The Macro and Micro faultlines set to take down markets – from Ukraine to the UK Post Office

Blain’s Morning Porridge 15^th February 2022: The Macro and Micro faultlines set to take down markets – from Ukraine to the UK Post Office

“I hope you’re not meeting Putin in Kiev.”

This morning – The world is a complex place, and the massive macro threat posed by Ukraine is a clear danger to markets. Less clear, but just as significant, is economic failure at the micro level as firms start to fail as banks pull back, and the sheer injustice of what happened to UK Postmasters. The elites will protect their own – not a single manager will go to jail despite their appalling treatment of post office staff.

There are two sides to markets – the big picture, which is so often indecipherable, and the micro perspective. Trying to look at both together can be quite unbalancing…. Let’s start with the Macro scene:

It’s a big day in prospect for markets tomorrow – apparently.

The two biggest event-driven market crashes of recent history were the collapse of Lehman back in September 2008 (-33%) and Covid in March 2020 (-35%). What’s peculiar about them is neither was a traditional “No-See-Um” – an unexpected shock that roils markets to the very core of their being. By mid 2008 it was blindingly obvious Lehman was going to tumble – the only real question was how noisy the Fed would let it be. (Turned out very – all the way up to 11 on the dial.) The Pandemic was equally predictable – from December 2019 the story of the killer Wuhan flu ramped itself up step by step, till suddenly… global lockdowns, supply chain carnage and the end of everything – for a couple of months.

The last proper “No-see-um” was 21 years ago: the 9/11 attacks in 2001. That was genuinely scary, but a unifying event. Shocking.

Aside from some taper-tantrums, the last time the market’s confidence snapped and staged a major crash all on-its own was the bursting of the Dot.com bubble in 2000 – but we all kind of knew that was coming when a pet-food internet retailer was worth more than the largest oil companies. Before that it was the Hurricane Crash of 1987 – which I remember well. I was a reporter for Euromoney at the time. But.. I digress.

Market crashes don’t need to be a surprise.. Sometimes they appear on the horizon as a looming steamroller of unstoppable events and consequences that just can’t be avoided.

(Meanwhile? The coming Tech Babble Conflagration? Coming to a market near you soon, but let’s get the Ukraine moment out the way first.)

What about tomorrow…?

Who will blink first? Apparently, the Russians will likely launch some kind of assault against Ukraine, while we in the West will all make all kind of angry noises about how terrible that is. (I am slightly concerned at the possibility of fireworks tomorrow morning. I’ll be flying early doors across Mittel Europe in the direction of the Gulf…)

I don’t think I even want to comment on the Geopolitics of the situation. Security, Energy, Energy Security.. this crisis has it all. Shades of August 1914 everywhere – Europe being forced into war a no-one is able or motivated to stop. (Recent references to Munich ’38 by senior UK Conservatives simply confirm history is no longer a strong point in UK schools, and suggests our “politicians” are learning diplomacy from Netflix.)

Whatever the press reports, the outlook is looking horribly messy. Markets? They don’t seem to believe it can happen. Markets are rational and war makes such little sense? But markets are just voting machines reflecting the hopes and expectations of participants – they don’t weigh up real world probabilities. If it happens, then tomorrow will be interesting – and the big question will be what will signal the buy the dip/abyss moment?

The American’s have been trying to set the West’s diplomatic tone – warning a sceptical Europe the tanks are ready to roll. The French premier has been to Russia – but who knows what he said, because he sure would not have been listening. The new Germany chap is in Moscow today – having been briefed by the US first. (This morning’s opening quote is GOP Senator Mitch McConnell’s pithy observation at dinner when Scholtz announced he was visiting.)

Boris might have said something – but we stopped paying attention a long while back. The Chinese want to get their joyless Olympic political dog and pony-show over and done with before they kick off – but I doubt they are terribly pleased with the Russians dominating the headlines over a young Ice-dancer doing the typically Russian thing of testing positive for drugs – yet still being allowed to compete.

Should Russia invade the West tomorrow, or soon after, its been made clear we will get out our very angry letter-writing pens and write a storm of very angry letters and impose all kinds of sanctions on Moscow… Bothered.. but yes…

Who Blinks? Putin needs an out. He’s offered to back off if Ukraine is clearly denied NATO membership – but the West realises that would solve nothing long-term and won’t back down. That’s the impasse. Russia wants defacto control of Ukraine’s security – which the West will not countenance. Biden has no intention of defending Ukraine, but Putin loses face if he doesn’t act. Not ideal – bleak Mexican music playing in the background.

Word is the Russian won’t opt for full boots and saddles across the border. Instead, we shall see targeted air and missile strikes, cyber-attacks and taking out transport and communication infrastructure nodes as objectives. The aim will be to keep the casualties down to limit the damage done to the relationship with the West, and avoid the possibility of an unpopular war at home.

Ultimately it’s a no-win for Putin – and will simply push Russia closer to China, leaving the next crisis to develop. Sanctions will hurt, and even if he sells Russia’s energy to China long-term, a revitalised and motivated Nato won’t help Russia – unless, of course, he goes.. which he wont… will he?

Compare and contrast to the UK headlines

Two pieces of UK news stand in stark contrast to the big picture Russia picture, but both are equally important in terms of what they say about the success and future of Capitalism and the UK.

Yesterday a mid-sized UK online retailer, Studio Retail, went into administration. It employed over 1400 workers in Accrington. It failed after posting profit warnings about the effects of higher distribution costs, rising wages, energy costs, and over-ordering stock ahead of the pandemic reopening, yet it was still profitable and posted a decent margin. The death blow was its bank, HSBC, turning down a £25 mm working capital loan. It has £50mm outstanding in a credit facility, and made £41 mm profit last year.

If there is a UK company that isn’t going to be hit by escalating costs, wage demands, energy price hikes and consumers strapped for cash during the most brutal cost-of-living crisis in living memory – please let me know. I will invest.

Meanwhile, UK revenue inspectors aren’t particularly bothered about chasing over £20 bln of the £74 bln of various COVID bounceback and support loans outstanding – with at least £4.3 bln written off as outright fraud.

Finally… and this get’s me angry.

I’ve been following the unbelievable UK Post Office scandal for some years in Private Eye – because it got scant reporting anywhere else. (There is also a superb BBC podcast on the subject.) I urge all readers to read the Private Eye report (link above) – it names the guilty parties within the Post Office, the Ministerial failures and the Execs at Fujitsu who should be in dock over this appalling scandal.

From 1999 to 2014 over 3000 post office staff were variously hounded out, bankrupted and sent to prison because of irregularities thrown up by a new “accounting” software system managed by Fujitsu. By 2002 it was clear the system didn’t work, and that thousands of post office branches were affected. Yet the post office managers didn’t stop – they continued to prosecute their staff despite knowing the system was at fault – and forced them to make up “apparent” losses. Lives were literally destroyed. Their lives were blighted. Over 33 of them died without any apology or recompense. There were suicides. People went to jail. A 19 year old sub-postmistress, a pregnant post office owner, and a 60-year subpostmaster each spent their birthdays in jail as a result of accusations levelled against them.

8 years after the malicious prosecutions were finally halted, an inquiry (with no power to punish anyone) is underway. Since 2014 the victims have received little support. It’s been a feeding frenzy for lawyers – in one successful class action, 59 of the victims won a £68mm judgement, and watched the lawyers walk away with almost all of it. The remaining victims have been offered derisory compensation.

Not a single post office manager from top to bottom has even been questioned by investigators, let alone prosecutors. The CEO during the later period of the crisis, Paula Vennells retired rich with a CBE, a position as non-exec director of the Cabinet Office and took a raft of director ships – before finally resigning last year. She was, incidentally, an ordained minister of the church. A raft of earlier CEOs have – apparently – got away with it entirely.

Hopefully there will be justice – but don’t hold your breath. This is the UK. The Elites win everytime. I shocks me to the core and has made me angrier than I’ve been in a long time. If this is justice, you can stuff it.

Five things to darken your mood this morning

FT – Bond market signals concern Fed’s bid to cool inflation will backfire

Bberg – UK Incomes see biggest squeeze since 2014 as inflation bites

WSJ – At trial, lawyers present clashing portraits of Goldman Sachs Banker

Torygraph – The decline of Credit Suisse is an embarrassment for Switzerland

ZH – Norway, not USA, is the greatest democracy in the world

Out of time, back to the day job, travelling tomorrow

Bill Blain

Strategist – Shard Capital