Blain’s Morning Porridge – 30th October, 2023: What next in the Economic War against the West?
“Heads I win, Tails you lose.”
The Gods of Chaos have brought together an alliance to bring down the West. If its not the weather, it will be Russia, Gas prices, the Middle East and Oil, or maybe the prime global commodity – Chips – is the next thing they will target. I’m staying long Gold.
This is going to be an “interesting” week.. in the Chinese sense of the word. We have a whole series of conflict, economic, monetary and fiscal forces on collision course. It might get fruity.
Let me try to explain:
With a sore head after the Rugby World Cup Final I went with our village swimming group Sunday morning to swim round the river in the pouring rain. It was the highest tide I’ve seen – the sea level up due to low pressure, a storm-surge up the English channel, and the extraordinary amount of rain that’s fallen on the South of England in recent days. The water lapped over the dock, flooding the road – two chums found their cars floating when we returned, both insurance claims. The ground is sodden and I’m increasingly worried about trees, still in leaf, when the next storm, Ciaran, hits Thursday.
I suspect the Capricious Gods of Chaos toy with us…
Chaos is not yet done with the Weather: costs this winter could skyrocket if increasingly chaotic weather events hit Europe and North America. Rising insurance costs will strain balance sheets, hit consumption and push up production costs. Throw in some more pipeline uncertainty – as we had earlier this month in Finland – and we could be looking at a second Gas price shock.
I wonder who else the Courts of Chaos are aligned with?
2022 was defined by the Russian invasion of Ukraine and the shock it triggered in Energy prices. By luck or judgement it was a well-executed act of undeclared economic warfare by Russia, triggering a host of consequences across Western economies, while testing the political will of nations to support Ukraine. (It’s still happening in the US – at which the Ruskies must be pissing themselves with laughter.)
The energy price shock across Europe had the unanticipated benefit (for the Russians) of unleashing a conflagration of previously suppressed inflation as higher energy costs cracked confidence, triggered runs on goods, and destabilised prices across food, production and supply chains. Gas prices were critical: we were lucky it was a mild winter – although Herculean efforts to build new Gas facilities helped. The success of the Russian strategy can been seen in the looming recession on the back of crashing disposable household income, and tumbling corporate earnings – they come on the back of the energy shock, and how the financial authorities reacted.
I am still trying to work just how necessary and appropriate higher interest rates to address the energy price shock were as the optimal policy choice. I have some doubts. Yet, central banks raising rates to combat inflation was certainly the predictable economic orthodoxy. I suspect Russian economic war planners were betting on it, and had observed closely what happened to western economies through the 2020-21 Global Pandemic, and the orthodoxy noise about “dangerous” fiscal deficits and pandemic bailouts.
Jump forward to today….
Who thought a new Middle East conflict would define 2023? It has become the third massively destabilising economic no-see-um after the Pandemic and Ukraine. Again it threatens massively destabilising economic consequences. (And massive civilian suffering on both sides.) The ready support given to Hamas by Russia, and Iran’s involvement in China’s BRICS and Belt & Road aggrandisements gives plenty of grounds to suspect a degree of common purpose and the shared objective of a destabilised west being unable to counter a resurgent reordering of global power.
All eyes in markets are focused on what happens next in Gaza. There is so much that could go wrong if the blue touch paper of all-out war is ignited. Ask who will benefit?
Initially Israel had widespread support following the Hamas atrocities – which are unforgiveable. But, the pendulum of opinion has swung – aided by useful fools – and Israel is increasingly seen to be the aggressor. It is Israel that is being called up to stem its actions. Yet, we are probably asking the wrong side to contain the war.
Iran holds all the cards. Even if Israel does its’ utmost to keep down casualties and minimise civilian suffering – they will still likely lose in the court of public opinion. Iran, Russia and China will ensure it. It’s in Iran’s interest to ferment further crises and outrage, certain Israel will over-react. I expect they will up the stakes by fuelling resistance, opening second and even third fronts in Lebanon and the West Bank to keep the situation unstable. And if Israel copes, Iran can still push the all-out war button.
The world makes a mistake to think Israel has the power to determine what happens next – but let’s not forget Iran is the nation currently trying to distract from massive internal dissent, executing political protestors and crushing the skulls of teenage girls for not wearing headscarves.
No matter how careful, measured and considered Israel is in its pursuit of justice, it’s the Iranian religious dictatorship that’s deliberately seeking to destabilise the whole region: a) it distracts from internal opposition, b) it embarrasses and diminishes arch rival for Muslim hegemony, Saudi Arabia, c) it damages Israel, the one militarily competent regional power Iran can’t bully and smother in manufactured Arab popular outrage.
Across trading floors there is a consensus oil prices will move higher the greater the degree of escalation and chaos. At the moment prices remain low as Israel moves cautiously – which I why I expect Iran will seek to create further Chaos in the very near future.
What No-See-Um might come next?
I spotted some very interesting headlines over the Weekend:
- The UK luxury powerboat brand Princess announced operating losses on £30 mm on its failure to deliver yachts into its over $1 billion orderbook. It is struggling to source engines and other key gear to put into its super-boats. Critically, they can’t source nearly enough chip sets for their vessels.
- Ryan Air’s voluble Boss Mick O’Leary is threatening to pull orders for new Boeing Aircraft on the basis the US plane-maker is failing to make deliveries anywhere close to time, and the Airline might have to reduce its 2024 summer schedule. Boeing’s delivery crisis has multiple routes – bad management, bad industrial relations, a shortage of trained engineers, and massive new engine problems, but.. also the ongoing shortage of global chips.
- HSBC can’t think of anything better to do than buying its own stock back. What do they know about China we don’t?
In 1973 the global economy suffered the first oil shock. The result was a decade of stagflation, industrial unrest and all that followed in terms of destabilising Western Society. By the 1990s it was boom time once more, with a stronger US economy. Over the past year we’ve shown Europe can weather a Russian gas shock. But energy is just one major component of the global economy.
With everyone distracted by events in the Middle East, no one really expects Emperor Xi to act on his promises to unify Taiwan to China, triggering a third crisis. In recent days the PLA has got more active in the Taiwan Straights. Taiwan fears it will be blocked from joining the CPTPP trade block by China exerting soft-power pressure on members – and empty promises about maintaining Taiwan as an self-governed independent province of China – the same promises it broke on Hong Kong.
With the rest of the globe a decade behind Taiwan’s Chip tech manufacturing capabilities, all it might take for a fourth destabilisation (after the pandemic, Gas and Oil) might be some bellicose statements from Beijing to raise the threat of chip supply chain shortages to trigger even greater meltdown in the global economy.
Meanwhile…
Let’s not forget we have the much feared US Treasury Quarterly Refinancing this Wednesday – and the expectations are for a big number that everyone fears will push US bond yields higher. A bond buyer strike by China? Where else they going to put their money – Chinese property developers? Seriously. If there is an alternative to Treasuries – please share.
Realistically, the bond market may yet see higher for longer rates. As corporate defaults start to rise, its possible there will be pull effect (rather than flight-to-quality) on bond yields. Its likely investors will demand higher real returns – especially if stocks continue to remain soft. Sticky inflation and further hikes in the US and UK can’t be ruled out. (Europe.. less certain.) 10-year US rates hitting 6% is a distinct possibility – although not nailed on. At some point – Treasuries will be a screaming buy! Not yet.
With the current uncertainty, and the knowledge this could be deliberately made worse… I’m thinking yellow metal. I suspect we’re going well over $2000 in coming days.
Five Things to Read This Morning
FT BoE expected to leave rates unchanged as inflation remains strong
FT HSBC unveils $3 bln in share buybacks despite lower than expected profits
WSJ Americans Can’t Stop Spending. Five Reasons Why.
BBerg Spanish Inflation Highest Since April on Electricity
BBerg The Big Bond Market Event Wednesday Is at Treasury, Not Fed
Out of time, and stuff to do…
Bill Blain
Market Strategist
