By Michael Every of Rabobank
A disclaimer: today’s Daily won’t be half as enjoyable for people who don’t like to watch films with subtitles; which is ironic, because the content is not going to be at all enjoyable for people who do like to watch films with subtitles. Consider this a trigger warning before proceeding.
Bloomberg starts the week by telling us that “CRYPTO CRUMPLES”. Bitcoin is down over 50% from its all-time high; all the other ‘coins’ and ‘currencies’ are slumping too; over $1 trillion of “wealth” has disappeared; and El Salvador is looking about as smart as US sports-star Odell Beckham, Jr., who on 12 November signed a contract for $750,000 in Bitcoin, which is now worth half that in dollars — and yet he is going to be taxed at 50.3% federal and local, which means he will net $35,703. I am sure the techno sophisticates, the crypto bros, and the early Meta adopters wandering around in headsets wondering where everyone else is will try to re-boot, but this looks like a crash for now, even before we get to regulatory blue screens of death.
Of course, the timing is not a coincidence. The Fed meets this week. The Fed is worried about inflation, because the White House is too. The Fed is going to make that clear, even if it does not move this month. Some on The Street say they are going to keep hiking rates all year. If they do, it won’t address underlying supply-chain issues at all; but, on past form, it will probably crash just about everything else. Crypto and the NASDAQ (-12% year-to-date) are just a warning.
The non-financial ignores crypto and press beats the drums of war with Russia – the closest cryptonites have come to showing concern about being when Moscow just banned crypto mining.
Ukraine states it is taking UK government allegations of a Russian plot to instigate a coup and set up a puppet government seriously. The UK government may not be able to tell a booze-laden party from a day at the office: but this serious accusation implies either Russia or the West, or both, are trying to stir things up rather than take a step back.
A German admiral just rightly got Das Boot (that’s the subtitle part) for giving a speech in which he declared himself to be a deeply religious Catholic who believes Europe needs to do a deal with ‘fellow-Christian’ Putin, who also deserves our respect, in order to stand up to non-Christian China. All ‘Clash of Civilizations’/not-so-closet prejudice aside, if there was ever a window for an ‘inverse-Nixon’ strategy to ‘flip’ Russia it surely closed in 2016, when some decided the best response to Brexit and a shocking election loss was not to admit the campaigns, candidates, or policies were to blame, but Russia was.
Amazingly, that wasn’t the silliest thing a senior German official said about this crisis this weekend. That award goes to Economy Minister Habeck, who wants to engage Russia economically by cooperating on renewable energy supplies to help de-escalate tensions over Ukraine, noting “We should also think about new business areas that can help lead both sides out of this confrontational position.” In short, the best way to stop a war is for Germany to sell Russia solar panels and wind turbines(!) Of course, this crisis is about carbon — just not in the way the minister thinks: Germany is paying for any Russian invasion with its gas purchases; the question is if it will be prepared to impose biting sanctions on Moscow in that case as even Der Spiegel worries that:
“In German political circles, all kinds of people are currently talking not about what Berlin will do in response to a Russian attack. Rather, they are focusing on what they won’t do. That doesn’t just apply to politicians belonging to the coalition parties, but is also true of Friedrich Merz, who is set to be voted in as the next leader of the conservative CDU – the country’s leading opposition party – in the coming days. Last weekend, he expressed his opposition to excluding Russia from the global payment system SWIFT, which is one of the most painful potential sanctions that has been proposed. Such a step would block the access of Russian banks and companies to international payment flows. And ruling out all kinds of tough sanctions both relieves pressure on Moscow and sends a clear message: Russia can rely on Berlin’s inactivity.”
Which brings me to a recent Twitter thread from @marceldirsus discussing German politics in which he stresses that from the safe, comfortable, prosperous German perspective, war is entirely illogical; that “History matters. There’s an obligation in the minds of many Germans not to go too hard on Russia because Germans killed millions of Russians during WWII. That same way of thinking doesn’t extend to Ukraine even though Germans also killed millions of Ukrainians. It just doesn’t.”; and that “Moral superiority aside, nothing is more important to Germany than the pursuit of short-term economic interests. If you can trade freely with everyone and afford not to worry about security or other political considerations, why wouldn’t you? That’s what Germany is doing.”
Allow me to give this attitude a name: “champagne pacifism”.(The cousin of the champagne socialism of those who can easily afford to pay higher taxes, or who avoid paying them while backing them.) Now don’t get me wrong, pacifism is great. But, like all virtues, it means far more when you have to risksomething for it. It’s easy to be a pacifist in Bavaria; much harder in Brovary, outside Kyiv; and Bialystok, on Poland’s eastern border.
The current crisis is proving a shock to eastern EU members. It’s one thing to see one-rule-for-me-and-another-for-you stances during a financial crisis caused by German intra-EU trade surpluses that didn’t impact them; or to clash over cultural or rule-of-law issues; but it’s another to have Russian tanks potentially roll up to your doorstep only to have parts of Berlin look stressed at the idea of standing alongside you if it means economic pain to them. The potential long-term damage to the EU from this cannot be dismissed lightly. And, more concretely, if we were to see war start soon, EUR is unlikely to be the safe haven it has been in the recent past.
While peace is always the goal, one thing is worth noting. For much of history, war used to be the underlying mechanism for giving institutional stupidity the boot: mismanage your state finances? You lose the war, and your country; treat your peasants too badly? They won’t fight for you — you lose the war, and your country; listen to idiot experts who pretend they know what they are doing/following? You lose the war, and your country; appoint idiot generals who only look good in uniform? You lose the war, and your country.
Alongside nuclear weapons, we moved to a Cold War economic contest, which the West won, and then a Pax Americana where markets were supposed to do this institutional-stupidity-thinning job for us bloodlessly. Until we ruined them too with QE. Nothing now seems able to sort the wheat from the chaff anywhere we look. Even crises on the scale of the GFC and Covid fail to generate any key changes “because markets”, and where we do see radical change there appears no joined-up thinking to broader issues.
Yet Russia now suggests we are back to a more bare-knuckle Great Power global contest again. That offers a steely litmus test for what policies do and don’t work, and are and aren’t relevant. If so, we will see some institutional-stupidity given the boot. Or we will listen out for the jackboots.
That process will ultimately prove as disruptive to markets as any Fed hikes.