I have two parts to this – first is my opinion, but at the end I have bullets here of “lessons learned” that I think can provide great value to those tracking geopolitics. Many of you may already understand a lot of them, but many who just casually watch the news might not be aware of the nuance under the hood….
Opinion (part 1)
“Nordstrom 1” (joke here) was recently shut down by the Russians for a bullshit reason everyone saw through. They eventually admitted it, and said, “gas will not come back on until sanctions are removed”.
I want to be careful here to remain topical and not cross over my swim lanes due to my career and with this – I need to be careful how I tread and will stick ONLY with geopolitical topical discussion for this reason. I want to look at the financial impacts we see here, and with this, why I feel Europe may drop sanctions at some point in the near future. While this might not age well, this is for academic discussion and entertainment purposes only. I can easily be wrong – but I wanted to “game out” how the next few months COULD work out.
WHY am I writing this? In January, everyone on FinTwit was convinced a pivot HAD to come by the end of summer. I can’t argue with the reasoning. But my feed was crowded with this view. I said to myself, “is anyone even considering they might want to burn this shit down and let rates rise”? I wrote this piece exploring that idea. It seems almost everything in that piece has come true, for the most part. I wish I was good enough to have CALLED that path, but the article was merely looking at how a branch on the tree would grow – IF that were to grow in that direction.
In chess, we try and look at all possible moves, then from there narrow down to the best few where perhaps 5-7 moves ahead we are in a better place. If someone is looking 6-8 moves ahead, they can perhaps beat you. But here, the concept is to explore moves where it is possible you are looking 5 moves out, and I’m looking 6 moves out. NO ONE knows the future – but we can consider a lot of different scenarios and run them down to see how they may turn out.
In this case, I’m going to CALL this. I am fully expecting to be WRONG with this call. Such is the world of academia. You create a hypothesis, post the evidence, and observe results.
It appears Russia had said “The West” needs to drop sanctions in order for them to get gas again. I take it that might include others outside of Europe, and I’ll leave it at that. Immediately, I saw commentary that said that – “why would he ask for sanctions to be dropped unless they were working“. Well, it’s sort of like a mutually assured destruction (MAD) doctrine. If the status quo continues – both parties will have severe destruction and chaos ahead. Russia is only ensuring the West feels as much destruction as them in order to release the sanctions.
Could it go a step further where it demands the West return the dollars and gold it seized? I don’t see why not.
When we talk about the world economy, you cannot have a discussion on this without seriously putting energy at the top of this discussion. The cost of this energy, and the AVAILABILITY of this energy are paramount to a country’s GDP. If you jack up the prices of this energy, you can see how pretty much every pub, bakery, coffee shop, etc in the entirety of Europe can close in the next few DAYS, not MONTHS. This is with the high energy bills. Now, I want you to REMOVE natural gas needed for factories, smelting, and fertilizer and ponder that virtually all production in Europe can cease inside of a month. Furthermore, we then have the entire banking system there which may face collapse within weeks due to derivative margin calls on energy with over $1.5T. This is but the first wave of perhaps many.
In all, if unchecked, you may see the entire collapse of Europe into a Great Depression inside of 3 months. 20-30% unemployment easily. Companies going insolvent overnight. Then, as an encore, we have no natural gas flowing which may cause many to freeze to death. Now, many may get firewood and just be really damn cold, but there is a reality here where the entirety of Europe, with a cold winter, could suffer the worst they have in perhaps 70-80 years.
Or, you have three options…
- Politicians try and find some sort of face-saving exit to this by dropping sanctions. Call it an “energy emergency”. Call it whatever you want. Get your spin doctors out of bed, and gaslight people into somehow claiming a moral victory. But you will lift sanctions and people will have gas flowing to their homes and businesses will go back to pouring beer, bakers will make bread, and baristas will be serving coffee. Manufacturing roars back to life, and you chalk it up as a minor recession. Boast how resilient you were in tough times, yada yada yada.
- Politicians stick to their guns, and inside of a month you have soup lines, power rationing, 20% unemployment overnight, and elections start picking off these people one by one, who all win on calls of removing sanctions. European Union fractures and potentially dissolves as right wing politicians who want cheap energy win elections. IF “free” elections don’t really exist anymore and are replaced with puppet elections, then these “leaders” can then make the most obscene policies that go unchecked by the masses – which obviously can lead to a more serious form of upheaval.
- All of the items in 2, but it keeps getting worse indefinitely. You win the moral high ground, but your 2 year old freezes to death overnight. You have no power to store food, no gas to cook. In this case, you have a government who ensures the population they will essentially print money indefinitely to make them ok. This is how you can see the Great Reset happening in Europe. People lose jobs. Govt gives them enough to buy food, but they default on their houses. Banks collapse and are taken over by an EU central bank (ECB). Digital tokens are sent to people to use for food and bread lines. People are 100% reliant on government for life. To get digital tokens, you must show your vax pass. You are given a social credit score and this affects your token rations. Your tokens are then good for “low carbon foods” and your protein source is somehow derived from crickets rather than beef. The majority of businesses that failed relied on natural gas – a fossil fuel. The new businesses that come online have no reliance on this, but will get their power from solar or wind as businesses then need a carbon license.
I got carried away in item 3, but if voters don’t use the voting button in item 2 above, or leaders don’t find a way to call off the Cuban Missile Crisis (of sorts), then the people of Europe are destined for a version of item 3. Which also corresponds to the 4th turning.
To me, I believe voters will see there are easy energy options in front of them, today. I believe that these people will continue to believe in Green, but realize the transition to Green needs to pause and come up with a new strategy that seems to do a parallel phase implementation and you stand down fossil fuels as new Green sources are stood up. What they are doing is shutting down energy sources with no real plan in place, and this has to be apparent now to most people in Europe.
I put 3 months above because inside of a few weeks there’s an Italian PM race. I heard Luongo talking about it, and he seems to think a candidate will win who may perhaps vote to remove sanctions and potentially break off from the EU. I may have his wording off – but I remembered the part of leaving the EU. I’m foggy on the sanctions thing, so I am apologizing in advance to Tom if I butchered his wording from the Palisades interview. We are seeing other PMs leave, like Boris Johnson – but apparently his replacement is a WEF alumni of sorts.
One has to wonder with the Euro going down, and debt in USD, how long this pain can go on? You also then wonder if this is a form of planned destruction to allow the “Great Reset” in item 3 above?
Genesis of conflict
Here’s the bigger picture many might want to understand.
Above, in red AND blue, is the area the USSR/Warsaw pact controlled until 1991 or so. This entire RED area is now NATO. When the Soviet Union was breaking up, in 1991 – they were ensured “not one inch Eastward“. What you see above in Blue are areas that are not NATO. Look where Moscow is. It’s perhaps a 6 hour drive from the Ukrainian border. That’s like in the US where our capital is in DC – to have Russian/Chinese missiles/tanks stationed in NYC. This would give ANY elected official/president/PM/ruler of a nation a lot of pause.
It is common in history to have buffer states between you and your rival/enemy. But in 2014, there was a revolution/coup (depending on who you talk to) where the powers that be became more West-friendly. This recently started to feel like NATO was trying to entice Ukraine into the fold. To Russia, this was similar to Russia moving missiles into Cuba. It’s the same as if Russia got into a pact with Mexico and put missiles/tanks all along the Rio Grande.
I’ll leave the specifics of the Ukrainian War to Luongo and military pundits. What I wanted to drive home here is that there is a possibility that over time, as the temperature of their European homes plummet into freezing temperatures, that more and more people see the cause of the war, and with this, develop more anger towards their leaders to drop “failed” sanctions.
I can’t tell you how this war will end, or how long it will go on. It seems like to me, Russia may be accomplishing the objectives they set out for. This BBC map is 2 weeks old, but to me it shows where many of us thought this might end near the beginning. This is an approximation of where I felt the endgame was on my bingo card – I didn’t expect the western side invasion, but if you recall, that was sort of a cluster with fuel and old vehicles – and that campaign could have been to draw resources from the East – which was their real target all along. I don’t think it is surprising that Donbass and this southeastern region may be part of a cease fire.
In 2014, you had the capture of Crimea – which led to the first round of sanctions. This is what the ruble did in terms of dollar performance then.
But with the second move, you see the sharp move down – but now it appears the Russians adapted to sanctions and used ruble for energy as a means of reversing the currency issue. Now that their currency is much more stable, they also seem to now not need to really sell energy to Europe at all. Sanctions initially did what they were supposed to, but completely backfired. In trading, you have stop losses to prevent shit like this. Instead, leaders are doubling down. My hypothesis here is that there may be a collective realization their stop losses were triggered but none got out of the position like they were supposed to. And – rather than making the damage worse, may cut the sanctions.
You can argue above that Crimea and the areas in pink are mostly Russian speaking people. That they did not want to be part of Ukraine, especially after 2014. One can also argue about the oil and energy in the Sea of Azov and Russians controlling that is good for their dominance of energy. I am not a Ukraine/Russian expert, and won’t pretend to be. But what I can tell you is that with Russia now cutting off gas, it’s signaling to me they want to get to the negotiating table before winter sets in. Cutting off gas presents a fork in the road. Cut bait with sanctions, or freely jump into a pool of razor blades on your own volition. To me, it is clear that cutting off gas is then asking the West to come to the table to “surrender” and drop sanctions – and gas will flow back.
But the West believes they have the moral high ground, and with that, you needed to gaslight an entire population into one way of thinking – and you cannot easily un-ring that bell without losing credibility. So now the leaders have a choice – back out of sanctions and lose significant credibility, or double down and get voted out for being an idiot. To me, if you are a polished politician, you “survive” another day by weaseling your way out of things and blatantly lying to people. To me, that’s being a bad person – but to career politicians, that’s a normal Tuesday.
Light at the end of the tunnel?
There could be a ceasefire. There could be an understanding of land that could be annexed by Russia – in the mostly pink above. Ukraine doesn’t want to give up this land, but they may not have a choice. If Europe starts leaning towards removing sanctions, you then have Ukraine losing support of the West with an emboldened Russia.
In Russia’s interest….
- No further loss of Russian life fighting Ukraine
- Get a quick resolution before winter
- No NATO membership for Ukraine, ever, in writing
- Pink lands are DMZ areas controlled by Russia to ensure no NATO membership and to unify Russians.
- Control of the Sea of Azov for more energy control
- Sanctions removed
- Restitution for funds confiscated
- Back on SWIFT system until they can build up a BRICS payment system to de-weaponize the dollar against them
- Customer base to their West that continues to pay the bills as energy is their only real export
- Divide Europe from US. By Europe facing energy emergencies, it can force the Europeans to disagree with the US and drive a wedge between us.
In the West’s interest
- No further loss of life or land in Ukraine
- Get a quick resolution before winter
- Western-friendly government in Ukraine to remain
- No further aggression by Putin
- Gas turned back on to all of Europe, if it’s still there
- Build up LNG facilities/baseload power to ensure Putin cannot use Nat Gas as a weapon against them in the future.
- Cheap energy to buy from Russia to bring oil/gas prices down worldwide
- Get manufacturing and commerce “back to normal”
- Ensure global supply chains remain intact until new ones can be built up
- Ensure access to Zeon gas, semiconductors, platinum, rare earths, and uranium/enrichment
- No further escalation with China and no further advancement of BRICS challenging the dollar
- Preserve the banking system that is getting killed by derivatives falling apart.
- Get back into Russian markets to sell them Levis and Starbucks.
Lessons learned (part 2) from this experience over the last 6 months of introspection:
- You cannot sanction a global nuclear power who provides a significant portion of energy to the world market. They have the ability to fight back or go around your sanctions.
- Global supply chains are much more fragile than anyone realized. Disruptions of global supply chains leads to inflation – which can be a financial weapon used by your rivals/enemies. We have seen this playbook now a few times with COVID lockdowns, Ukraine, and now continued COVID lockdowns in China 2.5 years after COVID started. Lots of this seems to be like “how many different ways can they get the West to spend themselves into hyperinflation”.
- Derivatives markets are super sensitive to supply chain disruptions – especially energy. So if you want to attack Western banking, target derivatives markets. We saw nickel go nuts and how our “free market” was crushed by a single Chinese short. We recently saw a $1.5T margin call on banks relating to energy. We are about to see many other markets go parabolic due to the disconnect of paper markets from supply chains that are JIT inventory. It’s possible the war may go on enough to dislocate a lot of these markets to precision target the banking sector derivatives weaknesses.
- NATO went back on their promise of not expanding Eastward – and pushed Russia too far. The Russian bear was provoked to war after two decades of trying to avoid it. Don’t poke the Russian bear. They do much better with “doing without” and brutal hardship than a soccer mom in the US.
- Russia has little to offer the global economy outside of energy. They are kindly reminding the world how fossil fuels are still here to stay. If you remove energy production from Russia and the Saudis, you have not much in the form of revenues. This is a massive weakness that is exploited by a Green Agenda. Russia may be at war with that ideology, and we can see how this might get traction with countries like Iran, Saudi Arabia, Iraq, and Venezuela. I think it makes a lot of sense to continue to use fossil fuels in PARALLEL with green energy to do this over 50-100 years, and not 2.
- You cannot cap energy prices, as it leads to immediately shortages and mockery from those supplying it. It also shows how those creating these policies are either myopic, unintelligent, or just outclassed in a political sense. It is a checkers move where Russians simply countered by stating “if you want to put a cap on our energy, we just simply won’t sell to you, at all”. I mean, is there a think tank out there who didn’t warn them of this retort?
- We are not ready, or even remotely close to ready, to “flip over” to green energy. We can chart a path where we stand down fossil fuels only when the power source to replace it is up and running.
- We need to build stronger supply chains. Build domestic and mix in 10-25% of your supply chain from a variety of overseas providers. My country is obscenely misaligned with supply chains – and rely mostly on goods from outside of our borders. At issue is when we have to start sourcing elsewhere, no one here is understanding the true price tag that is. Our currency would need to be significantly devalued against the world theater in order to produce anything. It is possible this is understood and the existing “blow this shit up” model is in the works to then begin a strong de-value of our currency to thus be able to produce anything here.
- Chips require Zeon gas, which Russia would control 90% of the world supply with between them and Ukraine. Taiwan produces 90% of the world’s semiconductors. You don’t have to be a genius to realize that much of our tech-based economy requires these chips.
- Russia and others are tired of the World Reserve Currency being used as a financial weapon, so they fought back with using energy as a financial weapon in a measured response. Russia could have escalated this militarily, but they chose a path to inflict damage that can be undone easily by reversing sanctions. They are giving the West an off ramp.
- Sanctions using SWIFT and the dollar as a weapon to dictate policy are weakening as a tool with the BRICS getting much stronger and re-building supply chains within that network. This is more or less a rival to the G7 and people need to pay attention, and quickly.
- Western currencies are near full MMT where the BRICS are hoarding gold to create a new currency basket. This could strengthen again the dollar and send prices of commodities vertical in USD prices
- Petro Dollar may be dying – as the definition of it is going away as Saudi influence is moving to BRICS
- The EU is weakening before our eyes, and it’s obvious they have not only an energy problem, but spending issues.
- It’s not as easy to gaslight the public today on “good” versus “bad” as it may have been 40 years ago. It is understandable to the world community why Russia took this action against Ukraine. It doesn’t mean anyone supports it, but it’s not as cut and dry as “Putin bad” as spin doctors would like to make it.
- My country has been very good at rigging elections and fomenting discord all over the world for 70 years to fracture their voting bases and install puppet regimes – perhaps in Ukraine in 2014 as a recent example. Our voting base is increasingly worried those tools have been used on the homeland, and that bell cannot be un-rung. I will leave it at that for obvious reasons, but many are wondering how idiotic policies somehow continue to get the support of the people.
- You need to be careful about overseas investments. Those who had investments in Russian companies got taken to the wood shed. What about my mining companies which may all be based in Canada, but have operations in BRICS and would-be BRICS countries all over the world? Could mines owned by these Canadian companies be nationalized by BRICS companies? I don’t see why not if we do not stop dialing back the rhetoric.
- It is clear to me that our paper games of COMEX have put out the lowest bid to those who would supply it, and a lot of our mineral/energy supplies come from BRICS+ nations. The COMEX DID produce an efficient market, allowing those who would sell at the lowest price to produce it. However, you can clearly see how paper games over the years have artificially suppressed prices and perhaps robbed billions or trillions from these producer economies. With a potentially massively falling dollar against real things, COMEX prices aren’t reflective of costs in USD abroad and BRICS countries may take their ball and sell on their own exchanges. We have recently seen a dislocation of Shanghai silver to COMEX silver. By them offering higher prices, it is potentially not re-stocking supply on the COMEX. Silver isn’t being drained as much as it is not being re-stocked on the shelves like it used to. This will inevitably lead to higher COMEX prices on just about everything IF they wish to actually sell any product at all.
- The DXY is a measure of the USD against EUR/JPY/GBP and some other currencies – but those are the big 3. When these countries have energy issues and they are printing to save their lives – as the US is tightening, it skews the DXY much higher than I could have thought possible. This created a headwind for PMs. However, all currencies are falling against “real things” as they print ridiculous volumes, debasing the currency daily. I don’t believe the markets fully comprehend the totality of money printing and the short term headwinds of PMs with the DXY could snap to the reverse IF sanctions are dropped. This would strengthen these currencies against the USD – but also show that Russian and BRICS+ have a formidable ability to fight the US’s currency dominance. PMs are a great place to be IF you think sanctions are going to be removed at some point in the near future. I believe the initial move of gold and silver higher were the correct moves, but COMEX did their COMEX thing and shorted the shit out of any metals – perhaps at the direction of higher ups. Meanwhile, IF the DXY drops like a rock, metals going to be a nice place to be – as well as other commodities.
- Oil could drop like a rock if Russian energy then “allowed” back on the markets. And, they may then flood the markets and work with the Saudis to attack US ability to produce with a profit to then ensure the West is reliant on BRICS+ cheap energy. $40 a barrel could do it. IF you believe sanctions are going away, long oil/nat gas is a dangerous play. I may look into 6-12 month puts if my convictions are sound and I scrape some money from the couch cushions.