Blain’s Morning Porridge 3 March 2022: Economic War is better than a hot one
“Alas, that these evil days should be mine...”
This Morning: Trying to strip out noise from facts has never been so complex! It’s time to resort to the rarest of all commodities; Common Sense – to work out how this will likely play out. There will be clear winners – and one massive loser – and significant economic pain before we get there.
At times like this its worth recalling two of my most overused market mantras:
- The market has but one objective – to inflict the maximum amount of pain on the maximum number of participants, and
- Things are never as bad as you fear – but never as good as you hope.
After that quick reminder of short, sharp and contradictory market common sense… what are markets telling us this morning? My opening bid for Chelski is £1 and give it to the fans… even if Chelsea supporters are definitionally delusional jibbering idiots (in my humble opinion). (Seriously… I wonder which Middle East prince will pick it up…)
There is so much noise, froth, sturm und drang as the news for Ukraine whips up all kinds of confusing signals threatening to undermine the markets. It’s a good idea to Stop. Look. Listen. Think. Try to figure out the likely, unlikely and very unlikely consequences. There is an incredible amount of information, disinformation, news and views out there – the trick is understanding what is real, likely and possible and discounting what is not.
After thinking about it.. I find myself surprisingly bullish… even though we are, de-facto, engaged in economic war with Russia. To ensure it does not turn hot across the whole of Europe – we need to fight it just like real war, putting the West’s economies in full conflict mode and being prepared for economic pain inflicted back on us.
Short-term – Trade what the crowd is thinking – and bear in mind the news will whipsaw sentiment in coming days. In coming days, I am sure much of the newsflow from the real war in Ukraine will be tragic.
Long-term – Figure out what the future looks like. It’s clear Russia’s invasion of Ukraine has crystallised what was already a gathering inflationary tsunami and will likely trigger recession as supply chains break again. How the West’s Central Banks and Politicians respond will be critical. The consequences will rock and challenge the West – but they don’t need to be disastrous. Central Banks can use what they’ve learnt over the last 12 years of monetary experimentation to address it, and don’t be put off by Jay Powell confirming US hikes are coming.
This is an economic war. It’s time to adopt a wartime economic stance. The West’s Paladins will be the Central Banks – they have substantial economic firepower they can and will bring to bear; delaying rate tightening, trading low rates against rising inflation to maintain growth and avoid market meltdown. They can continue to spend, at the cost of wracking up future debt.
That will have consequences – but there is no point dying of thirst to save water! Fiscal and Monetary Policy can and will keep the West economically functional.
The inevitable consequences of inflation on savings, prosperity and national wealth can be addressed via social policies. None of these things will be easy – they will trigger consequences – but we will do these things because they will be necessary and they will be difficult, to misquote an American president.
In an economic knife fight between the West and Russia – the West should not hesitate to pull out an economic blunderbuss, and use it.
For Russia? I don’t think they have clue what is coming.
One of my colleagues got through to the last man left on a commodities desk in Moscow yesterday – Russian TV is showing “peacekeeping” tanks being greeted with bread and salt, and only flowers being thrown at them. But, as Moscow will find out, this is not the 1930s. The Russians are not daft. They will figure it out. Runs on banks, protest and ferment will follow. Last night it was cut to Junk and is in technical default (as I predicted earlier this week). Their nation has become a pariah siege economy, and will shortly be hamstrung with Weimar-era inflation. All the West need’s do is increase the pressure – and wait.
Here in the Middle East, where I am currently working on a project, there is a surprising level of sympathy for Russia – many believe Russia has a justified case the West reneged on promises not to expand NATO. But, even they admit Putin’s invasion is unjustified. What China thinks is critical – do they break with the West and embrace Russia, or let it take its course while ploughing their own fertile furrows. The latter is the more optimal course. But perhaps, President Xi may not see it that way.
As this immediate crisis hardens into a new investment landscape what is going to be the most significant shift?
To my mind it will be in Europe – suddenly the richest, but most fragmented continent has pulled itself together! After years of endlessly debating where to put the commas on 1000-page agreements on what kind of bananas they can sell to citizens, suddenly Europe has found common purpose uniting versus Putin.
To the great surprise of long-term Euro-sceptics – including myself – Europe has awoken. The complete reversal of years of Ost-political dumbf*ck*ry by Germany, tough talking by Brussels, and even the most peripheral bad Europeans understanding their future as part of a rich influential Europe is far better than cowering under the threat of renewed Russian expansionism. Europe suddenly gets it – and dimly glimpsed in our future are glorious uplands..
Well.. maybe. How long European unity lasts is open to debate… later this year the USA is likely to remove itself from the Western “coalition of the willing” when Biden is crushed at the mid-terms and the GOP chose isolationism ahead of Trump V2.1 or similar in 2025. European leaders need to decide if they can continue/risk the fight without a reliable partner in America.
Hold-fast I say! This could be the making of Europe! (Although, to be fair history is not on our side here – when confronted by external threats, the default European sovereign reaction was to wonder who would stab them in the back, and therefore who to stab first..)
I was talking with an influential UK broadcaster the other night (you would be surprised who subscribes to the Porridge), and knowing me he was frankly stunned by my unexpected bullishness on Europe. (I am seldom mistaken for a ray of sunshine when it comes to being bullish.) I see Europe having just had its Road to Damascus moment of St Paul, or maybe the bit in Lord of the Rings where King Theoden of Rohan wakes from his addled drug induced apathy. But, do recall, they both paid heavily for what they came to believe.
This vision of a prosperous, effective Europe is an intriguing and exciting one… could it withstand the demands and pressures its many tribes would place upon it? Who knows… but in the fires of conflict and all that tosh are the strongest of bonds forged….
We can’t just hope the Ukraine crisis goes away. War in Ukraine is already hammering at the doors of the West.
I heard yesterday One-World, the UK’s global telecoms/internet satellite constellation was denied a launch on Saturday unless it promises its’ birds are not used for military purposes and the UK government divests its stake. Western companies that haven’t fully exited Russia – like VW and Goldman – are being rightly castigated by the public. This is Economic War – and what we know about war is go in hard, heavy and like you mean it.
Meanwhile, the media fascinates me at present. Everyone is an expert.. but for what its worth I have some questions about Ukraine.
Why is it all the Russian troops Ukraine has captured and displayed on the media seem to be teenage conscripts or elderly reservists? Over the past 20 years the Russian armies have been substantially professionalised and only 20% are now conscripts. Might that mean the professional Russian forces are somewhere else? Remember – Maskirovka – the classic Russian tactic of making their enemy focus on one hand while stabbing them with the other.
Is Putin really mad? That’s just too easy. I do think he’s been caught by surprise at how vehemently Europe and the US have reacted. He has miscalculated the reaction. He expected Europe to be cowed by energy insecurity. Russia is maybe fighting badly, but is by its playbook: being predictably unpredictable, throwing subterfuge and as much distraction into the battle and noise as possible, and unsettling their enemies to the maximum extent. Putin’s threats to escalate right up to nuclear seem classic attempts to play the “mad dog”, ramping up fears he is deranged in order to make the West absolutely terrified. Its intimidation – pure and simple. Should the West call his bluff? Amateurs talk tactics. Professionals talk logistics – which is where sanctions will crush Russia.
I expect all-out sanctions will work – but I doubt swiftly enough to save Ukraine in the short-term. Stories the Russians have already run short on war materials, and Ukraine only has to hang-on seem unlikely. In the near term, the tougher the sanctions – no matter how painful for the west, the more likely they are to destabilise Putin’s regime.
Finally. Some Morning Porridge Housekeeping…..
Unfortunately in hysterical times, it’s the most hysterical imaginings that tend to attract the greatest following.
Sadly, that means I am having to “aggressively moderate” the comment pages on the website – I seem to have attracted an infestation of conspiracy theorists, Trumptards, Antifas and pro-Russia apologists who believe they have a democratic right to insult me, undermine my opinions, question the veracity of my sources, my experience, and my right to comment while questioning my motivations and honesty.
Bothered. I shall simply block the dross. My site. My decision. Free and open comment isn’t possible when you are swamped by eejits.
I deliberately try to have a laugh while writing the porridge – most financial comment is dull, boring, coma inducing twaddle. That does not mean it’s not serious – my goal is share ideas, insights and opinions for financial professionals across trading, investment, regulation, banking and politics to consider and act upon. I welcome retail and interested non-professional readers.
However, I am not going to be a forum for Tinfoil-hat wearers, Trumptards, Wokery, Climate Change Inquisitors or Heretics, or honest-to-goodness outright idiots, although in a guesture of conciliation I will welcome Chelsea supporters to express ideas…. (like if eva!)
Five things to read this morning:
Thunderer – Merkel’s legacy is in ruins – good thing too.
FT – Valuations offer European stocks support amid Ukraine uncertainty
WSJ – Sanctions carve outs for energy aren’t enough to keep money flowing to Russia
BBerg – Russia’s Rating Cut to Junk,
Bberg – Weaning India away from Russia will take time
Out of time and back to the day job..
Strategist Shard Capital
Excellent commentary as always. Regarding the effectiveness of economic sanctions, there is no consensus within academic circles that they actually work. Lee Jones wrote an article in Unherd earlier this week questioning their efficacy, for instance. In short, do you think that sustained Western economic sanctions will result in Putin changing his current course of action? Whilst the media has pushed the narrative that the world is united in condemning Russia, India, China, UAE (as you mentioned), and many more, have yet to sanction Russia and will continue to do business with it. In China’s case, continuing to buy oil and gas, wood, and other raw materials. As a financial expert, I’d be keen to hear your opinion regarding why you think economic sanctions will be successful (I’m annoyingly one who sits on the fence): they haven’t stopped North Korea from developing its nuclear capability, nor Iran from pursuing the same course. BTW, read your commentary every morning – love it!
Economic sanctions will succeed in relation to how sophisticated an economy/society is, how well it can self-suffice, and how connected it is to the global economy. Sadly, sanctions will suffer from the law of diminishing returns as they take effect – as you sanction a country the less connected it becomes, and the less effect they will have. But by that point you’ve economically bombed them back to the Bronze age.
You can see that with North Korea – the least connected nation on the planet. Sanctions and mismanagement result in mass starvation, but have limited, almost zero effect because they don’t know what they are missing, make most stuff themselves, and they were used to having nothing either.
China – sanctions and trade tariffs do have effects because they hit the basis of the state grand plat – mass manufacturing for export to raise wealth to a level where domestic consumption kicks in. China is big enough to pretty much internalise that domestic consumption, and they have a very powerful and unique cultural imperative to do so – they have their own Tencent, Alibaba, EV makers, Tech firms, etc.. They can avoid sanctions through economic autarky – but eventually they will fall behind the west because capitalism drives productivity, invention and innovation much faster than state direction.
South Africa – sanctions eventually worked not because they caused poverty for the black population (they did), but because they impacted the sensitivity of the white minority who realised what they were missing from the globalised world.
Russia will be interesting. There is a large aware middle class who are very aware of rising inequality, are unconvinced of their government, and are about to see chronic hyperinflation, their savings destroyed and their aspirations flattened. The nation may think it controls energy and resources, but are not in a position to self-supply decent modern tech and standard of living unless they wholeheartedly embrace China – in which case see above. Russia is a pariah state, but also connected to the global economy. Here in Dubai (still here) its full of Russian tourists who suddenly find their credit cards aint working and are paying for everything in cash..
Lets see what happens.
Sanctions vs Russia is by no means a slam dunk. ANd they need to be cast-iron and not allow any oligarch to seep through.
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone,” wrote the French philosopher Blaise Pascal.
With Putin, perhaps this is true. Perhaps the pandemic has given him far too much time alone with his thoughts to further his paranoia. He’s like a spurned lover who feels nothing but spite towards his ex who has grown wearisome with his promises of wealth and progress ‘tomorrow and tomorrow’. As have the other ex soviet republics who realise better days lie outside Russian influence. He has failed. He has failed to make Russia great again. Russia under Putin has delivered nothing to these countries and also to his own. Why would you not look elsewhere? And so now, he feels betrayed and insecure. He’s mistakenly betrayed this emotion and hurt as well. This is a war of revenge and he will not stop until Ukraine is utterly destroyed.
If Russia chooses to throw itself into China’s arms they will be welcomed. But only because China will be running the market – there will not be price discovery to set a fair price for Russia’s resources, energy and commodities, but only the lowest price China thinks it can pay. Ask Iran how that plays out..
‘We had to destroy the village in order to save it’.
Russia may well claim Ukraine, but at what cost?
Sadly I think Ukraine will fall.. The Russians will crudely and destructively press on, and as you suggest… hold what?
There are number of videos of a particularly seedy looking American berating the Ukrainian government for arming the populace on the basis it now means a bunch of gangs are now armed to the teeth. He suggests its them, not Russians, murdering Ukrainians on the street. Really…?
Ukraine is not a pristine clean state. It comes near the top of the list of corrupt states.. If Russia ever takes it.. it will struggle to control it..
And if, pray, Ukraine does hold out.. this will be the making of the nation.
Furthermore, why would you want to hold onto a hot coal?
After all the death and destruction wrought, they’ve made it abundantly clear that they are enemy no 1. Will this be Putin’s Afghanistan?
Bill I am sorry to hear that those with limited IQ have resorted to bullying you by text and email. I am reminded of a saying of years ago that bullying is the last resort of the weak minded. It would seem to have been proven here.
When I read your thoughts I buy into someone who has no political axe to grind and brings logic and reason to a table groaning with self interest and bias.
Please ignore these tossers and keep up the flow of alternative views. Your inimitable style does make me think of Dame Edna whose approach could be summed up as “methinks you spoke bull manure. Please expand”.
sanctions? is germany still buying and receiving gas from Russia and still paying for it to Sberbank?
i think it still going on
I believe the UK is expecting some Russian LPG carriers to dock later today. Apparently the stevedores will refuse to work on them, but they will get unloaded somehow.. and we will attempt to pay.. and then we should take the pain and refuse any more..
I think I shall go all Scipio on this: Putin Delenda Est..
Bill, I really enjoy your perspective, finance with a socialist twist, as I came from up north like!
The issue that I would like to see you address is the oiligarchs, as the amount of their illicit money spread around the world is immense, and it is mostly invested in property which has caused inflation for the non monied classes, London is a classic example, but it extends to all large cities. Pressure on these people who support Putin is required, confiscation of all these illegal funds and purchases will make them remove him to preserve their wealth and ability to travel. When the rich suffer, they make changes necessary for self preservation.
Bill, please allow. point of debate on one point. (My tin foil hat is in the closet). Yes, it appears Biden is set for a drubbing in the midterms, but don’t expect an about-face regarding Ukraine.
While many Republicans lean toward isolationism the people of the US love an underdog and generally loath Putin. The Ukrainians have caught the imagination of our public and most of our politicians are slaves to the polls.
Biden’s defense of Ukraine may be his saving grace, a year is a very long time in politics. If not, I can’t see the Republicans turning their backs on the Ukrainians.
As someone whose life’s work (now retired) has depended on being able to objectively read the political winds, I caution that in this and other posts you seem too certain of Trumpist victory and US isolationist withdrawal.
The GOP will almost certainly make gains in 2022 (though some circumstances may mitigate the gains), but Biden is a committed and fairly savvy internationalist and in these matters the president is supreme (especially given how Congress has given away most of its powers in this area over the years).
As for 2024, Dem defeat in 2022 could likely strengthen them in 2024, a pattern long observed in US politics. Barring a disastrous Kamela Harris candidacy, the Dem strength in presidential elections remains.
Bottom line: it is wayyyy too early to think we know the outcome.
I will hide my politics here. I hope you are right. I fear you are wrong.
Good piece today.
Thanks Bill for your insights, I have significant percentage of portfolio invested In Russian etfs (erus and rsx), gazprom adr etc even before war, I have added more in melt down. What would be best course of action, would it be best to cut my losses?
Your call mate. I am not a moral councillor.
I would think its fine to simply let your Russian holdings sit tight – trying to sell them would be purgatory.
I did think about buying Russian paper , but then I thought about it… and came to the conclusion… NO. And our compliance had made clear it wasn’t an option. I can see enormous profits – but I’d rather sleep at night. Your call.
You probably aren’t doing anything illegal holding Russian Stocks.. but ask your legal advisor on new purchases.
Thank you Bill for taking the time to answer the question.
Sadly Putin will not stop at Ukraine, he is dreaming big. I was reading earlier this evening that Transnistria has now asked for independence. It will not take long until Russia will cross border in Moldova to ‘liberate’ the separatists over there. Do you think is just coincidence or part of the plan?
Even if we anticipate a speedy resolution to this war, the reliance on this energy source is obviously a major strategic weakness. In any analysis, energy input prices are going to be be higher, food prices will be higher, commodity prices will be higher. Inflation will be higher, real incomes will be lower and interest rates will be much higher for much longer than people currently expect.
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