Blain’s Morning Porridge Feb 22^nd 2024: The Munich Security Conference and Ukraine – Market Moving.

“If ignorant of both your enemy and yourself, you are certain in every battle to be in peril.“

This week’s Munich Security Conference saw much discussion around the Ukraine end game. The war is destroying Ukraine’s manpower – but what price peace? The West has to understand Russian weakness, and its own limits to impose a long-term and effective future for Ukraine – it rather depends on politics.

Apologies for no Morning Porridge y’day – it was a “fair and foul day”, stuck in gridlocked traffic to and from station for trains, but I had very interesting discussions with clients and new deals to consider for my new venture, Wind Shift Capital.

The top immediate market story this morning is Nvidia’s results – a clear beat… but will it prove a buy the rumour, sell the fact moment? This morning the market is full of counter stories to Nvidia’s upside narrative – how Microsoft, Google et al are already developing their own chip sets, that Nvidia’s lead is time limited by competition, and the obvious question if its stellar numbers and future outlook justify the current stock price. I suspect many long-term holders will be thinking they’ve ridden it high enough, its priced beyond perfection, and is this the time to take some profits?

Check on the website – www.morningporridge.com – for updates on Nvidia and HSBC’s numbers later this morning.

But this morning: Ukraine and markets. One of the topics I meant to write about was the Munich Security Conference – held earlier this week.

The world’s doers and enablers – the real power wielders; generals, spooks, empowered financiers and political movers, rather the B-list of mere bankers, ranting political loudmouths, and self-proclaimed tech-visionaries – now rate the Munich event as far more important than the nonsense that is Davos or World Bank gatherings.

Real discussions about real stuff, real geopolitics and real power.

Why does Munich matter for markets? Macro factors, investor confidence and events dear boy, events drive sentiment and thus how the voting machines called markets perceive the future. Munich is a good a guide to geopolitical outcomes and the consequences of politics as one will find. Oh, to be a fly on the wall… what follows is based on the observations of contacts who were there, spiced with my own thoughts.

This year’s conference was haunted by stark shadows of power. Trump isn’t prepared to acknowledge it even exists – but he cares, and that showed as he tried to derail it, making clear to senior Republicans any involvement would result in their exclusion from a Trump v2 administration. Many believe Putin timed the execution of opposition figurehead, Alexei Navalny, to demonstrate his indifference to what the West thinks.

Game of Thrones it was not… but a gory shocker it may still be. A main theme was the Ukraine End Game.

A consensus at the conference – which will upset the many doomsters who believe the Red Army is poised to roll up the Ukraine – is the invasion remains a massive Albatross around Putin’s neck. It will remain a personal humiliation for the long-term. It’s important to understand that Putin can’t move on till he has put all this behind him:

• The Special Military Operation clearly failed in its objective of a swift, clinical removal of the Kyiv government – if anything it strengthened it.
• It’s cost hundreds of thousands of casualties, unravelling long-established myths about Russian military superiority and the strength of the “Steamroller”. Russia’s military credibility has been battered.
• Massive corruption, flawed tactics, and the inbuilt denial of initiative have been exposed from top to bottom across the Russian forces – severely limiting command and control options, and at one stage leaving Russian mercenary forces, The Wagner Group, as the only reliable formed force.
• Missiles and drone-tech have broken the back of the Russian Airforce, made its state-of-the-art tanks questionable, left its helicopter forces obsolete (far too dangerous to use near the front line), seen the Black Sea Fleet largely sunk, and exposed serious logistical and supply chain failures.
• Whatever they claim about a wartime economy, the Russians are now dependent on North Korea – at the far end of the Trans-Siberia express for artillery shells and other supplies, and on Iran for Drones.
• The war is now a stalemate. If Ukraine wasn’t so handicapped by the non-delivery of promised Western arms, Russia would not be slowly winning back ground.

(Interesting story in the NYT this morning: a well-known pro-war Russian Military Blogger, Andrei Morozow, took the proverbial tumble out an open window (found shot) after he posted the Russian capture of Avdiivka cost 16,000 men and 300 tanks, while the Ukrainians retreated from encirclement intact with losses of a few hundred.)

Thus far, Russia has made, effectively and at a massive cost, just about every mistake it would be possible to make. That may not matter – standard Russian operating procedure (The Japan War in 1905, WW1, The Winter-War in Finland, WW2, and Afghanistan) is to start any war badly, absorb losses, slowly learn lessons, and come back all-in with scant regard to casualties or costs. The Ukraine War has been bloody and fruitless thus far for both sides – it could get dramatically worse, raising the pressure on the West to force a settlement.

Yet, the key takeaway for power brokers is:

• The only way Putin can mitigate the embarrassment of the Ukraine War is a win, on the battlefield or at the conference table.

What happens next?:

Europe sees the signals. Even if Trump loses in November, Europe’s reliance on the US for military defence is now done. Trump conclusively shattered that last week in a comment that could have been designed to destabilise the conference – inviting Putin to attack any nation that didn’t pay for US defence.  NATO will change. Europe is clear it has to stand on its own European legs. That means significant rearmament. Unity and alignment will become the critical themes that will either make or break Europe over the coming decade. Putin is a reminder from history that could catalyse a reawakening of Europe. Everyone will agree it is necessary. Europe’s fractured tribes will have to grow up or else no one will agree on who, what and how.

Trump is a factor in his own right. We are still 9 months from the US Election, but the reality is Trump’s hand is already on the joystick via his capture of the Republicans and Congress. The US election will have a significant impact on ending the war.

We all understand Trump is all about the Art of the Deal. The fact Putin is a murderous, kleptocratic bully and dictator who has aligned his nation with all the enemies of freedom, democracy, and the West, (Iran, North Korea, Syria and now sits as China’s rabid dog) has rather escaped Mr Trump – who sees the issue in purely what has the US to gain, not what the West has to lose. What he understands is the need to do a deal with Putin – and how to force the Republican party to do his bidding to achieve that deal.

Putin will be delighted. A deal that gives his territory and/or guarantees works.

Trump’s ego needs the deal even if that means favouring Putin – something a little like Czechoslovakia in 1938. Rewarding Putin’s aggressions with territorial gains in Ukraine will further widen, perhaps fatally break, the already torn US/Europe alliance, and widen the sense the US no longer holds hegemony in Europe. It won’t negate Putin’s view, expressed on the embarrassing Tucker Carlson Moscow show, that Ukraine historically is part of Russia. It won’t stop Putin.

Russia will insist that sanctions are lifted – which again will be unacceptable to many in Europe, again clearly rewarding Putin for his aggression. Russia is currently selling oil to India and China at less than half-price. Putting Russian oil back on the market (10 million bpd) will crash prices – great for cutting global energy costs and reflating Europe’s struggling economy. It may mean Russians in the Gulf find themselves less welcome – although it will be great for Russian economic recovery, or a round of new yachts for the kleptocracy.

Some analysts reckon oil-price deflation would allow central banks to massively cut interest rates – but this is unlikely. Rates will fall, but not the ultra-low levels seen during QE and Covid – central banks seek to normalise monetary policy, not repeat the mistakes of the QE era and distortions that followed.

Trump’s objective it to play “peace” for raising US consumption: reducing inflation by cutting oil prices, stimulating growth, and painting himself as creator of peace and prosperity.

Europe and Kyiv will demand protections – like a swift move to associate-EU membership and some form of NATO guarantee of new reduced borders. It is in Europe’s interest to see Russia bounded by its failure in Ukraine. They will not accept a reset to previous relationships following a ceasefire. Trump and Europe could have a standoff – which only Putin will benefit from.

The risk to Trump’s strategy is that by denying further support to Ukraine today, (to embarrass Biden), he may weaken Ukraine to the extent Putin feels empowered to go for all-out victory and ignore calls for a ceasefire by the time the US election is out the way.

Biden, meanwhile, is playing to a domestic and global audience – knowing the USA’s reputation is on the line. That’s a bad place to be during an election year, when the polarised US electorate is disinterested in events outside its own borders. He is also facing down Putin unarmed – reliant on Trump’s power over Congress to allow the resumption of supplies to Ukraine.

At the back of any discussion on the Ukraine War is the unknowable of what Putin might do were Ukraine seen to be winning – which could yet happen if it received all the promised war stocks. American spooks will have warned Biden there is a significantly high risk Putin may resort to using tactical battlefield weapons (defining the battlefield as Ukraine) if he is in any danger of losing.

Sadly, there is only one way to deal with bullies. The conference understood that. The difficulty is selling it to electorates.

You don’t “deal” with Bullies. You face up to them and make clear they won’t win. Putin understands escalation to de-escalate. Re-arm Ukraine with what it needs – modern weapons and acknowledge its manpower crisis. There may be no need for a new Ukraine offensive. Let Putin send his penal battalions and human-waves at prepared Ukraine positions and face fully supplied and re-equipped artillery brigades able to strike hundreds of miles behind the front lines. Let him stew at the butcher’s bill, while inviting him to the conference table where the only option is Ukraine’s historical borders and then, maybe.. talks about sanctions at some point in the future. Quietly make it clear to the oligarchs/kleptocrat class in Russia that Sanction are unlikely to be lifted till we are in a post-Putin age.

We know things are not perfect in Ukraine. It has “issues”. A Ukrainian friend’s 75 year old father was beaten up by press gang squad who thought he might be a deserter. We know there was more than whiff of corruption around its politics pre-war. We know the Ukrainians want peace. But any price?

I guarantee I will receive hate-mail over this post. I’m surprised at how many in the West seriously believe we should appease Putin, even that the West is guilty of murdering Ukrainians by enabling them to successfully defend their homeland and freedom by striking back against their aggressor.  Bollchocks.

Slava Ukraine!

Out of time, and off to look at Nvidia

Bill Blain

Strategist