First the bad news. Judging by what is going on in financial markets, we are about to come perilously close to recession. Indeed, there might even be one by the end of the year or early 2023.
The chart below, from Bank of America’s monthly survey of global fund managers, shows a near majority are expecting a recession. Even those that do not agree have been reducing their exposure to shares and shifting into other assets, such as cash.
For those of us who consistently warned of the dangers of inflation and that central banks were being too slow to withdraw stimulus, this is no surprise. They are now moving into panic mode and Jerome Powell, chair of the US Federal Reserve, told the IMF meetings in Washington last week that defeating inflation was “absolutely necessary”.
A separate Bank of America chart shows a recession is the biggest source of worry for fund managers. But bizarrely, concern over the impact of the Ukraine conflict has receded dramatically. This makes no sense to me. In reality, they are two sides of the same coin.
In addition to inflation, there is a new thing to worry about: China. A resurgence of Covid cases has run into its supposed Zero Covid policy and weak vaccines, leading to a lockdown in Shanghai and, judging by media reports, Beijing will be next. This could mean yet further disruption to global supply chains.
Markets are social institutions and are subject to the same fads, humours and fashions as others. So it is always good to question when “everybody agrees” something in a poll or survey. In addition, my experience is that with some honourable exceptions, fund managers and bankers are not good at analysing politics, too ready to muddle up their own preferences with likely outcomes. This tendency has in fact got worse in recent years, because they inevitably rely on sources of metropolitan groupthink: market strategists, consultants, think tanks and the media. The rest of us can be just as guilty of this.
Which brings us to Ukraine. Judging by how events have transpired (Mariupol should supposedly have fallen weeks ago, for example) there is empirical reason to question the market’s current view that it is not important any more. Those with actual experience of these matters, including from the front line, take a different view.
The human impact of the conflict has been terrible. From an economic standpoint, the biggest reason to question the consensus is the potential impact on inflation. Put simply: a ceasefire in Ukraine would mean a rapid fall in oil, gas and food prices, bringing inflation down too; ergo fewer interest rate rises and either no recession or a modest one.
It is no coincidence that simultaneous to Powell telling the IMF Spring Conference in Washington that bringing down inflation is “absolutely necessary”, the US Defence Secretary Lloyd Austin articulated America’s war aims after meeting President Zelensky: “We believe that we can win, they can win if they have the right equipment, the right support,” he said. “We want to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine.” (My underlining).
At the same time, we learnt that a major Russian logistics hub and fuel depot at Bryansk, on the Ukrainian border, burst into flames following an apparent missile strike. Funny that.
The reality is, of course, that Powell and Austin are actually singing from the same strategic hymn sheet. The West, led by the US, is seeking, if not exactly the defeat of Russia, then its humiliation and degradation, partly because it is in its economic interest to do so. A rampant Russia = high inflation, and vice versa.
Which leads us to a secondary front in the war, in the Black Sea.
The reason Russia is determined to consolidate its hold over Crimea and to obtain a land corridor to it is that Sevastopol is its only large and reliable ice-free port. For a commodity exporting nation, sea access is absolutely vital. So is it for the customers – the West, Africa and Asia – which rely on the free passage of its shipping to import Russian and Ukrainian commodities.
So when Turkey shuts the Bosphorus to Russian warships (as it did last week) and René Kofod-Olsen, chief executive of V.Group, the world’s largest shipping manager, calls for Nato to escort merchant shipping in the Black Sea, we should take notice.
This is not just about stopping the Russian navy from making amphibious landings, it is about re-opening the Black Sea to merchant shipping and denying control to Vladimir Putin. It is about re-opening or making safe the ports of Ukraine, the Caucasus and the Eastern Mediterranean for the big commodity traders. Energy groups like Exxon, Shell and BP and commodity traders like Vitol, Cargill and Louis Dreyfus.
Kofod-Olsen said: “We should demand that our seafaring and marine traffic is being protected in international waters. I’m sure Nato and others have a role to play in the protection of the commercial fleet.” We should be very surprised if this is not in fact already happening. And just as in the land war, much of it may be imperceptible, this time by submarines, deep water drones, and Ukrainian raiding parties.
So I am sticking to my view: inflation is a threat, Ukraine has made it worse, but the stakes are so high we should hope and expect that Western institutions prevail in the end, whatever mistakes they make along the way.
George Trefgarne is CEO and founder of Boscobel, an independent strategic communications firm providing clients with bespoke financial PR & public affairs advice.