Pinning Blame

Vladimir Putin once observed that one could gauge the mood of American diplomacy by looking at the kind of brooch worn by the late Secretary of State Madeleine Albright. For instance, to parse her elegant book ‘My Pins’, she first wore a ‘serpent’ brooch as a message to Saddam Hussein after an Iraqi government newspaper referred to her as an ‘unparalleled serpent’.

When meeting Putin, Albright varied the message from her pins – ‘hear no evil see no evil’ monkeys to warn Putin over human rights abuses in Chechnya and then a spaceship brooch to mark the collaboration between the US and Russia in space. Interestingly, in the book (p. 110) she notes that Putin ‘was capable…but his instincts were more autocratic than democratic ..and single minded in his pursuit of power’.

Albright was Secretary of State at a time (1997-2001) when American power and by association, globalization, were very much in the ascendancy and Putin was the new kid on the diplomatic block. Before becoming Secretary of State, she was US Ambassador to the UN at a time when the UN had power. It was also a time when Alan Greenspan’s Fed was easily the predominant central bank (the Bundesbank was not far behind), and generally well respected or even feared by investors.

Greenspan’s utterances, usually mystic in comparison to the typically forthright statements of Albright, were carefully followed and scrutinized by investors. He cultivated ambiguity (‘if I have made myself too clear, you have clearly misunderstood me’).

Today, the Fed remains predominant, but in a somewhat different way – in terms of its size and market influence (the role its balance sheet plays in financial markets) it is overbearing, but in terms of the credibility of its leadership team it is increasingly impaired. A share trading scandal, and the appalling policy miss on inflation have degraded its reputation.

Today’s Fed Chair, Jerome Powell, has little suasion over markets (he has the worst track record in terms of equity market reaction to his press conferences). That is a pity, at least for the US, because today in the context of the invasion of Ukraine, central banking now is a critical part of the geopolitical landscape.

At a time when many people (notably this week Larry Fink and Howard Marks) are waking up to the ‘end of globalization’, central banks are raising interest rates and curbing quantitative easing, something they arguably should have done last year, but that now amplify geopolitical risks.

In this way, the end of globalization, the rise of geopolitical risk and the end of QE are all linked.

Quantitative easing tranquilized the (market) effects of many of the world’s troubles and arguably insulated decision makers from the long-run political effects of Donald Trump’s trade war on China for example.  QE helped to disguise the signs that globalization was stuttering from the mid 2010’s onwards.

It has also helped to skew moral and logical views of the world – the stock market doubled in value in the aftermath of the COVID pandemic which has resulted in over six million deaths.

Perhaps the greatest danger has been the dulling of the minds of central bankers, and to a certain degree the politicization of their work (in Europe, the US and Japan). Central banking is a notoriously closed environment where groupthink can dominate – this is reinforced through the job market for young economists, the pressures of markets and the institutional rigidities of many of the central banks.

Here the ‘sin’ of the central bankers has been to deploy an emergency policy tool on a permanent basis. QE1 gave way to successive QE programs and the highly supportive monetary policy enacted during the coronavirus period has been kept in place for too long.

The result of this is blisteringly high levels of inflation, made worse by the economic side-effects of the invasion of Ukraine (wars are typically inflationary). In particular, bond market volatility in the US and Europe is nearing historically very high levels, from which it usually spreads by contagion to other markets (equity volatility is comparably very low).

The geopolitical effect of this is to make Western economies more vulnerable at a time when they need to be robust. It is also to sow seeds of doubt in the predominance of the dollar (which I would nonetheless discount) and in general make markets more sensitive to geopolitical risk.

The overall effect is to create the disruptive financial conditions (higher trend rate of volatility, higher trend interest rates and potentially higher inflation for the near term) to accompany a disrupted geopolitical world. As we have noted in recent missives, these can feed off each other – negative wealth effects, high food prices and the trapping of new home buyers at high valuations are just some of the issues to contend with.

Central banks have badly misjudged the economy and mis-calibrated their policies, and the world is a more unstable place as a result.

Have a great week ahead


Ukraine: What does China see?

A neat explanation for why Vladimir Putin has found the suppression of Ukraine harder than he thought came to me from a very clever friend, who described how in recent years Putin has committed a series of outrages (assassinations in Berlin and London), provocations (Russian troops bringing ‘peace’ to Kazakhstan) and incursions (Syria, refugee influx’ through Norway and Eastern Europe, Russian money into Western politics) as a means of testing the West’s reaction function.

In most cases, the West had not reacted strongly to these incursions and the theory is that Putin read this and other events such as the disorganised retreat from Afghanistan, as signalling that there might be little international opposition to an invasion of Ukraine. He was wrong (many Westerners also could not have imagined the European response).

That he miscalculated shows that different ‘tribes’ or cultures can look at the same set of events and draw very different conclusions, something that has often struck me when hearing the Russian view of international affairs.

The question I now ask, is whether Beijing, given its cold, and apparently tone-deaf pronouncements on the invasion, have a view of international relations that is at odds with the Western view, and in detail, what lessons China is drawing from Ukraine.

I should preface my remarks by saying that really too few people in the ‘West’ have made enough of an effort to understand Chinese political culture and the forces that drive policy making. That is not made any easier by the veil of secrecy thrown up by the Chinese Communist Party, and the relative attractions for Westerners to live and study in China (I estimate that there are twenty times the number of Chinese students studying in Britain, as there are British students studying in China).

To that end, cultural differences mean that Chinese policymakers may simply not ‘get’ things we see, but that they may well be more keenly attuned to other aspects, such as the response of the emerging world to the invasion. It is also worth emphasising that people around Xi Jinping may draw different conclusions to him, such as the way in which Vladimir Putin is demonstrating the shortcomings of autocracy.

As a final caveat, most people will watch China in the light of its repeated threats regarding the place of Taiwan as a sovereign country (that echo the views of Putin regarding Ukraine) and the repeated sorties of Chinese fighter jets and bombers into Taiwanese airspace.

Broadly, China may notice several things.

First the rapid cohesion of European foreign policy, the increasing singularity with which (coupled with the re-election of Emmanuel Macron) European foreign policy has reformed, and the emerging power of eastern European countries like Poland, not to mention the ‘foreign policy tigers’ in the Baltic states. The immediate, concrete implication for all of this is that the extension of China’s ‘belt and road’ initiative into Europe and its ’16&1’ partnership with eastern European countries is all but dead. Chinese investment into Europe will also face even greater scrutiny.

The Chinese reading of America is more complicated. American intelligence and diplomacy have in my view performed well – and much of the latter has been sufficiently discrete. America has notably paid more attention to the Chinese reaction than Europe has (France will be glad it is not part of AUKUS now). Whether China realises it or not, its international stance on the invasion can see it move from a ‘strategic competitor’ to the US to an outright adversary. A profound breakdown in relations with the US would damage the international economy and international institutions severely, so there is much at stake.

One swing factor for China is the attitude of many emerging countries to the invasion. Several Asian countries – Bangladesh, Vietnam, Laos and Sri Lanka abstained from voting in the UN resolution on the invasion, while notably half of Africa did too (including South Africa) and India’s closeness to Russia is laid bare. To note, many of these countries – across Africa and Asia – have been targeted by Russian info ops.

The fact that the emerging world appears split on the question of Ukraine shows several things – the lure of the Chinese economy and the notion of a ‘managed democracy’ in many countries, and correspondingly the perception that the ideas of democracy and the liberal order may only be something for the West. Pessimistically, it suggests that the post-globalized world order will be a contest between the models of democracy and non or managed democracy.

If this is true, China is in a more comfortable geopolitical situation than it thinks. Equally, parts of Asia are now taking sides – Singapore’s move to condemn the invasion of Ukraine was brave.

Geopolitics apart, there is also much China can observe on how this war is waged. In recent years the Chinese military and navy has undertaken several large-scale exercises with Russia, and the Chinese military is organised in a similar way to the Russians. Given that the Chinese have effectively no battle experience, they must surely wonder if they have the right training partner granted the poor performance of the Russian army (for instance multiple war games by the US Marine Corps University suggested that the Russians would have wrapped up the invasion within three days). Financially, China might well regard Russian assets as opportunistic and cheap.

China will also worry about the ability of the West, the US in particular to detail Russia’s moves before they happened and should be concerned that the US and Japan’s Public Security Intelligence Agency, in addition to other intelligence configurations (Five Eyes) have the ability to read its moves.

The area where China has the greatest scope to learn is in information wars, where President Zelensky and Ukraine have excelled. Globalisation has spread social media, which still retains its Western cultural bias internationally. I can think of very few Chinese media or social media outlets that have penetrated beyond China in terms of creating engaging, trusted content. In short, this means that in an increasingly contested world, China will struggle to ‘tell its story’.

In that respect, I suspect that China feels much less sure of its position on Ukraine/Russia, and will most likely continue to watch and wait, hopefully suing for peace.

Have a great week ahead,


Breaking Bread

The Salon de l’Agriculture that takes place at the end of February in Paris is one of the few places (in Paris at least) where you can witness French people tipsy at ten in the morning (they are normally more circumspect than their English and German speaking neighbours), and in general where the atmosphere is far more genial than the practiced nervy, combativeness of Parisien(ne)s. As with many events, this gargantuan festival (which I thoroughly recommend) resumed after an enforced break during COVID.

The Salon is remarkable not only for the displays of agricultural prowess, and the array of foods, wines and increasingly, beers on offer, but also as a political barometer. Since he was the mayor of Paris, Jacques Chirac embraced the event, and is still spoken of as someone who was truly attached to the ‘terroir’. Other politicians fared less well, notably Nicholas Sarkozy whose reply to an attendee at the Salon (‘casse toi pauvre con’) became infamous.

Contemporary French politicians still regard the Salon as an important stage, and a litmus test of their ‘closeness’ to the French people. My sense is that the younger generation of politicians fail this test, Emmanuel Macron has often looked awkward in a combination of suit and wellies, though at this stage I suspect French people accept him for the ‘intello’ that he is. In other countries, at similar events such as Ireland’s National Ploughing Championships, politicians such as deputy Irish Prime Minister Leo Varadkar have also looked ill at ease.

The point of raising the topic of food and agriculture is that it will become an increasingly important political issue, especially so in the context of the invasion of Ukraine. It is this event, rather than his performances at the Salon de l’Agriculture that has propelled Emmanuel Macron into a commanding lead in the forthcoming Presidential elections.

A critical part of the expectations set around the idea of the French president is that he or she can act commandingly on the world stage, and here Macron has delivered. The open question now is how he frames the mandate that the electorate will give him for his second term. He will be keen to take a second run at domestic reforms (pensions for example) and to also play an active part in the making of the ‘new Europe’ (he may well become President of the EU in the future). Once he is re-elected, one of the issues he will face is food price inflation and food security.

In recent notes (Ne vous melez pas du pain II) we have flagged how governments are trying hard to dampen the consumer impact of high commodity prices, as this has historically been fuel for popular unrest. To some extent policymakers can lay the blame for this on Russia and its president, but in many emerging countries where spending on staples makes up nearly 40% of disposable income (i.e. India, and large parts of Africa) this must be worrying from a humanitarian point of view at least.

Many industries are now feeling price pressure. In that respect, my own sense is that the spike in commodity prices is more likely to cause a recession (or demand shock) than an inflationary spiral (at consumer price inflation of 8% some might say we are there already), and there is a risk that markets and central banks overreact to this, having underreacted in 2021. One new trend we may see is popular fiscal activism, where the producers and potential beneficiaries of commodity prices spikes are hit with supplementary taxes.

In the longer term, the spike in food prices may do for food security and the food industry what the COVID epidemic did for digital commerce. COVID meant that we became used to shopping, working and being entertained from our homes. High food price inflation and the Ukraine are a reminder that food supply chains can not only be disrupted but can also become weaponized.

To that end, I can see a great many countries, especially those who do not have the agricultural arsenal of France and Ireland, examining their vulnerability to food security and acting accordingly to become more ‘autonomous’. Sadly, many of the poorer countries of the world that are exposed to weak food security (notably Nigeria, Egypt, Congo, Chad, Central African Republic, Afghanistan, and Somalia) do not have the wherewithal to become more ‘food’ autonomous.

Across developed countries, we can only speculate what this will provoke in terms of investment trends.  One will be a shift towards urban farming (underground farming for example), another is a drive towards ‘artificial’ and replacement foodstuffs (coconut sugar, oat milk) and most importantly of all a deeper emphasis on nutrition. 

We will also rightly hear more about food inequality – and how the food that different social groups consumer is a function of their education, conditioning and social status. An American dentist Mary Otto wrote an interesting book called ‘Teeth’ which shows the startling differences in dental health across social classes and reports that they spring from differences in education, diet, and upbringing.

The strategically important move will come from China, a large country with a relatively small amount of farmable land. China has, in general poor diplomatic relations with its neighbours and in certain cases food security might push them towards a more benevolent attitude to Indonesia and Vietnam and may see China launch a foods focused investment wave into South America.

Have a great week ahead,


The First Financial War

One of the early, memorable experiences I had of how international economic policy is made came in the late 1990’s when Stanley Fischer, then the second in command at the IMF, came to the Economics Dept. (Princeton) to give a seminar on the manner with which the IMF disbursed money to Russia in the aftermath of the 1998 emerging markets crisis. I, doubtless like colleagues, was surprised that much of the funding to Russia was granted without collateral or what later (i.e. euro crisis) became known as conditionality.

Being the most junior and easily least clever person in that room, I dared not pitch a question to Stanley Fischer, but I still wonder how Russia may have developed differently had the IMF financing been structured differently (at the time it was widely suspected that some of the money found its way to oligarchs and politically active former KGB agents!).

Over twenty years on, some things have not changed. The IMF is still a discredited institution (Joe Stiglitz’ attack on the IMF ‘Globalization and its Discontents’ was published in 2002), and the Russian economy is still fragile, under-developed and riven by corruption. Russia still has the same president it had in 1999, and still has many, many nuclear weapons.

What is new is that from next week, the financial penalties and sanctions enacted on Russia and key Russians will begin to take effect, shrinking the Russian economy by close to 40%, financially freezing Russia and potentially setting in motion socio-political unrest and sadly, an escalation in Russia’s military tactics. As an experiment in financial combat this is unprecedented and will effectively ‘anti-globalise’ Russia (cut off the flow of people, goods, finance).

Here, the lesson of the conflict so far is that whilst many of us expected Russia to focus on unconventional/hybrid warfare, they have concentrated on ‘old fashioned combat’ where as the West has excelled in information warfare (in calling out the detail of Russian moves before they happened) and now in prosecuting a campaign to cut Russia off economically.

In that respect Russia may be glad that it is not a highly globalized country (that might be the fault of the IMF in 199!) but it is a good example that the currency of a country, in the long run, is a decent barometer of its institutional strength. Around 1870, the dollar and rouble traded close to parity, and from then to the Russian Revolution the Russian stock market outperformed the American market by a factor of two. Today, Russia is uninvestable.

The short-term effects of Russia’s financial freeze will manifest themselves next week. There are several elements to keep a focus on – how Russia will stabilize its currency (it may peg it to gold, or to a group of Asian currencies), the decimation of pensions, the political effects of a likely bank run, the operational effect on the economy of so many businesses either closing or being deprived of large chunks of their revenue base, not to mention the cost of the invasion of Ukraine.

Add to that a global financial system that is increasingly strained (funding stress is mounting), and undercut by high energy prices, my sense is that next week the focus may be more on markets than military. The key for that stress to lift a little, will be public proclamation by a number of Fed and ECB officials that the war risks a recession, and that therefore market liquidity needs to remain ample.

The longer-term effects will be more interesting. The response of the corporate world to the Russian invasion has in general been commendable in the sense that so many companies have cut ties with Russia.

In the near future, it is very difficult to see many governments and corporates trusting Russia again and this will entail a permanent hit to its economy, of something in the region of 20%. China and select other countries may try to make some of this up eventually and Chinese investors may try to buy cheap Russian assets, but strategically this will not sit well with the Kremlin.

There is also a growing debate that the West’s cutting of ties to Russia will usher in a race for the ‘next reserve currency’. I recall being in Moscow some years ago and overhearing a story where someone asked Vladimir Putin if ‘Russia is leaving the dollar’ and he allegedly answered ‘no, the dollar is leaving us’. He was right, but is on the wrong side of the trade.

In that context, the assumption is that the Chinese renminbi, currently 2-3% of international transactions, will pick up ‘fx market’ share. I am not so sure – the lesson for China from the Ukraine invasion is that it may want to be less financially connected to the developed world, a strategy that might heavily restrict the international usage of the renminbi.

The other assumption is that crypto currencies enjoy greater usage, and to an extent there has been a pick-up in trading in crypto currencies (though not much of it in Russia). A number of crypto exchanges, underlining their independence from the centralized financial world, have refused to cut ties to Russians. In my view, this will invite regulators to police crypto exchanges and investors will discount the value of companies such as Coinbase.

To stand back a little, the invasion of Ukraine remains brutally underway this weekend. It has (correctly in my view) led to an economic war, from which it is very hard to see Russia escaping financial catastrophe. And, this time, they won’t even have the IMF on hand to help.

Have a great week ahead,