Blain’s Morning Porridge, September 7th 2022 – Things are never as bad as you fear… are they?
“If you are feeling depressed, then stop reading the Daily Mail. It will most certainly help.”
This morning– The news looks bleak. A cataclysm of gloom is set to sink Europe and the UK – but, maybe things aren’t as bad as we think. Good news and a realisation things can get better could stabilize sentiment, and build a recovery base. Maybe?
Perhaps the most important of Blain’s many Market Mantras is: “Things are never as bad as we fear, but seldom as good as we hope.”
Try to remember it as you read about the multiple challenges facing Occidental Economies:
- The Ukraine War: Uncertainty on what may happen next and how it could further escalate, and otherwise remain a long-term barrier to growth.
- The Energy Spike and Energy Insecurity: A massive lightbulb moment for governments, with the threat of economies being destroyed by the rise in energy costs. Power outages and energy rationing are set to cripple Europe – apparently.
- Embedded inflation and rising social discontent on the back of wage inflationary pressures: increasing discord is expected across Europe
- Ongoing Supply Chain disorder: China no longer exporting deflation through cheap goods, while key strategic products (including chips) remain scarce.
- Geopolitical Instability changing established relationships: the support the West traditionally assumed from the Gulf and Asia is no longer apparent as China eyes Taiwan and digests Hong Kong.
- Political Instability: Populist politics in the US, UK and Europe raise increasing doubts on currencies, bond markets and economic growth. Italy’s next government will call for Europe to reach an accommodation with Russia
Plus, all the usual stuff:
- Unravelling the massive stock and bond market distortions following 14 years of monetary experimentation and mispriced money
- Inflation, inflation and inflation…
- Consumer Cost of Living Crisis hitting debt sustainability.
- Central Banks hiking interest rates to combat inflation – even as governments are splurging on fiscal rescues.
- The rising risk of recession and stagflation.
It’s not a pretty picture out there…
But maybe we are being unduly gloomy?
Get over it. Things are never as bad as we fear! Markets, expectations and outcomes evolve – and when things look bleakest, they often tend to move in a more generally positive direction than feared. (True – sometimes they get worse…)
The thing is… we like to scare ourselves.
Any newspaper editor will confirm horror headlines garner most hits, and sell more subscriptions than good news. Negative headlines drive and magnify negative reactions, and curiously are easier to accept than good news. We are biased to always assume the worst – which is why if you put 5 market talking-heads in a room to talk about growth, they will always agree the world is about to end in a cataclysm – which never happens. (In my experience..)
If you are feeling particularly nervous – then whatever you do, not read the new Nouriel Roubini end-of-everything book: “MegaThreats: Ten Dangerous Trends that Imperil our Future”. It’s classic Econo-dysto-Porn. It is apparently so miserable it will sell millions of copies. You would never have heard of Roubini if his books were about how successful the US economy is – he would be correct, but who wants to read about it?
Dr Doom appeals to the current doom and gloom zeitgeist. He called the 2008 crisis. Now he says were heading for the ultimate economic disaster; “a great stagflation that will make the 1970s look moderate.”. Oh dear. I guess I better get the bunker ready. The “preppers” who blame the Davos Cabal and other rich conspiracy theories for all our woes, will say he underestimates the coming “great reset”. Whacky populist Politicians will use it to argue for economic isolationism. A chum was joking the right portfolio composition now is 40% Gold, 40% Tinned Goods, and 20% Small Arms.
If you are of a nervous disposition, don’t buy the Roubini (actually, it’s not published till October..) He will upset you with his recipe for debt crises, geopolitical tension, serial pandemics, migration, climate change and host of other nasty things… They will only upset you further. That other voice of professional global economic misery, Nassim Taleb says: “I have never read a more lucid and nuanced account of our financial condition.”
Again, I say… Relax. Get over it.
Things are not going to be easy… but the end of the World is a long, long way away…
So even though Liz Truss has packed her cabinet with yes-men, and binned anyone who even shook Rishi Sunak’s hand, while Europe is scrabbling to find ways to bailout consumer and small business energy bills through windfall taxes and unravelling renewable pricing agreements…. things could yet surprise us to the upside.
I’m serious. When everyone else is fearful, when everyone else is out… that’s the time to be brave. (Or to put it another way – if we’re doomed.. go out with a boom!)
Humanity is generally more inventive and innovative than we give ourselves credit for. Give us a chance and we tend to find solutions. (Even Americans will eventually stumble on the right solution – after first exhausting every other possibility!) The work-around, muddle-through process works best in market economies, rather than in stultified command economies – meaning Russia and China are set to suffer most, a lesson their new friends in the Gulf, Asia and Latin America will come to rue.
Long term I have zero doubt the West will emerge from the current crisis in stronger shape! We will definitely emerge stronger than either Russia or China. Tech, health and welfare are going to be so much better here. Demographics and taxes – the two most powerful forces in the galaxy – will ensure it. The Occident is ageing, but wealthy (and marginally more healthy!) Russia is poor and old. China got old without getting rich.
The cycle of despair can turn very quickly – one piece of good news can trigger a chain reaction of positivity.
Let’s start with the Ukraine war. It’s a desperate bloody affair for Ukraine, and even more so for Russia. The losses, and the unsustainability of the logistical inventories on both sides, mean a peace is likely. An increasing number of analysts believe Putin will shortly announce he has won, and offer a peace based on the current front lines. He will put the onus on Europe to pressure Ukraine to accept by playing his energy card.
Matteo Salvin of the Italian League, who will be in the next Italian government, has called for an end to Russian sanctions across Europe, to support Italian consumers. Italy is demanding Europe reopens the gas taps by kowtowing to Moscow.
But, much as it will pain the Ukrainian people, we’d be wrong to accept. Winning is important. Whatever the Russian troll-bots would have you believe, there is no moral equivalency between Ukraine and Putin. Letting Putin win would be appeasement, and just be a problem delayed. Russia is the aggressor and must be seen to lose and lose badly. We don’t give folk the credit for understanding that.
It can happen. Europe’s energy situation is not nearly as bad as we think. We don’t need to be beholden to Russia. Putin’s big bluff is founded on persuading us he holds all the keys and has an absolute lock on our energy. He does not. Once we realise Russia can lose, the mood changes.
The latest numbers show Europe’s gas reserve tanks are ahead of the expected curve – the winter storage facilities will soon by 90% full, even with NordStream 1 pipeline remaining shut and not a molecule more from Russia. Even Germany has been able to replenish stocks faster than expected. It’s been costly. Europe has paid top dollar – filling the tanks by buying at the top of a highly distorted market. Europe has paid the cost – now we have to figure out how we afford it without bankrupting SMEs, beggaring consumers and destroying our economies. The blueprints on how to do so are still there from the Pandemic.
Even though I gleefully read that JP Morgan is going to repatriate bank staff from Frankfurt to London because of power cut risks, if we get a normal European winter (as opposed to a very cold one) Europe, including Germany, will avoid power cuts. Things are not as bleak as we fear.
Meanwhile, European businesses are successfully diversifying their energy and raw material supply chains – I was hearing how BASF is keeping fertiliser markets open by importing ammonia from the USA, which ends up being cheaper overall, is less energy dependent, and has the advantage of taking fertiliser security out of Russia or Chinese control. That’s just one single example of how the entire Occidental economy is cutting its reliance on the outside world, and making the group economy of the Democratic West stronger.
Liz Truss is going to announce an imperfect £100-150 bln bailout package. It shows UK government can deliver; biting the bullet to absorb the massive increases in consumer and SME energy bills. It will keep inflation closer to 10% than Goldman’s 22% horror snapshot.
Solving for Europe is not without challenge. Bailing out consumers and SMEs is not so simple – although the EU is talking windfall taxes. How the EU and EBC hold together the Euro in the wake of growing social unrest, recession, job cuts, denied wage demands, the apparent income inequality in society, and the cost of living crisis, is going to spawn a host of naysayers saying the Euro will collapse.
But here’s the thing. It’s easy to explain how Euro will disappear in a puff of logic – but historically that’s not what happens. It’s more likely to surprise its detractors by surviving – external pressures pulling it together rather than apart. Europe is not stupid – they have seen what Brexit has done – and is doing – to the UK.
How quickly market sentiment shifts depends on how quickly we can bring down inflation. That’s a problem for smart governments and aware Central Banks to coordinate. In Europe, the big fear is the new right-wing (and probably kompromated) Italian government will cave, and demand Europe surrenders also. Europe might do best to simply sling them out – why not?
Rather than the end of the World, what we have is a crisis. It doesn’t necessarily end the way we fear most. Yes, there will be problems, unrest and instability, but the reality is better than we think: Europe will survive the winter. That’s a good starting point.
The UK will stagger through yet another likely Tory embarrassment till the next election, and idiots will continue to tell me anything is better than a Labour government. No its not – a change will do us all good. We will survive the winter, and while inflation still has to work its way through the economy – it will not be the end of everything.
Head to the grindstone, keep the portfolios under review. Crisis is coming, but it’s never the end of the World – well, not yet anyway.
Five Things To Read This Morning
FT – EU Plans windfall taxes to counter “astronomic” energy bills.
BBerg – Russia’s Economy Faces Years of “Great Pain”, Yellen Deputy Says
WSJ – Windfall Taxes are the Latest Hit on Europe’s Banks
Thunderer – Democrats target Republican weak points in hope of holding US Senate after midterms
Politico – Germany “skeptical” over price cap on Russian Gas
Out of time, jump on a train, back to the day job…
Bill Blain
Strategist, Shard Capital
22 Comments
Comments are closed.
Even the Americans! I resemble that remark! (Maybe it’s time to move to Canada.). And when you said “…it may pain the Ukrainians, did you mean “Italians”? (If not, I’m missing something, besides my wits….)
The expression… “The American’s will always do the right thing, after first exhausting every other possibility” is a famous Churchillian quote, an it tickles we Brits every time…
My first one. Really thought provoking. Thank you
The closure of significant fertiliser production across Europe seems problematic for world food supplies. It seems unlikely that alternative supplies can ramp up to replace lost ones this year, which implies less fertiliser use, lower crop yields and probable shortages and starvation for many in 12-18 months (probably not in Europe since we’ll print more money).
Right now us buying lng in Europe is also creating shortages and power cuts in other countries who can’t afford 10x pricing.
Does that change the balance of whether it is worth ending sanctions (which as things stand seem to be hurting the west more than Russia given their pivot towards the other BRICS).
Thank you 🙏🏼
Well written, good arguments and a good counterbalance to the ‘headline’ driven society/World we have become. Yes, it’s going to be a bumpy ride but there has been many in the last 100+ years. In the end, the ‘Occident’ prevailed irrespective of what was ‘thrown’ at it👍
Years ago I was introduced to your “porridge” by sailing friends in Cowes, and have since keenly followed your thoughts. I find them provocative and frequently enlightening.
I am a dual national (British and Italian) and equally worried that once again Italy may prove to be the soft underbelly of Europe. However as you rightly say things sometime look worse than in reality: Giorgia Meloni who will likely become the next prime minister has repeatedly confirmed her condemnation of Putin’s aggression and war in Ukraine. She also affirmed her total commitment to NATO and Italy’s Atlantic friendships.
While having coalition parties that are in an appeasement mindset to whom she will need to make concessions, those may possibly not be related to the international domain. She has been extremely coherent and steadfast in her opinions and practical ideology, a conservative leader but by no means a fascist one. This has gone down poorly with any Italian journalist of leftist bent, usually the main news source non-Italian journalists turn to for their opinions. Giorgia Meloni is the closest Italy has come to an Italian Margaret Thatcher. She may just turn out to be a breath of oxygen to give respite to a sick country that has had enough of years of tax and spend stifling of the economy. In her future government’s international affairs Giulio Terzi di Sant’Agata, a highly reputed former Foreign Minister and presently member of Mrs. Meloni’s party may well find an important role. I doubt he would cave-in to pressure from coalition parties. He has proved his qualities in the past in particular when resigning from Mario Monti’s cabinet on a question of principle.
This may all be wishful thinking. But a step in the proper direction from the incompetent antics of the previous largest party and main member of the ruling leftist coalition, the “5 star movement ” which will thankfully be reduced to insignificance by the coming elections.
Tony
Thanks for this. Maybe we are being manipulated by the Italian left media. However, looking at Meloni’s record and previous comments on Italexit and Putin, I can’t help but think she has been to the Le Pen school of learning to say the acceptable.
If you are agreeable I may ask you for your thoughts on Italian politics ahead of the election later this month?
Absolutely. Will be happy to respond.
Best.
I felt a sense of relief and excitement in reading this column . A voice of reason and sanity in a world gone mad. I followed David Smith’s advice S.T. To read your post. He should have made clear that it is required reading.
Then I suggest you subscribe.
£10 per month, freshly delivered to your mailbox each morning.
And thanks to David at the Sunday Times…
Ukraine seem to be much closer to the last Ukrainian that ever.
For 10 days now reporting on the war has been pretty much banned by Kiev. So their attacks on the Southern Russian occupied area (including Kherson) barely make the Western news, and then as opinion pieces where big wigs warn us to expect it to last a long time.
Counterattacks by Kiev up in Kharkov are also being played down.
Russian reports though suggest very small advances by Ukraine with the suggestion that limited advances are being encouraged in order to make destroying the Ukrainian army that much more convenient.
And a large amount of Ukrainian deaths.
The last 10 days seem to have been the most action packed of the war (which ties in with an absence of reporting, obviously). They could quite presage the end of Ukraine’s ability to fight as an army at all, limiting them to long distance HIMARS and sabotage.
All the above can be read between the lines in western media.
The real question being will Europe go back to buying Russia gas once the war negotiations are over.
(Obviously Lyn Truss strengthens US even more than Boris did – she was threatening nuclear war as Foreign secretary).
You may have a point.
The news out of Ukraine is one-sided, and if they are in the midst of a successful advance, its strange not to be hearing more about. News is leaking out about large scale casualties on Ukrainian forces. Maybe it is more a stalemate than Kyif lets us know.
On the reliance of Europe on Russian energy – that is not going to return. Europe will move on.
Russia will face two very stark choices as Western sanctions beggars them.
a) Either it can become a satellite and client state of China – in which case it’s Siberian resources will be pillaged by Beijing far more agressively than anything we’ve seen before, and the Russians will find themselves untermensch in the their own nation, and on the same plane as the Uighers, or
b) they have another revolution, overturn Putin’s regime and the oligarchs and try again to become part of Europe – which is unlikely to succeed as Eastern Europe will never trust them.
Putin can claim victory as much as he likes – Russian leaders have been doing that since the days of Viking Rus. But saying it does not make it true. Russia has historically squandered every opportunity it has been given by the West.
Thanks for replying to me – as a non-Bot!
“The news out of Ukraine is one-sided”
This is very true as regards to western media, much less true of the world as a whole.
If we consider Russian reports to date as being pretty accurate in terms of keeping the score so far, it looks grim.
The real issue is that this is not about Russia and its relationship with China (though if I were Russian I’d far prefer Chinese hegonomy to US). This is about the end of US polarity and how Europe has been cut off from access to the East for the rest of the century. UK/EU are going to sink with US.
Its interesting that the US has sent about $13 billion in military aid to Ukraine while Truss is staring at a £130 billion bailout for British consumers. Its a bit apples to oranges but not entirely. $1 in military aid could have been worth $10 in economic bailout costs had the NATO alliance made a Draghiesque ” Whatever It Takes” declaration and started the arms flow from day one instead of letting it dribble in over 6 months. If course the EU doesn’t work like that and neither does Joe Biden. Biden said an invasion was imminent and he was sure his intelligence was right but, rather than send a squadron or two of US fighters to Ukraine to conduct ” joint exercises with the Ukrainian Air Force” he deployed some aircraft to the Baltics. Ukraine has lost Crimea but without Western recognition of that Crimea is not worth much to Putin. Maybe that and a micro Donetsk People’s Republic can salvage Putin’s need for some ”victory” and let him pull his worn out and poorly equipped army out of Ukraine. Sanctions stay of course until Putin is gone so he cannot rebuild his military.
Excellent work Mr. Blain. I strongly disagree with you on the Russia situation, but on the other hand? We will survive. When food prices double, I could stand some weight loss. When gas prices are over $5 I need to plan trips more carefully. These are going to be incredibly difficult times, much more for Europe than for the US, but we will “mostly” survive. I do feel the poorer segments of society will be crucified by this situation. But they voted for the people creating these disasters. Or more importantly, did not vote. And I personally have not touched my equities. I went long oil and war when Biden was elected. Which has worked. Since then, I have been building cash. I feel the Fed is going another 75 basis points here shortly, and that might be my new entry point. So, one man’s disaster is another man’s feast.
Time for the GGG ETF – Guns, gold and groceries
hello Bill
“Long term I have zero doubt the West will emerge from the current crisis in stronger shape! We will definitely emerge stronger than either Russia or China. Tech, health and welfare are going to be so much better here. Demographics and taxes – the two most powerful forces in the galaxy – will ensure it. ”
The baton of power passed from west to east some time ago, try to keep up Bill.
regards.
If you think so…
I will disagree – I believe the East has as many problems to solve as the more mature west, and the “pivot to asia” seriously underestimates these. Even the Demographics are not so great.
In contrast the West may be perceived as “pale, stale and male” and approaching its dotage – which is a challenge, but could be overcome by tech, social structure, and the capitalist system. Bet against the west at your peril.
Russia is self-sufficient, resource-rich and China has had the world’s leading economy for all but 2 of the last 20 centuries. Groups such as the BRICS bloc, SCO, and EAEU are united and expanding. The EU is fractionating. I am wearing my BRICS T-shirt today. Proud to be in the Eurasian movement.
Mr Hallmark
I have blocked about 20 comments I believe are from Russian Trollbots – each saying something like Russia is wronged party, the west has created this war, Putin is fighting for his people, Putin is virtuous, the West is corrupt, Russia is just, Russia is bastion of law and order.
I suspect you are also a bot – I only post this comment to highlight to the readership the scale of the Russia Troll bot attacks underway against the west to undermine us, and influence the weak minded.
If you are real, then please excersise your democratic right to move to Russia and enjoy it. I suspect your Euroasian movement chums – if there are any – will find themselves in much the same boat as American Facists of 1940 found themselves the following year.
Please continue to wear your Brics shirt – but I suggest you refresh yourself on recent economic history first.
Without xenophobism, perhaps it is time to use trade and purchases overtly to bolster ourselves and our allies.
I have been in training and small scale property development for thirty years now, the days when Chinese quality compared to cost was a no brainer are fast disappearing. In the quality end Occidental production is sufficiently ahead in quality to warrant the extra cost and at commodified end Indonesia, Vietnam and Thailand are cheaper without much noticeable drop in quality.
About five years ago as an expat in Australia I started using the generic internet search engine to find Australian made, then widen to allies and my home country. I am sitting at my Australian made computer in Australian made clothes in the main, arrived at work in a UK assembled Nissan. I have not noticed a real change in costs.
Goodness knows the UK and EU need the jobs now.