Blain’s Morning Porridge, August 25 2022 – Why are we so scared of Putin, Russia and an Italy debt meltdown?
This morning: Putin’s supposed cleverness haunts markets. How much harder will he squeeze Europe’s energy crisis? How will Russia change the geo-political order? Will Italy’s coming election be the crisis that breaks the Euro? We give Russia too much credit – it’s a weak nation that can only get weaker.
Sometimes I wake up confused. Other times it’s with a dash of blinding clarity. This morning I must have been dreaming about Italy… when a passing thundershower– bringing a much needed soaking – woke me. It left me pondering the biggest question of the day: Why is it Europe is so sh*t scared of Vladmir Putin?
Basically.. Putin is the unknown at the heart of all the economic doomsday expectations dominating today’s markets: making us wonder just how much more damage, instability and economic mayhem can Russia inflict? It’s a testament to the success and sophistication of Russian media-manipulation that a nation with such limited real real power is scaring the be-jesus out of Western markets. Fake-news is a much cheaper way to fight a war, and much more effective than missiles, tanks and planes that don’t seem to work particularly well.
The scenario most earnestly debated around the market is how Russian energy (the lack thereof) has triggered a massive destabilising inflation spike, will sink the European economy, precipitating global recession, and a global geopolitical reordering – from which China and Russia will emerge triumphant as America slinks off into isolationism. Yada, yada, yada…
The secondary order consequences include an Italian debt meltdown breaking the Euro, leaving the dream of European union in tatters, allowing a path for Russian hegemony over the Region (especially if a MAGA2 Trump America pulls away from Nato).
And Putin has planned it all this way…? Laughed…? I nearly s***. Its utter bollchocks.
Yesterday, I must have read half-a-dozen very learned articles on how the coming Italian election heralds the end of the Euro and a terminal north-south European split. Each variously said the splintering of the ECB and Euro is now inevitable as a result of the energy crisis and inflation. Newspaper comments pages were full of opinions of how this was proof the UK was right to Brexit. (Yes.. Brexit definitely stopped the sky from falling on our heads… whatever..) I made much the same mistake about 10-years ago when the European sovereign debt crisis looked unsolvable – till Draghi stepped in, and it became a massive buying opportunity.
Italy is a problem. But, to be fair… Italy has been, is, and will always be a problem. We live with problems. Italy does have significant “issues”, including political ineptitude on the grand scale, and demographic weakness – but I personally believe we will cope with declining population trends through automation. I can live with Italy problems – I love the place, the people, afogato and especially the wine – Cervaro for choice… Nothing wrong with Italian cars – out Fiat 500 is about the best fun you can have with your clothes on in an automobile.
Italy does have a Virtuous Sovereign Trinity crisis – its bond market is in trouble, and its politics are a mess… but it doesn’t have to worry about its currency. The Germans do that for them…
In about a month’s time Italy is likely to elect its first Lady prime minister, Giorgia Meloni, the populist head and brains of the Brothers of Italy (a “this time it’s different” brand of lightweight national socialists), who’ve adopted the Petty Patel approach to conservatism, immigration and social welfare. The Brothers and their confederates, The League and Berlusconi’s Forza Italia are making all the right noises about supporting EU membership and the Euro – but their spend and spend some more policies will result in a further hike in Italy’s burgeoning debt to 166% of GDP. They will say one thing and do another.
The ECB know Italy is a problem in terms of the “fragmentation” of European bond spreads. If/when Italy spreads balloon wider and Greece V2 threatens, the ECB will buy Italian bonds. They are hoping the mere iteration of the policy – already announced – will keep spreads in line. The Germans are already fulminating about their constitutional court, the dangers of back-door European debt-mutualisation, and German workers paying Italian pensions, but… that’s the way the Cannoli is going to crumble. Buy Italy bonds on weakness.
There will be an awful lot of noise between the ECB and Italy about sticking to debt cutting schedules vs the Brothers’ plans to spend their way out of an energy recession. But, here’s the thing… Christine Lagarde, the ECB and European political leaders are not going to allow an Italian debt crisis to sink the Euro in the face of Russian provocation. If they did it would be the biggest political failure since Sarajevo 1914. They will deliver, as Draghi did; “whatever it takes.”
And Gas – yes, Gas is a massive problem for the European economy – and it will hurt this winter.. but less next year, and less the year after that… and in few years.. Gas prices will have tumbled and Russia, not Europe, will remain in a long-term recession, which will only get worse as the crippling demographics of a declining aging population consign Russia to economic nothingness.
Going back to my opening point… why is Europe so scared of Russia?
The European Union – including the former client states of the USSR in Eastern Europe – is one of the wealthiest, economically developed, and potentially most vibrant, regions on the planet. More Nobel prizes, more classic designs, more inventiveness, diversity and innovation than anywhere else. Russia, in contrast – is bleak, bleak and bleaker! Yes, Europe’s government is less than ideal, and the trend towards closer union has stalled, and its weighted against weaker economies… but it still kind of works.
There are 450 million EU citizens, with an average per Capita GDP of $38k free to consume and believe whatever they wish. Add in the UK (which remains clearly aligned with Yoorp whatever Lord Mogg thinks), with a further 67 million folk and per Capita GDP of $47mm. Look at Russia: a declining tightly controlled population of 143 million with a per Capita GDP that barely breaks $12k.
When I was young – we were probably right to worry about the USSR. We feared Nuclear War. The Red Army steamroller was set to brush aside Nato, and seize Europe up to, and maybe beyond, the Channel coasts. Today, we’ve seen Russian forces exposed as tactically inept in Ukraine. (We should not count our Ukrainian chickens too early – Russians historically start wars badly, but can finish them well – at enormous cost.)
In terms of economic power, the invasion in Ukraine should be an Elephant and the Ant scenario – but, of course its not. Europe has no appetite for a hot war. Reading though any comment section on the war or economics, you will inevitably find screeds of Russian Troll factory comments about how Russia losing 25k men is actually them winning, how Putin is right, and how Europe should envy Putin’s strong leadership. It’s all terribly blah, blah. You can spot Russian trolls in every stupid comment. I am deleting them from Porridge comments.
I am sure Russian fake news, troll-bots, and kompromat on European politicians are all terribly sophisticated – and we are right to worry about them – but, to be blunt.. Russia is a busted flush. Don’t give them more credit than they deserve. Its a nation as beset by stupidity as anywhere else. Vlad might be clever, resourceful and many things.. But he is nothing special. He’s just the lucky turd among many that floated to the top of the Kremlin sewer. He got lucky. Luck is not a lady. She is fickle. It does not necessarily last.
Valar Morghullis as they say in High Valyrian.
Let me illustrate just how dysfunctional Russia is with a story from very high up:
How clever is Russia? In the wake of global pushback in the wake of the seizure of Crimea, Putin allocated billions to the FSB (the successor to the KGB) to mount a long-term hearts and mind campaign to ensure a peaceful Ukraine takeover. But, corruption is endemic across the Rodina. FSB chiefs trousered the money, (deposited in their private Dubai accounts), and when Putin got real about an invasion they leaked the plans to MI5 hoping Putin would be forced to cancel! Hah, instead of choirs of happy schoolchildren and flowers, the underprepared Russians were flung back by well prepared and fully informed Ukrainian forces. Now the FSB guys are languishing in their own prisons.
What Europe needs is a fly-swat.
Despite being rich in energy (both fossil and renewable) Europe now faces a difficult few years weaning its economy off over-reliance on Russian oil. Energy security was a massive failure of state, but it will be solved. It’s a wake up call. In a few years, Europe will be in recovery, stronger and prepared. Italy will remain a perenial problem – so what? Energy prices will mean reverse. Russia will be isolated and stagnant behind its borders. And, yes, we probably should close our borders to every Russian, good or bad… let them all stifle back home in the Rodina and watch how well they enjoy it, and who gets the blame…
Five Things To Read This Morning
Out of time, and back to the day job…
Strategist Shard Capital