Friday 18, February 2022

War games

Putin seems to be running rings around the west in relation to his strategy for Ukraine. I have no idea what’s going to happen, but markets got spooked. There were reports of shelling in Ukraine. Conspiracy theories swirl around: one that I have heard repeated is that a “false flag” attack on Russia will be arranged, which will be used by Russia as an excuse to attack and occupy the Ukraine, or at least parts of it.

The reality is that Russia is a kleptocracy from which all citizens with any luggage will attempt to escape. The grim reality of living in a country in steep decline means that as the population shrinks, more people will want to escape, especially the young. Putin will get older and more rigid in his policies. His lieutenants will become more powerful and more greedy, draining more and more of the country’s wealth into Londongrad and similar hard-money economies. (OK, you can argue that the GBP is probably not the hardest currency in the world, but it has a rule of law and there will always be a welcome from Swiss private banks for the oligarch’s cash).

I am signed up to the free tier of Macro Ops. This note, sent to me via email, but not accessible from the website seemed outstanding. Note that the scraped text of the email will go after a month, and the link in the previous sentence will stop working. Sorry.

Oil and the Fed

My (amateur) take on headlines I read from a speech by Governor Williams of the Fed was that they are striving to sound dovish, in order not to spook the markets. The idea is that they will not actively tighten, but let the balance sheet “run off.” I don’t know the maturity breakdown of the Fed’s balance sheet. If it is evenly divided by maturity, allowing the existing positions to redeem will keep the mix largely unchanged except for some shortening at the long end as new long bonds will no longer be purchased. Does this make any difference to anyone? I doubt it.

Williams seems to think that the Fed has everything under control, and that inflation will glide down towards the target rate. I’ve read a lot of smart commentators who think that the idea that the Fed can unwind a $9e12 position without crashing asset markets is ludicrous. So far we have Fed: 1, Sceptics: 0.

Oil doesn’t seem very happy. Options have become very expensive, and it has continued to sag, but not badly. Again, what impact the war has is hard to quantify.