You may see a cup of tea fall off a table and break into pieces on the floor... But you will never see the cup gather itself back together and jump back on the table. The increase of disorder, or entropy, is what distinguishes the past from the future, giving a direction to time.

Stephen Hawking, A Brief History of Time

Picture of sunrise over gorse and spiders webs
Golden sunrise over gorse and spiders webs (or is that a nuclear blast?) Picture: Author

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

The Kerch Bridge after a bomb attack
The Crimea Bridge aflame (image: satellite photograph, MAXAR Technologies)

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.

30 year Gilt bond yields increasing
30yr Gilt Yields and the cost of government borrowing goes up and up (now 4.8%, up from 1% less than a year ago); TradingView

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.


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