What the diabolical stone cold killer in the Kremlin is thinking is the never ending question as the horror continues to unfold in the Ukraine. I just started to read the book Putin’s World written by Angela Stent and published in 2019 and it only took a chapter or two to understand his big picture frame of mind. She wrote “The idea of permanently giving up lands Russia once controlled has been anathema to tsars, general secretaries, and post Soviet presidents. Almost immediately after the USSR collapsed, some in the new Russian leadership – although not Boris Yeltsin himself – began thinking about how to regain their lost territories. There is no precedent in Russian history for accepting the loss of territory, only for the expansion of it. What is it that propels this Russian drive for expansion?”
Knowing that she wrote these words in 2018-2019, Stent went on to cite Catherine the Great who ran the country in the mid to late 1700’s as “the one who conquered the territories that today are the scene of the Ukraine-Russia standoff in Eastern Ukraine” and is someone that desired for this “drive for expansion.” Stent said that Catherine “came to believe there was only one way for Russia to defend its fluid borders. ‘That which stops growing begins to rot,’ she once said, adding, ‘I have to expand my borders in order to keep my country secure.’ “
Only 10 pages later Stent wrote “Russian’s senses of their own identity was also increasingly bound up with their sense of imperial destiny, of paternalistically ruling those around them, including Ukrainians, who were known as their ‘little brothers.’
Tying this back to Putin, Stent wrote what he’s most likely thinking, “The central argument is that, since the Soviet collapse, there is a mismatch between Russia’s state borders and its national or ethnic borders, and that this is both a historical injustice and a threat to Russia’s security. After the Soviet collapse, 22mm Russians found themselves outside Russia, living in other post-Soviet states. Russia, in Putin’s view, has a right to come to the defense of Russians under threat in the post-Soviet space.”
I bring this up not to make a specific point other than give some background on what is likely going through the crazy, killer mind of Putin who insanely thinks he can just invade a neighboring country with a democratically elected government because of his empire building fantasies. It unfortunately means that he won’t stop until he fully gets Ukraine and that the current sanctions and then some will remain in place until this guy is gone forever, of course depending on who will replace him.
Turning to the Fed, there has been so much digital ink pored on this topic that there isn’t much more to add that hasn’t already been said. The Fed is tightening monetary policy into the teeth of the most difficult macro environment this current crop of central bankers has ever seen. How far they’ll get is of course impossible to say for sure but I don’t think it will be much. We know there is one thing to hike rates but another to shrink the balance sheet at the same time in terms of the impact. So many years of addiction to QE and zero rates has made the financial system ever more vulnerable and unstable to when it unwinds.
This all said, ending the financial poison of QE and zero rates is a long term good thing but only if we never see it again which seems highly unlikely until modern day mainstream monetary thinking changes.
It’s not just the Fed this week that is meeting, the BoE and Brazilian central bank will be hiking rates this week too.
In the weekend FT, there was added insight into how the thinking of many on the ECB has shifted on inflation notwithstanding the Russian invasion. “The argument about inflation dominated and prevailed over anything else, including the war, the uncertainty and the fears about growth,” said one person involved in the meeting. Another comment for someone there was this, “It is getting clearer and clearer to more of my colleagues that the transitory story on inflation is a bankrupt story.” My bold and this person went on to say “It is not just oil and energy prices that are rising fast, you have food, non energy industrial goods and services all accelerating at more than 2%. We have to do something – we cannot be the only central bank not reacting.”
The European bond market is selling off sharply on this new reality and as I’ve argued many times before, you can’t just analyze the US Treasury market based on your expectations for growth and inflation without understanding the influence of overseas bond markets. The German 10 yr bund yield is higher by 10 bps to .35%, the highest since November 2018. The French 10 yr yield is up by 8 bps to .81%, also the most since November 2018. The rest of the region is seeing similar increases in yields. The US 10 yr yield did touch 2.10% early this morning but not sits just below at 2.07-.08%. The US 3 yr yield is touching 2% now and the 5 yr is now above it.
10 yr German Bund Yield
The other notable story over the weekend was the decision in China to shut down the 17.5mm person southern China city of Shenzhen, the Silicon Valley of that country. Two years of lessons learned on how best to deal with covid and they are still repeating all the mistakes as shutdowns only temporarily stop a spread. Higher immunity is the only thing that works. You can only imagine how disruptive this will be to global supply chains but hopefully this does end in a week. Foxconn, the major supplier to Apple, is already stopping production at its Shenzhen locations. Chinese stocks got slammed again and the level of panic after already sharp declines is reminding me of the NASDAQ in 2002.
Is part of the drop in oil prices today in response to the worries of less demand out of China? Likely a definite influence.
And speaking to the supply chain challenges that are only intensifying in the face of the war, Automotive News is citing AutoForecast Solutions who said as of last week, “The number of vehicles cut from automakers’ factory schedules because of ongoing microchip shortages surged 42% this week from previous estimates.” They said most of the cut came from plants in Europe and Asia. Japan in particular has been hit and even today Toyota said they are stopping operations in Changchun in China because of Covid lockdowns.
A few weeks ago the Swedish Riksbank said they were sticking to their belief that rates should stay at zero until 2024. We’ll see about that after Sweden said its February CPI rose 4.5% y/o/y and 3.4% ex energy, both 4 tenths more than expected.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.