1 March 2022

A shout out to my brothers and sisters in Ukraine who are fighting for survival – you have shown the world incredible strength and courage. I am in daily contact with my team in Ukraine so I have witnessed first hand how this proud independent nation has stood up to a bully and shown the rest of the world how to behave in the face of aggression. Its not by bending the knee as the so called “leaders” of the free world were doing until a more aggressive approach was adopted over the last 24hrs.

Before it was sorry mate the conflict is not on my turf so I cannot really help you, I will do my best but you are on your own. The minute the western world realised that you are dealing with an autocrat with imperialist ambition there was a mobilisation of many forces, i.e. financial and military and 360 change in tone.

As you would expect from a bully he was quick to put the nuclear threat on the table. We should not for one minute underestimate what a lunatic is capable of doing. He is clearly calling the shots with nobody in his inner circle capable of talking common sense to him. We are heading towards an even more highly inflammable situation as he becomes more isolated from the world.

Today is day seven of my isolation and I head back home tomorrow so my not get to do a post tomorrow.

MarketWatch

There is clearly a lot of volatility in the markets – a traders market.

Let me start with a look at Ukraine’s foreign reserves, thankfully this country has been building up its reserves since the 2014 conflict started. I also believe that the rest of the world will be helpful with the rebuilding of Ukraine, assuming that Russia can be held back.

Let me now switch to the Russian situation as I think Putin, the megalomaniac narcissist, is going to find the hardship he has brought to his people will make him public enemy number one at home. Despotic leaders like Putin crave adoration, they want to be seen as saviours, as hero’s. Despite the propaganda he is likely to be pumping his nation with, the truth will get out. We live in the 21st century where technology enables access to foreign media. Not all foreign media get it right, but there are enough sources for someone with an open mind and common sense to get the picture.

“By geography, the CBR reports that most of its currency (non-gold) reserves are held in China (18%), France (16%), Japan (13%), and Germany (12%). The precise location of Russia’s reserve assets is more difficult to ascertain, but disclosures from the CBR and other international sources suggest that funds were likely shifted from custody accounts at the NY Fed to Europe and China and Japan.

The race is currently on to try and freeze Russia’s foreign reserves. While I don’t think they will succeed completely they sure will lock some of it up. We are seeing major multi-nationals like BP say they will walk away from a $25 billion dollar investment in a Russian oil company. The Ruble is in free fall and is the weakest it has been in history, interest rates have shot up to 20%+, the banking system is experiencing a run on deposits and Russia is in the process of being cut off from SWIFT and I am sure many other payment solutions.

These are just some of the reasons I believe the Russian people will be forced to eventually speak up or take action against their leader. This will be difficult because he is likely as we have seen in the past to shut down any opposition. I believe we are about to see this country that was doing so well become a financial desert and a fractured disharmonious one politically and socially. Putin’s only hope against my doomsday prediction is for China to come to their rescue and the world to once again be divided by an “iron-curtain”.

As you can see in the chart below, Europe is still highly dependent on Russian energy and this is unfortunately the fly in the ointment.

According to Sanford Bernstein: it is very difficult for Europe to replace the 150Bcm of gas it gets from Russia. We would need 2M annual heat pump sales in 244M buildings, 26GW of annual solar, 3.4GW of additional annual offshore wind, 14GW of annual onshore, continue efficiency improvements, delay nuclear closures, secure 33% of US LNG exports (not the 18% seen in 2021). All of these changes would equate to 33Bcm/ year reduction…but this would only compensate to offset these factors: domestic gas supply declines (which have been 10Bcm pa historically and we est 5Bcm pa to 2030), then the 10Bcm of coal – gas switching demand and then continued improvements in EU’s inefficient building stock. Even if we then add in our last extreme assumption which requires 500M people to take a cold shower and turn-off the central heating one day per month, its only gives us an extra 4Bcm per year of reduced demand.

Money Complex

Unfortunately due to the reckless behaviour of our central banks we now face ourselves in a no win situation. I will focus on Europe but the same argument can be made for many of the developed countries around the world.

Usually around times of war, governments go into deficit spending to help provide welfare to their people and spend money on their military and eventually spend money on infrastructure repair after the war. Central banks usually come to the party by lowering interest rates to help fund this expenditure.

But unfortunately we have been living in this low interest rate cash for free environment for decades. We are now coming face to face with the consequences of this loose monetary policy in the name of inflation. To fuel this inflation even higher we are ironically faced with a lack of access to fuel for geopolitical and environmental reasons. So while we should be in situation to be able to cut interest rates and to deficit spend with low government debt, we are in the exact opposite position. We are currently lifting rates and our nominal debt is at highly elevated levels.

As a small digression when I read this quote I truly wanted to be sick.

And so, I hope President Putin will help us to stay on track with respect to what we need to do for the climate.” – John Kerry, February 23, 2022

Yes you read that correct, Kerry far more worried about the climate than the life or death on the battlefield, as if Putin cares a stuff about the environment.

Since the launch of the Russian equity ETF in 2007 it has lost 37% versus the SP500 making 294%. I think that is a clear display of the differences between east verse west.

China

My concluding remarks are reserved for China.

Property development is a big thing in China and was an important driver of the economy. Not to mention their banking and shadow banking sectors are highly connected to this asset class. You can see that the equity and bonds related to this sector continue to get smashed. If one adds the geo political tensions and their potential consequences I think it is really easy to see a recession on China’s economy in the very near future.

You could say that Dr Bearman is as bearish as ever and you would be correct, I see the risks of a global recession through stagflation forces as an almost sure bet. Surprisingly to myself I can see myself getting long equities in the not too distant future if we get some more sell off in the near future.

I have become exposed to the thinking of one macro strategist who is holding all his bets to decipher Powell’s March 16 FOMC speech and is hoping to get long the markets in the later half of the year. Maybe just maybe this could be the way??

I fear we are very expensive still on a valuation basis and would only consider a constructive stance from much lower levels. But Bearman will become Berman at some point, that I can assure you.

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