Today’s Battles, Yesterday’s Generals

Russia’s elite 1st Guards Tank Army (1GTA)had been tasked with protecting Moscow in case of a NATO attack. Now, it is no more. An army which fought in all of the major Eastern Front battles of WWII, beginning in Stalingrad and ending in Berlin, has been demolished outside Ukraine’s second largest city, Kharkiv. Clearly, the surviving generals of 1GTA should stay away from open Moscow windows in the coming weeks but this particular military debacle did prompt a related thought. Are our civilian ‘generals’ – politicians and monetary authorities – in danger of using out-dated strategies to combat today’s global economic challenges too? Put your helmets on and consider the current thinking in our battles against inflation, energy security and autocratic populism.

In a single day of trading this week a whopping $1.6 trillion was wiped from the value of US stocks. The cause of financial market volatility was, at the headline level, a slightly worse than expected US inflation(CPI) figure. However, in truth, there was nothing new in the CPI report with inflation remaining stubbornly over 8%, but this meant market traders knew the “generals” at the Fed were going to stick to their weapon of demand destruction – more interest rate hikes. Our fear is that the Fed is using the wrong weapon to save its credibility and that supply rather than demand is the bigger challenge. A combination of Covid-19 and war in Ukraine has crippled supply chains and destabilised energy markets but the initial cost shock seems to have receded dramatically in a number of key markets:

  • US house sales have been falling for 6 months and are now down 30% year-on-year(July).
  • US gasoline prices at the pump are down 25% and have been falling daily for 3 months.
  • Global freight rates for container shipping (measured via the Baltic Dry Index) have dropped by 70% in just 4 months.

Arguably, the Fed is doing even more damage overseas. Higher US interest rates have seen the US dollar increase in value dramatically. Readers are probably aware of a loss of euro and Great British peso purchasing power of 14-15% during 2022, but in emerging markets the effect has been even worse, particularly for those countries buying critical commodities priced in US dollars. Diminished purchasing power can dramatically impact global demand for US goods like iPhones and Nike sneakers. Just yesterday, a Twitter commentator was highlighting the price of an iPhone in Turkey (in Lira terms) is the same as that of a new Volkswagen Golf back in… 2015!

So, in our view, the Fed’s idea of monetary Red Cross treatment is the equivalent of going back to the battlefield to shoot the wounded. According to financial data group, Factset, a whopping 240 of the S&P 500 companies made mention of recession on their recent Q2 earnings analyst calls. Now, adjust your helmets. The news on the supply side is looking much better. More specifically, energy prices and newsflow are moving significantly in the right direction. Consider the following developments:

  • Germany’s reserves/storage of natural gas have almost reached 90% a full 2 months ahead of schedule and despite Russia cutting off the NordStream 1 pipeline.
  • Goldman Sachs reckon Europe has “successfully solved” its gas supply issues for this winter and is forecasting the price of gas to more than halve.
  • European political “generals” are beginning to act in unison and reform energy markets urgently. In the existing Europe-wide electricity pricing framework the price of gas was the dominant pricing influence and failed to take into account cheaper renewable options. In Germany alone, renewables account for 40% of energy generation. Political action on pricing frameworks and excess profits/windfall taxes will add to the downward pricing momentum forecast by Goldman’s research team.
  • As we pointed out in a previous article, oil(down 25% from highs) and gas are commodities which generally trade in equilibrium and require only marginal changes to supply/demand for pricing to exhibit extreme volatility. Now think about the “marginal” impact of a weakened Vlad the Vulnerable coming to the negotiation table and potential commodity pricing moves. As recently as March 2020, oil futures prices were actually negative ie the producer paid you to take future delivery.

Irrespective of short term energy solutions, there needs to be a European political re-think on nuclear energy if long-term energy security is going to be a realistic goal. Of course, there are negative aspects to nuclear energy but the climate crisis and geopolitics are messaging clearly that the current alternatives are pretty grim. On that note, our political “generals” should also be urgently looking to skewer another alternative solution with false promises – autocratic populism.

Janan Ganesh writes an interesting piece in the Financial Times this week, US soft power grows as the alternatives become clear”. The US bit might surprise but the starker conclusion in the article is that 2022 has proven to be a year of “autocratic incompetence” as Russia flounders in Ukraine and China compounds a property meltdown with zero Covid zealotry. Populist right wing charlatans have been banging the Putin drum that liberal democracies are failed social models. As Ganesh puts it, “This has been illiberalism’s pitch through the ages: not that it is nobler or moral, but that it works. In this telling, democracy is a well-meaning charter for chaos and weakness.” But, autocratic regimes are having a very bad year. And, global leaders should not stop at Russia and China in exposing false promises and failure.

President Biden has outraged many Republicans with his direct accusation that the MAGA cult of ‘Agent Orange’ is a threat to democracy. Arguably, he could have been even more explicit and robust – the United States on January 6th 2021 came dangerously close to a coup and it is increasingly clear that the former golfing executive in the White House was trading national secrets with foreign powers for financial gain. And why stop at Washington? As the UK mourns the death of a genuinely respected global leader it should not be forgotten that its last Prime Minister left office in disgrace. The incompetence of Brexit and the pathetic Channel dinghy bashing was bad enough but the Johnson administration possibly saved its worst till last. As the NHS and cost of living crises gripped the nation in July and August the entire government went missing-in-action. Populist alternatives don’t work, literally. And there’s another thing that doesn’t work…..yesterday’s generals.

Today’s real leaders should be more vocal about those “generals” promising a return to rose-tinted periods of a country’s history. Take your pick from 1950s ‘Apple Pie’ America, Global Britannia or Iron Curtain hegemony. The future is the opportunity for all, the promise of the past is a lie for the few. A very few. Want to go back in time? Between 1920 and 2020 the average human life span doubled. However, if you were a white male in America wanting to ‘Make America Great Again’ your life expectancy just dropped by 3 years between 2019 and 2021. Bad generals get their own killed too.

“If nothing else works, a total pig-headed unwillingness to look facts in the face will see us through.

General Melchett – Blackadder Goes Forth


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