Geopolitics is just another market factor – don’t let it distract you from ongoing reality.

Blain’s Morning Porridge – 7 March 2022 – Geopolitics is just another market factor – don’t let it distract you from ongoing reality.

“The last capitalist we shall hang will be the one who sold us the rope…”

This morning: Yet another difficult week in prospect for markets as $130 oil threatens a global shock, geopolitics remains on the edge, and London tries to rid itself of an infestation of oligarchs without exposing the politicians who let them capture the state.

With Oil touching $130, it looks another perilous week for markets! Inflation, recession, and war. What a mix. What do we know and what don’t we know? No change there then… we don’t know most things – situation normal: AFA. What we really don’t have a clue about is how all these disparate forces acting on markets might come together….

There is no point guessing about Ukraine. The stakes might be rising as the Americans put Polish planes on the table, and the Russians step-up their strategy of bombing the sh*t out of civilians because it’s the one thing they seem to do semi-proficiently.

But who really knows how it plays out? How to tell fact from fiction? And how weight these in markets. The questions are legion:

• Will Putin have the strength to finish this invasion? Does the Red Army have the military competence to do so? Or has Russia being holding back front line troops for something bigger?
• How deep will the Western Financial Blitzkrieg cripple the Russian economy? Will it force a Kremlin rethink?
• What will with consequences of the Sanctions Blitz be on the West – already its clear actions will trigger painful consequences as Western Aviation lessors contemplate how badly they are screwed on 500 leased aircraft worth $10 billion. (I will try to write about unintended consequences later this week – but I’ve got a lot of travel coming up..)
• And, what are the long-term implications for normalisation when the vast majority of Western populations are clearly in support of Ukraine, while most Russians (except for the 4,000 arrested over the weekend) support Putin? Will the West ever trust Russia? (Probably not. It never has.)

Or maybe it’s all a very clever plan by the Ruskies – committing their third-tier troops to a semi-serious offensive, while simultaneously encouraging massive Western Economic sanctions in the hope the consequences will precipitate the kind of economic collapse Marxist economists have been predicting for capitalism since year dot. (If that was the plan I really don’t know why they bothered – we were getting there without their interference….)

Geopolitics – and what happens when it morphs from the talking to fighting stage – is just one of those things to factor into markets. At the end of the trading day, its discounted into prices. The markets are warning of clear dangers, but also a high expectation nothing really changes. Let me explain:

• The price of energy and fuel has gone through the roof on expectations of shortage, dislocation and an inflation spike. (The 1973 Oil-Shock led to 20 years of inflation.) If we want to challenge Russia through sanctions, then it’s a pain we have to bear.
• The same is true for agricultural produce, fertilizer and commodities. Price spikes and shortage triggers all kinds of instability as consequences spread like a wave through the economy.
• Supply change dislocation from a war with Russia is frankly limited – but it gets serious if things kick off in Asia.
• Stocks have shrugged off the war – pundits suggesting uncertainty will be trumped by post-pandemic consumer spending, strong corporate balance sheets, while sustainably strong earnings will maintain stock upside.
• Fed Head Jay Powell confirmed a 25 bp hike, and the market has absolutely no problem with it.
• The US yield curve (2s/10s) is flattening – a signal of longer-term slowdown and a potential of recession around the corner.

You can, of course, pick holes in all these mixed signals and argue what they mean; that consumer spending will be nullified by soaring inflation, that corporate balance sheets will be neutered by higher rates, and the curve supports the most likely outcome is stagflation as geopolitics sees globalisation fracture as the world coalesces into new armed spheres of influence.

Looking at stocks its clear the world is changing.. last year’s heros are this year’s losers. Defence stocks now look a buy. Yet, it’s worth remembering the cold war triggered the greatest technological leap-forwards ever.

And at the back of your mind, don’t forget… the real reason stock prices are so high, and bond yields are so low is distortion – how 12 years of QE created massive inflation across all financial assets, and expecting them now to normalise without a tsunami of consequences is…. unrealistic.

My gut feel is all these disparate forces acting on markets will play out in ways we don’t yet have the imagination to invisage – and not positively.

Meanwhile.. Back in the UK. Get real about Russians

Could someone please explain how Moscow born Evgeny Levsdev, (the son of Alexander Lebedev, a billionaire Russian banker, world-class kleptocrat and former KGB officer), the owner of the Londongrad Evening Standard, was given a seat in the UK’s House of Lords last year despite security service warnings he was a danger? Oh… he’s a mate of Boris Johnson. (He also happens to co-own my former local in Narrow Street, the Grapes, with Gandalf. Did not know that till this morning…. )

Where did Lebedev get his money? Where did Daddy’s money come from? Rhetorical questions.

Young two-beards Evgeny collects Modern Art, supports Charities, and according to a mate drinks a lot of Krystal. What has 40-year old Evgeny done to deserve his Lordship in the second house of UK politics that, let’s say, a leading UK scientist, social improver, or businessman hasn’t done? Rhetorical question. Evgeny even styles himself Lord Hampton and Siberia as his title! And he has a pet wolf called… Boris. Could someone please explain what this succubus has done to deserve this singular honour – except keep Boris J in funds?

While we worry about Ukraine, maybe it’s time to think about taking back dear old Blighty before Russian Oligarchs complete their state capture of Londongrad and the home counties….

On Friday I heard about a friend’s kid who was sent home from school for wearing a blue/yellow bracelet: apparently the Ukrainian colours might offend other pupils. Well, if you were headmistress of a school with a sizable number of fee-paying Russians… what would you have done?

It would appear Oligarchs have nothing to fear in London – the government is proceeding forwards in a backwards direction on sanctioning them. It’s the usual Tory strategy – talk big – do nothing. (After all, these guys have donated billions to both parties to buy influence – which they have got in spades.) The bureaucrats in Whitehall have been advised taking action may breach our Russian Kleptomaniac guests their legal rights.

The edifice Oligarchs have constructed for themselves in Londongrad looks solid. They have successfully bought influence at the highest levels, and employed phalanxes of London’s most highly paid and least morally troubled lawyers, barristers and politicians. They frighten off dissent by silencing any detractors with SLAPPs (Strategic Lawsuits against Public Participation), intimidation and threats. Even as Ukraine is bombed, MPs who demand action are trolled and threatened. Intimidation is their mode.

Since their president has declared Cold War against us – literally with a new Beast from the East brewing in the Weather – it’s time to fight back.

I have a simple proposal. Every Russian (including former Russians now posing as Portuguese) in the UK or with assets here, should have their accounts immediately frozen – legal justification: Defence of the Realm. Every house owned by a tax-efficient legal shell should be seized. We will give back these assets the moment our Russian guests demonstrate exactly how their wealth was legally acquired – and make a simple public statement condemning the invasion of Ukraine.

It’s a bit “guilty till proven innocent…” but these are unusual times. In 1914 we were burning naturalised Germans out their homes, and forcing others to change their names. In 1939 we gave them a 6-year vacation on the Isle of Man. This time we can be ever so nice about making clear they are no longer welcome unless they play by our sensibilities.

Five things to worry about this morning…

WSJ – Global Markets Fall After Oil Hits $130

BBerg – John Authors; Weighing up Stagflation and Armageddon

BBerg – ECB gauging inflation shock is still waiting for a wage reaction

FT – Why is the UK Stock Market so Cheap?

Guardian – Ship moves on after dockers refuse to unload Russian oil

Out of time, and back to the day job

Bill Blain

Strategist – Shard Capital