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October Entropy
President Putin’s Birthday President Putin turned 70 a few days ago. He did not have much to celebrate, though, with his forces seriously under pressure in Ukraine. It is worth remembering that although the Russians are the aggressors, it is the Ukrainian forces that have the numerical advantage: the whole country has been mobilized and men of fighting age have been legally prevented from leaving from the beginning. The Russians engaged in the Special Military Operation may be outnumbered by as many as 4 to 1, and are now on the receiving end of a series of Ukrainian counter-attacks. Ukraine’s efforts are powered by a flow of weapons, advice and finance from the US, UK, EU, Poland, Germany, Canada and others, to the extent that they have depleted their own reserves of equipment, which they are having to back-fill. Maybe a good time to look at defense stocks? Ukraine tells Elon to “F*ck off” President Putin recently said Russia was in a war with the “collective West”, which is exactly what it is: the G8 expelled Russia from its club after the annexation of Crimea in 2014, becoming the G7 in the process, and it is the nations with the most developed militaries from that same group of industrialized countries that are contributing the most: as one ex-military friend said this week “we are letting Ukraine fight our war for us”. The logical conclusion of that reality is that Russia is seriously outgunned, out-manned, out financed and - in all probability therefore - is not going to win. That is even before the errors of Russia’s dysfunctional military system. President Putin has clarity on his antagonists, but with that knowledge it underscores what a strategic error it was by the Kremlin to attempt to overthrow the (however previously hopeless) Ukrainian government. Meanwhile, the eccentric serial entrepreneur and richest human being, Elon Musk suggested a solution to the conflict via his acquisition target Twitter, which involved Ukraine accepting that it would have to give up Crimea and other parts of the Donbas and earned him the pithy advice to “fuck off” ( sic ) from Ukraine’s ambassador to Germany, who added that “no Ukrainian will EVER buy your f…ing tesla crap”. The resilient and youthful President of Finland, Sana Marin was more diplomatic but no less steely when asked by a journalist what the way out of the conflict would be: “the way out of the conflict is for Russia to leave Ukraine.” Burning Bridges As if to underscore the level of risk for Russia, on Saturday actors unknown (one would assume the Ukrainians) blew up part of the Crimea Bridge that connects South Western Russia to Crimea: a snaking, elegant road and rail connection that spans the short gap between the pointed eastern tip of Crimea and mainland Russia. President Putin had the bridge built over the Kerch Straight that leads from the Black Sea in to the Sea of Azov after Russia’s annexation of Crimea, and it was the President who opened it with much fanfare - and by driving a construction lorry in the first official crossing in characteristically macho style - in 2018. Although the bridge is already back open, images of it on fire have dealt another demoralizing blow to Russian pride, and resulted in a series of missile attacks on Ukrainian cities in reprisal. Russia is now outmanned and outgunned on the battlefield and burning off military capability that will take years to rebuild and - with the “partial mobilization” - is denting domestic goodwill. I have written before about the inability of the Russian/Bolshevik state to have orderly transitions of power : I suspect President Putin is now concerned not just what the collective West might to do him, but his own political circle, as more battlefield defeats occur and more troops and territory are lost. President Putin is now a wounded tiger: I would guess that the risk of a coup against him and him resorting to extremes such as nuclear weapons now have similar - non-trivial - probabilities. China’s New Emperor The Director of the UK’s intelligence, cyber and security agency, GCHQ, Sir Jeremy Fleming today told the BBC that although Russia is the current enemy it is the threat from China that the West needs to deal with in the longer term. A stark warning from a very senior intelligence official within the UK deep state. Sir Jeremy’s remarks precede the 20th Congress of the Chinese Communist Party, which starts on Sunday, and at which Xi Jinping is expected to be confirmed in an unprecedented third term as political leader of the Party (in a one party state that also means leader of the country) as either General Secretary or Party Chairman. The Congress, which only occurs every 5 years, brings together central and regional Party apparatchiks and the leadership of the People’s Liberation Army and is likely to be a disciplined and structured acclamation of General Secretary Xi, and some rubber-stamping of Politburo appointments and Party administration. Xi’s China is an assertive player on the world stage and is now willing to recommend the “China model” to others, rather than the more modest “communism in one country” (i.e we do it our way you do it yours) version of the past. Communist officials are gleefully describing the current era, and what they perceive as the chaotic weakness of liberal democracies (in sharp contrast disciplined one-party success of China) as “the rise of the East, and decline of the West”. As someone - admittedly a cynic - put it to me recently, “while the West agonizes over what pronouns to call each other, China is taking over the world”. The UK U-Turns In sharp contrast to the austere discipline of the Chinese Communist Party, the UK’s Conservative Party conference was chaotic, with protesters, open dissent, counter-briefing and criticism from Tory MP’s and even Cabinet members against the fiasco-prone new Prime Minister, Liz Truss. Days before Chancellor Kwasi Kwarteng was forced in to an embarrassing climb-down by scrapping the 45% tax rate for higher earners; the most controversial of the expansive tax cuts announced in his recent mini-budget that induced a collapse in GBP and chaos in the UK’s sovereign debt markets. Under more pressure Kwasi and Liz have now had to bring forward their updated fiscal plan on how to pay for the rest of the tax cuts from the end of November to the end of October - which like the reversal on the tax cut they originally said they would not do. Even if there is some conceptual merit to the new administration’s plan to grow the economy it was very ill-advised to throw experimental economics in to a febrile and uncertain market, with the backdrop of an overvalued USD, and without warning or the oversight of the OBR. UK Inflation risks becoming baked in UK inflation has hitherto been driven by exogenous forces; notably the soaring price of energy and food. What the UK’s unwise experiment has done is devalue GBP (which is tantamount to raising taxes for everybody, ironically) and increase the size and cost of government borrowing: that makes all imports more expensive and puts pressure on government spending, which creates structural, endogenous inflation (prices for everything, including domestic borrowing go up, and effective government spending goes down). Such is the ongoing chaos in the long end of debt markets that the Bank of England has had to extend its debt buying program to try and stop the price of 30 year Gilts collapsing further. The UK is still a big economy with a more manageable debt to GDP ratio than many, but it has certainly made its own recovery harder. The Ironic European Political Community Liz Truss must have been relieved to be able to escape the market turmoil, her own party and its 25% poll deficit to un-charismatic Labour, to attend the comparatively welcoming inaugural meeting of the European Political Community. The EPC is the brainchild of French President Macron, and had its first meeting on 6 October in Prague: it is an informal club comprising the 27 EU Member States, the Presidents of the European Council and European Commission and 17 other countries, including the UK, Azerbaijan, Turkey and Ukraine. It is Russia and Ukraine that has given European cooperation more impetus than it has had for decades; it has brought about at least a temporary entente between the British and French and at least some rapprochement between the UK and the EU. There would have been zero chance of this meeting occurring with that membership before the invasion of Ukraine, so on that front President Macron is right: never let a good crisis go to waste. Be good, everybody. Duncan If you enjoyed The Perspective Pool please share it! It is free to subscribe.
Duncan Wales
Oct 11, 2022 · 8 min read
The Chess Pieces are Moving
Risks and Opportunities for Russia and Ukraine As the weather in Ukraine deteriorates the options for significant military maneuver reduce. The first full winter of the conflict will give both sides an opportunity to regroup, and create a lull in the good news/bad news cycle from the battlefield, and chance to train and equip troops, organize supply lines and prepare defensive positions. It is also likely to bring a grim winter of power-cuts to large swathes of the Ukrainian population, as Russia continues to destroy Ukraine’s infrastructure. It will also be grim for the troops dug in and under bombardment. These military realities will have political effects: The winter lull may therefore open an opportunity for the geopolitical forces behind the main protagonists to encourage some sort of route to a ceasefire, or at least start the process. Economic recovery in the US and China - early sings of which are visible - will only increase that pressure. Once that opportunity is gone, and Spring allows a big upswing in offensive military action, the game will change again and resolution will once again be harder. Zelensky makes his first mistake The first signs of strain became visible between the “collective West”, which is funding and arming Ukraine, and Ukraine’s President Zelensky last week, with the Ukrainian President insisting that the missiles that fell in Poland, killing two people on 16 November were Russian, and that Articles 4 and 5 of the NATO charter should be invoked (i.e.for NATO to collectively defend Poland, one of its members, and implicitly to go on to declare war on Russia). When the news of the missile strike broke, it caused a flurry of action among world leaders who had just arrived at the G20 in Bali, Indonesia. It seems that after a few early hours calls the leaders of the largest military powers - including President Biden and Prime Minister Sunak - became much more relaxed and a crisis seemed to have been averted. NATO, the US and Poland had quickly investigated and concluded that the missiles were very likely Ukrainian, and the event a horrible accident. President Zelensky, however, carried on with his insistence that it was a deliberately targeted strike by Russia, much to the frustration of Ukraine’s foreign allies, and was consequently met with an unofficial rebuke from the various powers that be. This comes as a reminder that President Zelensky is an an inexperienced politician, who’s government was incredibly unpopular before Russia’s invasion. Before that invasion there was a civil war bubbling for 8 years in the Dombas, with Ukrainian forces engaged against pro-Russian separatists (and allegedly Russian special forces), which Zelensky did not or could not stop. Ukraine’s President is a great orator, but exhorts to Ukraine’s international supporters over Zoom rather than in person; for a number of reasons he obviously believes it would be unwise for him to leave Ukraine. This is unusual for a wartime leader in the West (think of the extensive wartime travels of British Prime Minister Winston Churchill when he was seeking international support for the war against Germany in the early 1940’s). It tells us something about Ukraine’s internal politics. Ukraine is a complex polity, with a number of powerful factions within it. As someone said to me recently, President Zelensky is “an actor, turned actor”. Either way, he has just made his first diplomatic mistake by irritating his allies as a degree of Ukraine-fatigue sets in. Biden and Xi go dating On 14 November President Biden met President Xi in Bali, at the G20, for what appeared to be a positive discussion: the official White House “read out” of the meeting said that President Biden had made it clear to President Xi that: “The United States will continue to compete vigorously with the PRC” ……but that “ this competition should not veer in to conflict ”, maintaining that both sides have a “ responsibility” to prevent such a conflict occurring. The other main area of agreement was that Russia’s implicit threat to use nuclear weapons was unacceptable. By all accounts this was a much friendlier entente than could have been expected earlier in the year. President Xi, now anointed in his unique third term as leader of the Communist Party has clearly decided that the partnership “without limits” between Russia and China declared in February - mere days before the invasion of Ukraine - does in fact have some limits, particularly if Russia makes an embarrassing hash of its attempts to recover its former empire. Global economy, growing Chinese power, a longer term plan being required to reunify China (i.e. PRC to re-absorb Taiwan) are all more important. Before meeting President Biden, President Xi received a visit from German Chancellor Olaf Sholz, who is clearly an economic pragmatist keen to expand economic ties with China. As recently as the summer President Putin intended to be at the G20 in Bali, but such has been the military and associated PR failure of Russia’s “special military operation” that he is both in risk of being ostracized by his erstwhile friends and (in public at least), and is perhaps nervous of leaving the Kremlin for too long. Politics for Russian and Ukrainian leaders has always been a dangerous sport; the longer this goes on the more one would think it could end badly for at least one of the current incumbents. Be good, everybody. Duncan If you enjoyed The Perspective Pool please share it! It is free to subscribe.
Duncan Wales
Nov 22, 2022 · 6 min read
Football, the US Defends Europe, and Emerging Markets comeback
An Epic Struggle Between Nations No, not the conflict in Ukraine, the FIFA World Cup: even those trying to avoid the soccer will have noticed that the tournament is on, and that it has been riven by scandal and dissent. FIFA the world soccer governing body has a (shall we say) “patchy” record when it comes to corruption allegations: in 2015 the US Department of Justice charged nine of its officials and five of its corporate directors with “racketeering, conspiracy and corruption”, resulting in a number of bans, fines and in one case a 9 year prison sentence. It is perhaps no wonder that skepticism has surrounded FIFA’s choice of Qatar, which is not a famous footballing nation, has limited infrastructure for visiting fans, unplayable temperatures for most of the year, and imposes strict legal constraints on what most societies regard as human rights and personal liberties (homosexuality, alcohol and adultery are all illegal: even displays of empathy with human diversity, such as rainbow symbols, have been banned by the event organizers). Although official numbers are hard to find the UK’s Guardian newspaper claimed as long as a year ago that 6,500 foreign laborers had died during the construction of venues for the 2022 World Cup in Qatar, including many from heat related injuries. This was hotly contested by Hassan Al Thawadi, the secretary general of Qatar's Supreme Committee for Delivery and Legacy. In a recent interview with controversial British journalist Piers Morgan , Mr Al Thawadi said only between “400 and 500” workers had actually died. That is around one immigrant worker each week for ten years. Oh, that is OK then; I was beginning to worry that the whole event was a cesspit of corruption, hypocrisy and exploitation. European Defense is Subsidized by the USA Finnish Prime Minister Sanna Marin this week pointed out the obvious to attendees of an event at Sydney based think-tank Lowy Institute - that Europe is still reliant on the US for its collective defense. At the start of the year the US European Command (EUCOM) had approximately 65,000 troops in Europe; chiefly in Germany, the UK, Italy and Poland. In March EUCOM said US forces had surged to 100,000 in the region, in response to Russia’s invasion of Ukraine. To put that in to context, the whole regular British Army that is fully trained to do its job numbered 77,000 as at January this year. Not all of those troops would be deployable due to injuries, training duties and standing obligations, so the US deploying 100,000 of its people to Europe is a lot: more even than the US has stationed in Japan and South Korea . The US is by far and a way the largest financial and military donor to Ukraine in its existential conflict with Russia, having so far pledged more than $30bn in support . Anyone in Europe that does not realize that their freedom since 1945 has been broadly underwritten by the US (and to a lesser extent the UK because of its extant “at sea” nuclear deterrent), is - as Prime Minister Marin pointed out - thinking about the issue incorrectly. Emerging Markets Come Back Another thing that has happened since 1945 is that the economic and demographic power of countries outside Europe and North America has risen enormously. I have written before about this shift in power politics and economics, with the West ruling for now, but only just . Over recent decades many countries have started to borrow from international investors by issuing bonds in hard currency (in most cases US Dollars). The effects of global inflation, rising US interest rates, supply shocks, the strong Dollar (and therefore weak local currencies) has made much of the last year very negative for the developing economies. However, speaking with people in the market it seems that the smart money has made money in “EM” debt this year: lending to the right countries and companies has proved to be a success for all involved, and even the hard-pressed sovereign bond market showed a strong return to positive territory in November. I am an optimist, and despite the gloomy news cycle, I would like to think that not many things need to go right for the global economy to get back in a positive mode: US inflation coming down, China abandoning the excessive harshness of its Zero Covid policy, and even the start of serious attempts to stop the conflict in Ukraine. Let’s all hope. Be good, everybody. Duncan Subscribe to The Perspective Pool by entering your email at https://the-perspective-pool.scriber.to/ , to receive alerts and bonus content!
Duncan Wales
Dec 6, 2022 · 4 min read
Permacrisis, Climate and Political Risk
Permacrisis - not a 1980’s hairstyle gone wrong “Permacrisis” has entered the Collins English Dictionary as the word of 2022, defined as: Certainly 2022 so far has had its moments: Russia’s invasion of Ukraine, the revitalized NATO engaged in a proxy war, a European energy crisis, global inflation, market turmoil, threats by Russia to use battlefield nuclear weapons, the end of Finnish and Swedish military neutrality, China rattling its sabre at Taiwan, the re-militarization of Japan, the resurgence of radical politics with the re-election of Hungary’s Victor Orban, the strong run of Marine Le Pen in the French presidential election, the rise of Italy’s Northern League and Brothers of Italy, and the return of former prisoner Lula da Silva in Brazil. That is before one thinks on the political chaos in the UK, and entrenched and increasingly toxic political and social conflicts within the US. This is what we would euphemistically call “political risk”; the risk that unsuitable people end up in leadership positions doing the wrong things. And there is a lot of it about. Politicians are now back in control of economics, unfortunately What marks the current era apart from what came before, and what most of us spent our lives experiencing hitherto, is that economics and investing - the value of our pensions, houses and jobs - has changed from being driven by fundamentals to being driven by politics; I hate to say it, but rather as it was in the 1930’s. Central banks are entirely distracted by fighting inflation, and have ceased providing endless liquidity via QE; as they shrink back to more limited monetary policy roles, the politicians are taking over the fiscal (tax and spend) side of the economic equation. The theory of political economy - and the various “isms” that go with it - has returned with a vengeance. All of our personal assets, wealth and future prospects are not going to be dictated by growth, efficiency, technology, saving the planet, or basic economics, but by ideologically driven politicians engaging their various personal biases: for the last 40 or 50 years politicians in the larger economies had to be regarded as broadly economically competent to be - or stay - elected. Now politicians are elected if they are going to expand the state, punish the rich, liberate business, fight authoritarianism, promote authoritarianism, end wokism, promote wokism, get Brexit done or make America Great Again. If Marx, Grotius, Hobbes, or even Keynes were still around they would each be saying “I told you so”; particularly, Marx, as he was that sort of guy. Not much COP-27 The COP-27 climate summit is being held in Egypt this week, among its key aims is the much debated 1.5c temperature limit (ie the obligation of countries to collectively limit the global average temperature rise to no more than 1.5c above pre-industrial levels). There are a few things wrong with this: first, although there is a surprising amount of consensus among scientists and official bodies who measure land and sea temperatures (including NASA, The UK’s Met Office, and the US National Oceanic and Atmospheric Administration) it is hard to obtain very accurate data from before 1850; indicative data can be gleaned through sources as diverse as farming records, soil samples, tree growth rings, wildlife records and sea levels; long-term accuracy may be hard but it is clear the planet is warming up after a cooler period between the 14th and 18th Centuries, but by exactly how much compared with before 1850 is not clear. This makes some of the debates about reparations (in COP speak “Loss and Damage”) for who caused what pollution when, spurious, albeit it may not change the outcome: there are very valid reasons to financially support populations in the Global South from the consequences of pollution caused by the Global North (which includes China of course). The second thing that isn’t much discussed is that an average global increase of what sounds like a modest 1.5c actually equates to very extreme increases in some places, notably the Arctic, which has seen average temperatures increase by 6c in recent decades (as a result of the so-called “Arctic Amplification” where carbon dioxide concentrates at higher latitudes). Even notoriously predictable London (where, as an American friend once said to me, the temperature never goes lower than 4c or higher than 23c, and if it does there is a crisis) had temperatures in excess of 42c this year. The planet may warm up and cool down at fairly regular intervals, but it is usually the result of volcanic activity and solar radiation. Generally speaking if solar radiation drops and volcanic activity goes up, the planet gets cooler; and vice versa (sulphur dioxide from volcanoes reflects solar radiation). This time global warming is driven not by those processes but by human produced carbon dioxide and other greenhouse gasses, which work like a pane of glass, letting sunlight in but preventing heat from escaping. The great physicist Carl Sagan pointed this out in the 1980’s . Let’s hope the sun doesn’t have a long spell of increased solar radiation any time soon. COP-27 will be fraught with politics; the US and China, as the world’s biggest economies and largest polluters in absolute terms are still not in compliance with their targets: in fact China is doing better in some respects than the US, generating 8.75mt of greenhouse gasses per capita, compared with the US 18.43mt (2018 data), albeit China’s total emissions keep going up while the US is falling. It is rather alarming to think that the original UN climate change treaty was signed in 1992 ; it has taken 30 years - and 27 conferences - for it to be taken more seriously by politicians and the public at large. US Mid-terms; Divisions and Lame Ducks As I write the US goes to the polls in the mid-term elections; mainly for the House of Representatives, although some Senate seats are also being contested. It is predicted that the Democrats will lose control of the House, to a resurgent Republican party, which would make it hard for President Biden to get any more legislation through in the remainder of his term. A Republican dominated Congress may also seek to impeach President Biden; some senior Republicans feel it is the wrong thing to do, but the fact it is even being suggested as a possibility is a sign of the political times. The Republicans have also indicated that their support for Ukraine would be more limited than that provided so far; President Biden may also have some difficult times with questions about his son Hunter Biden and his very well paid role with the Ukrainian gas company Burisma (which ended in 2019), as well as his well publicized struggle with drug addiction . The US economy is the World’s most powerful, and with a slight increase in unemployment reported on Friday, markets flickered upwards slightly, cautiously wanting to believe that the Fed’s rate hikes are having their desired counter-inflationary effect; although a lot more data will be needed to reassure everyone that inflation is indeed under control. All else being equal the US seems destined to sail out of the economic doldrums first, and as it does so it will drag the rest of the planet’s economies with it. The only real threat to that global recovery is US political turmoil. We should all hope for benign politicians with boring and sensible views, that can be changed by new information. Wishful thinking. Be good, everybody. Duncan If you enjoyed The Perspective Pool please share it! It is free to subscribe.
Duncan Wales
Nov 8, 2022 · 7 min read