Blain’s Morning Porridge – 3rd April 2023: Oil Shock a Harbinger of Geopolitical Shocks to Come
“You can’t beat honesty, education and competitiveness.”
This morning – Q2 opens up with a new oil shock, but after the volatile start to 2023 what will roil markets next? Might it be further geopolitical instability?
A new month, a new quarter! After the tumult of Q1: a spate of bank failures, the rescue of Credit Suisse, crashing bonds followed by a flight to quality rally, uncertainty and certainty, volatility and liquidity… where are we headed next? There are so many ways to read markets, but anything we say is frankly guessing when we don’t really have a breeze about what’s happening tomorrow. Which outcomes are most likely?
- The optimist will tell you about Central Banks easing rates, repressed demand, entrepreneurial spirits unleased, earnings set to rise, and how battered stock prices are bound to bounce back higher.
- The pessimist will warn of rates, inflation, consumer discretionary spending, and the long slow requirement to undo the financial asset price inflation caused by ultra-low-interest rates and QE distortions.
- Nouriel Rabini et al will tell you we are caught in a doom-loop of central banks facing a trilemma of being unable to provide unlimited liquidity to bloster banks, rising inflation and a deeper recession – triggering a debt Armageddon. Entertaining stuff it is not…
What factors are likely to dominate markets this quarter? Rates? Inflation? Employment? Energy? Or…… maybe something more external; Geopolitics?
Lots of commentators don’t think we face an ongoing banking crisis – it’s already been nipped in the bud by the swift promise of liquidity to US banks suffering deposit flight, and the swift quietus administered to Credit Suisse. Back in September 2007 everyone was quite shocked by the run on UK bank Northern Rock (caused by its funding sources drying up). It was not a one-off. It was almost exactly a year later that Lehman failed. I remember writing a note back then about the Global Financial Crisis 2007-2037 – inferring this ongoing crisis is barely halfway through. Further pain this way comes remain my prediction – but the market seems less concerned….
The reality is the future path for markets probably lies somewhere between all these varied perspectives – we can make our calls based on probabilities, experience and informed guestimation.. There may be trouble ahead, but frankly there always is.
However, first clue on more volatile conditions in Q2 might be this morning’s news of a 1 mm barrels a day cut in oil quotes by OPEC – well, basically Saudi. It should remind us how changed the world is – Saudi Arabia not just flexing its muscles, but making a direct challenge to US hegemony while leaning in towards the new China axis. In terms of a shock to prices, inflation and expectations on markets – it’s a significant move likely to set the tone this month. But whatever the Saudi’s just triggered will likely just be a footnote in the long-term historical record of tension between East and West.
Strip the market down to the basics, and there are three big, closely interrelated themes currently being spun by the tides of human affairs. These define where the global economy is likely going, and where these are likely to lead markets.
- Recession – will be global economy tumble into a deep recession? How much will central banks be able to ameliorate the consequences and at what risk by supporting markets?
- Consumers – how will society and markets cope with crashing discretionary spending? Don’t discount a rising tide of populism across the West – France might just have been the first domino.
- Geopolitics – What does the conscious uncoupling of China and Russia from the West mean?
I have a feeling we underestimate just how destabilising politics and the rising tension betwixt East and West may yet become. Unlike Russia – which favours the direct approach and battle, the Chinese are far more subtle and long-term in their approach.
The Great geopolitical threat to the West, and the reason so many now expect the end of dollar hegemony, is China challenging / offering itself for the top global spot. It’s seized the opportunity – created by the distracted West – to place itself in front of the non-aligned economies by presenting the illusion of an alternative to dealing with the West. Long-term initiative like the Belt and Road project, debt diplomacy, agreeing rules on the South-China Seas with its neighbours, focusing on being the regional power, and flexing across Africa, Latin America, and in the soft Italian underbelly of Europe, it is now inserting itself in the Ukraine/Russia equation as a Russia’s crutch and as the potential peacemaker. Critically the Chinese are resetting the fundamentals of dollar based global trade by inserting the Yuan into oil and other commodity payments.
In a world made less certain by the hatstand behaviour of elected leaders and the bitter political gridlock of the US, the opportunity from China to look a more reasonable partner and present its self as alternative offering peace, wealth and prosperity appeals to many struggling nations. The US is presented as unreliable – China presents itself as a resolute partner.
This morning’s oil spike will be a boon to China’s ambition. Although China is now Saudi’s largest buyer, it is benefitting from Russian oil (being delivered in old, dilapidated tankers bought by Russia but flying whatever the most convenient convenience flag) at deeply discounted prices. By fracturing the Saudi-US axis, global oil prices will remain increasingly volatile. While China can play peacemaker in Ukraine, but ferment ongoing conflict to keep the West distracted and using up warstocks – China is a clear winner.
Senior European leaders, French president Emmanuel Macro and EC President Ursula von der Leyen, are set to pay court to Emperor President Xi. Ostensibly Macron says he will talk to Xi about Ukraine and attempt to unravel the current alliance between Russia and China. (Why would XI listen – effectively Russia is now a client state.) More interesting is von der Leyen’s presence: she has commented previously on de-risking Europe’s dependency on China – the Chinese may be judging how unstable her position may become.
The current political ructions in the US – where the gridlocked house makes the frightening scenario of a technical default and shutdown look a non-zero outcome, and the soon-to-be-arraigned Former President Trump is the GOP frontrunner – raise serious concerns in Europe about the future of the relationship with the US. Trump is sworn to revenge European slights and withdraw US support.
But, just how good an alternative to the West is China? I have some very simple questions: How many Western entrepreneurs are asking for Chinese citizenship? How many western business leaders are seeking to sell their companies to move East and invest their proceeds buying Chinese companies? How many refugees are knocking on the doors of Russia and China looking for opportunity? Govts lean one-way, business and people the other.
The West is not perfect – far from it – but it kind of works. China may build more high speed railways in 10-years than Europe can dream off, but no matter how much they spend, how many theses their educational scientific paper mills push out, or how much IP they liberate from the west, they still can’t make a decent superconducting chip.
Factor that into how this plays out long-term.
Five Things to Open the Quarter Reading:
Project Syndicate The Coming Doom Loop
Out of time, and back to the day job..
Strategist – Shard Capital