By Michael Every of Rabobank
Prognosis Positive or Negative?
Besides a bond-market rally (US yields down around 10bps across the curve), an inevitable ‘nothing-else-to-do-and-need-to-justify-my-job-so-buy-the-dip’ US stock rally, and China slowing down the fall in CNY and CNH with a policy tweak, there were other things of note yesterday. Indeed, in multiple dimensions, the outlook is now positive and yet equally negative.
Elon Musk is buying Twitter. Cue screenshots of former Clinton Labor Secretary Reich arguing, “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both — Louis D. Brandeis”… overlooking that Clinton helped to lay many of the foundations in place today. Others’ tweets quote Reich saying it was fine for Twitter to ban former President Trump because it was a private company, juxtaposed with him bewailing a billionaire buying it because it limits public debate. Musk himself tweeted: “I hope that even my worst critics remain on Twitter, because that is what free speech means.” For those who don’t want to stay, and was the case for those who couldn’t stay before, where else is there to go - Trump’s ‘Truth’, which ironically him returning to Twitter undermines the future of? That remains a huge structural negative nobody has an issue with when their side is ‘winning’.
Will those anti-free speech now reembrace it or double down on censoriousness? Former President Obama recently said, “Disinformation is a threat to democracy” – and it is; so is censorship; and so is any state or private system to decide which stories are the former and require the latter. The only solution, logically and constitutionally (in the US), is free speech. Of course, Twitter won’t get any more civil ahead. There will be a broader range of voices available for people to ignore or troll. Psychologists suggest this is how we all really work, deep down, and social media companies recognize is where the money is made, up front - Twitter too, I would guess. And on civility, Google’s document editor will be introducing a new autocorrect function that offers warnings that vocab being used “may not be inclusive to all readers,” while suggesting users should consider using different words, offering politically-correct corrections. How long until they just autocorrect for you, and all Big Tech, ex-Twitter, do the same across platforms?
US Secretary of State Blinken and US Secretary of Defence Austin just met President Zelenskiy in Kyiv, which is quite the turnaround from 60 days ago, when the US was offering to airlift the latter out. Blinken now says President Putin has “failed”, which sounds positive; and Austin that US strategy is “to make Russia so weak it can’t invade another country again”. That is a statement with negative consequences.
As Von Clausewitz stated long ago, “War is a continuation of politics by other means.” In short, what are you trying to achieve? Putin lost his planned war when it became clear Ukrainians are not ‘Little Russians’: victory can now only be achieved by destroying Ukraine, not liberating it. Moscow’s ‘Nazi’ wrappings aside, that is irredentist imperialism that lets the genie out of the bottle. As such, there is no logical Western basis for a ‘realist’ foreign-policy argument to ‘let Russia be Russia’ in its ‘sphere of influence’; or at least not one that is compatible with the so-called ‘liberal world order’. It is either appeasement that doesn’t look at second-order effects (*cough* Germany *cough*), or a Melian dialogue that also doesn’t understand second-order effects (*cough* US isolationists *cough*). France is stepping up weapons supplies to Ukraine, it seems. (And President Macron was too busy to take President Biden’s congratulations call!)
However, what does the West want from their side if they can’t just rewind to 23 February? Historians will tell you that post-WW2 plans for Germany began as early as 1942. If, over 62 days, the US plan has shifted from ‘run away!’ to ‘weaken Russia so it can’t invade anyone else in the future’, then it sounds akin to the WW2 Morgenthau Plan for a defeated Nazi Germany - which was to turn it into a pastoral nation of farmers who could never bother the world again. When published in September 1944, it was used as part of German propaganda efforts in the final seven months of the war in Europe to help convince the public to fight on to the bitter end.
Austin’s public statement will likewise feed Russian paranoia about the West. There is no better way to swing all sections of Russian society behind the Kremlin, or to encourage Russia to escalate this conflict into areas where it feels the US might still decide blinking is a better strategy. Foreign Minister Lavrov just stated that rising military aid to Ukraine means NATO is “in essence engaged in war with Russia.”
True, maybe Austin was saying nothing new – but Lavrov did. One can argue that over time US and EU technology export controls are going to hamstring Russia and its military. (Yes, China could fill the gap – but then China would suffer sanctions next. And note this tweet from the IIF’s Robin Brooks from last week: “China chatter at IMF spring meetings: 1. The elephant in the room; 2. Risk of US sanctions seen as high; 3. Investors don't want another "Russia mistake"; 4. Now lots of distrust of "stable" autocracies; 5. Shanghai lock-downs seen with dismay; 6. Investors don't want any part of that.”)
Yet if we are to take Austin more literally, as Russia will, then the logical strategic step --as underlined on Twitter by experts from the IIF and the logistics industry-- is to cut off Russian oil in a short, sharp shock. Specifically, by sanctioning key firms and oil-carrying vessels for two months, Russian oil flows would back up to the point where its wells would have to be capped – and restarting them would be incredibly difficult, if possible at all. That would prevent Russia from redirecting oil to Asia, while depriving it of a major slice of its export earnings. Russian oil would be taken off the map. Meanwhile, Russian gas to Asia would take years to come online on a scale (and price) to match what Europe buys now.
In short, this would be an escalation into permanent economic war – and Russia would respond in kind. (And Beijing will take note, as will others: on ANZAC day yesterday, Australia’s Defence Minister Dutton stated his country must “prepare for war“ – and has been backed by defence experts in doing so, while being pilloried by the opposition for not having done so.)
It would also be inflationary. Wars tend to be. Permanent wars more so. Against that backdrop, Bloomberg notes that negative-yielding bonds, which totaled $1.5 trillion last year, have disappeared from the market.
That’s a big structural change; one prompted by remarkable shifts in the geopolitical and geoeconomic environment; and those, in turn, were most obvious to those who read the most interesting, most-likely-to-be-banned people on Twitter. And there are lots more of them yet to come. Both the voices and the geopolitical and geoeconomic shifts.
So, positives and negatives.