that time it was agreed that the country’s financial policy would be placed in the hands of the financial entity which is for all intents and purposes not strictly a government agency but a private enterprise. One of the arguments was that if it were the presidents who could decide about the interest rates and the amount of money in circulation, they would soon trigger huge inflation and consequently bring the United States to rack and ruin.

Indeed, that might be so, the argument is somehow valid. Still, the same arrangement appears somewhat weird. It looks like a ship’s captain cannot give orders to the ship’s helmsman and decide about the course of the voyage. The passengers have entrusted their lives to the ship’s captain, not to the ship’s helmsman (by the way, governour derives from Latin gubernator, which means helmsman); consequently, if the ship runs aground or remains adrift, it is the captain who is held accountable. But the ship may run aground or be left adrift not because the captain was not competent enough, but because the ship’s helmsman refused to take the captain’s orders. Now the ship’s helmsman may be right in refusing to carry out the captain’s orders, but then in case of accident it ought to be the helmsman who should be held responsible rather than the captain. It may equally be so – as mentioned above – that the ship’s helmsman may act out of malice or may take orders from some of the influential passengers (shareholders). That’s a nice fix, isn’t it?

The problem of such or similar checks and balances is not limited to the United States. If leaders are restricted in their action, how can they be expected to deliver on their promises? If leaders cannot deliver on their promises because they are restricted, what sense then is there for having elections?

Silver is important

The USA recently officially classified silver as a “critical mineral” on the Department of the Interior’s list. What is this list and what does it mean? It contains minerals that the United States considers critical to its economy and national security. Many come from countries that are considered political adversaries, such as Russia or China. What does it mean for silver to be included on this list? First of all, any project related to the extraction, exploration or processing of such a mineral can claim state financial support. In addition, the process of obtaining mining permits is reduced from 10 years to 1-2 years, which can significantly support the development of national resources of this mineral.

Silver, together with gold, has been a real hit for stock market players in recent years and is steadily gaining in value. Readers of our Bulletin may recall our multiple recommendations for gold and silver. The US government’s decision and the possible imminent upheaval in the financial world – the switch to digital currencies by some central banks (CBDCs) with a return to gold backing – will ensure that the two precious metals will continue to shine for a long time to come.

Trump’s tariffs

The media in the EU tend to condemn and ridicule the US president. Yes, you could say that for them he has become the second biggest threat to the Western world (after Putin of course). Now thinking coolly and analyzing the latest facts, it can be concluded that Trump is doing everything good for America’s budget and economy.

Trump’s tariffs, for example, are portrayed as malicious and harmful to the global economy. In fact, they are an effective tool to successfully negotiate with all countries. The latest example: After negotiations with Japan, the US has lowered tariffs from 25% to 15%, but tariffs on steel and aluminum (50% and 25% respectively) remain unchanged. To reach this agreement, Japan agreed to open its market to American goods, including cars or agricultural products. Japan also offered a package of USD 550 billion in the form of loans and investments in US sectors such as semiconductors and energy, with the US retaining 90% of the profits.

If you want to take the propaganda of the leading Western media (CNN, BBC, ARD and all who serve the US Democrats) at face value, then consider the following:

① when someone/something hurts the US economy, stocks on Wall Street fall – since the stock market has realized that Trump is boosting the economy again, the indicators are rising and reaching their all-time highs.

② many companies listed on the Japanese stock exchange recorded growth following the announcement of the deal with Trump. The Nikkei index rose by almost 4%, while automotive companies rose from 9% (Nissan) to 17% (Mazda). The solid announcement of tariffs in April and tough negotiations by the United States have put pressure on trading partners to make concessions. Although the tariffs are lower than stated, the US has secured preferential terms such as opening markets for US exports (for example, Japan will buy 100 Boeing).

③ revenues in the US budget are rising hyperbolically and Trump will probably be able to realize his election promises.

Quelle: Daily Treasury Statement

Tariffs are, of course, a double-edged sword – they can increase prices and inflation in the US – but they have allowed them to obtain favorable terms that would be difficult to achieve under normal circumstances.

If you are in a dilemma as an investor…

…then take a look at the world’s most famous investors and their strategies.

In our last bulletin, we devoted a lot of space to Warren Buffet. Another bigwig of the financial world – Peter Lynch – has been providing recipes for success on the stock market for decades. His long-standing approach is the opposite of what beginners in the financial market experience today: they buy access to a trading platform, sink into the swamp of information from the Internet, experience their first defeats, buy access to information from analysts, experts, specialists and … according to statistics, 80% of them do not make profits, but losses.

Today’s investors rely on so-called technical analysis (of share prices, for example), fund forecasts and the like, the opinion of an advisor. Lynch, on the other hand, has proven that an ordinary investor who is familiar with products and services can be successful if he invests with discipline and patience.

What assumptions guided our hero when analyzing companies? Lynch believed that the key to success on the stock market was to understand the business rather than blindly following the numbers. For example, going to a shopping center and observing which stores are successful (crowded). His method was based on several main pillars:

① excellent product – a company must provide a product or service of distinctive, inimitable quality;

② scalability – The company’s business model should allow for broad development;

③ overlooked – the company is overlooked by Wall Street for some reason;

④ long-termism – instead of speculating, Lynch invested in companies for years or even decades on the assumption that a good business will turn a profit given enough time.

⑤ empiricism – Lynch avoided complex mathematical models and relied on direct experience and intuition, supported by reliable research.

If this has aroused your interest, consider the following Lynch’s thoughts:

① “professional investors don’t understand the basics. A bunch of software does nothing unless they have done basic homework on companies. They feverishly buy access to services like Bridge, Shark, Bloomberg, First Call, Market Watch instead of spending more time at the mall”

② “When even analysts are fed up with any stock, it’s a sign that it’s time to buy it.”

③ “If I find 10 good stories of companies and they are all equally attractive, I buy all 10 and look forward to these companies growing. It’s like playing 10 games of poker. The third story is doing better, the sixth is weaker, the seventh is stable but has already earned 50%. Then you sell the seventh and buy the third again.”

④ “If the prototype works in Texas, postpone buying stock until the company shows it can make money in Illinois. Will this idea work elsewhere? That’s exactly the question I forgot to ask the founders.”

⑤ “You need to invest in multiple companies because of the five you choose, one will be wonderful, one will be very bad and three will be average.”

⑥ “You can lose money quickly, but you need a lot of time to recoup the losses.”

Warren Buffett said of Peter Lynch: “Well, I know Peter, I like him personally, and of course he has a great track record. Of course we have a lot in common, but there are also some differences. Peter of course loves to diversify a lot more than I do. I mean, he has more companies than company names that I can remember. But this is Peter and I… you know, I’ve said in the past that there’s more than one way to heaven in investing and that there’s no one true religion in this space, but there are some very useful religions. Peter has one, and I think … there’s a lot of overlap, but I wouldn’t do as well if I tried to do it the way Peter does, and he probably wouldn’t do as well if he tried to do it the same way I do.”

You have to find your own way. Both to invest correctly and to understand world events objectively. Gefira will help you with this.

Trump wants to cause a recession

The American president changed his approach to the stock market in his second term. To the extent that he paid homage to Wall Street during his first term, he recently said in an interview for Fox News that he needs to build a strong country without looking at the stock market. The average American cares because retirement funds are operating on risky assets and many small investors are putting their savings into the stock market instead of keeping their money in low-interest accounts like Germans or most Europeans.

Trump believes that we are now facing a transition that will eventually lead to the return of wealth to America. Incoming Secretary of the Treasury Scott Bessent later added fuel to the fire when he said during his interview that if anyone thinks Trump will change his policies to stop the stock market decline, they will be disappointed. Bessent is of the opinion that we are currently in a “detox period” – a transition from reliance on public spending to private spending – and any negative market behavior is the legacy of Joe Biden and his policies to stimulate the economy with debt and deficits.

The new managers on the Potomac point out that the indicators are falling and Wall Street appears to be heading for a deeper correction.

What is also falling are the indicators of economic activity: the ISM Manufacturing (PMI) (activity in the US manufacturing sector), while ISM Manufacturing Price (change in the prices manufacturers pay for raw materials and other materials for production) is rising significantly. In the case of the former, it was above 50 points, i.e. above the threshold above which the economy is assumed to be developing, but well below the previous value and also below forecasts. In the case of the latter, it may be a return of higher inflation. In addition, orders in the US manufacturing sector are falling. Unemployment is also rising – Trump’s (or Musk’s) redundancies in the public sector are important here.

As a result, Americans are less willing to spend their money, which means that domestic demand, one of the main drivers of the US economy, is falling. After all, consumer spending accounts for 68% of US GDP!

Can such a situation suit the Trump administration? Paradoxically: Yes!

It is well known that the Fed is maintaining high interest rates (4.5%) in response to persistent inflation of around 3% (target is 2%). High interest rates lead to higher bond yields. Considering that the US needs to refinance a large portion of its debt this year (a good 25% of the total), it would be best for it to do so at the lowest price – i.e. the lowest interest rate on bonds. It is well known that it will not be easy to get the Fed to lower interest rates in the face of increased inflation, so a recession is the best solution. With limited economic growth and demand (see above), inflation may ease considerably and the associated layoffs could prompt the Fed to cut rates to stimulate economic growth.

Hence the tariffs, hence the trade wars – the aim is to bring production back to America, to increase the attractiveness of US products for domestic consumers and… to initiate a new, better period for the American economy after the recession.

Milei shows central bankers how to do it right

Argentina’s President Javier Milei, whom we praised in our article in February this year for his sober views and realpolitik, is showing his clout. Since he has been in office (exactly one year), applying radical measures, he has brought inflation in Argentina sharply down. At the beginning of his term of office, monthly inflation stood at 25.5 %, but it has now fallen to 3.5 %. This success is based on a comprehensive “shock program”, which included far-reaching cuts:

Reduction in government spending: Milei halved the number of ministries and laid off numerous civil servants. Subsidies, for example for energy and transportation, as well as social benefits such as food subsidies and support for soup kitchens were also cut.
Monetary and fiscal policy: Argentina’s national currency, the peso, was devalued and a strict austerity program was introduced to reduce the budget deficit. The aim was to achieve a balanced national budget.
Market-oriented reforms: Milei was guided by ultra-liberal principles, aiming for a drastic reduction in the state apparatus and greater deregulation.

The FED or the ECB take years to get inflation under control, surrounded by crowds of employees, in their towers in Frankfurt (ECB) and Basel (BIS), in their bunkers in Fort Knox, cut off from reality, with the media serving them, convincing the public of the efficiency, caring and reasonableness of central bankers, leading us from one crisis to another. The ECB can do nothing about the deepening recession in Germany. An Argentinean who is going against the tide, a showman whom all the Western media despised a year ago and predicted his quick downfall, has succeeded. Against all odds. Though he is on the side of Ukraine and Israel in their conflicts, though he speaks out against the BRICS, Venezuela, Iran, Russia and China, nonetheless he argues against woke culture and all left-wing ideas for social transformation. Note that he was the first head of state Donald Trump met with (informally) after his election. While Trump is a protectionist who will try to control the US market with administrative measures, Milei is an opponent of liberalism and open markets. After 20 years of socialist government in Argentina, came a man who keeps his promises: he is putting an end to socialism and its failed ideas. First in the economy, then in all areas of life. One man, one word.