Amateurs Talk Strategy, Professionals Talk Logistics

By Michael Every of Rabobank

I start today with a reference to yesterday's Seinfeld focused Global Daily: a reader reminded me of the most appropriate George Costanza quote for our present times, which I had missed: "It's not a lie if you believe it." There is a lot of that about.

Of course, shills aside, a strategist should try not to lie to themself about what's going on in order to best predict what may happen. And how does one best look at what's going on? As I stress, start with precepts (how does the world work?), then look at logistics (how is the world working?). After all, as a US general once said, "amateurs talk strategy, professionals talk logistics." What's true in war is true in peace, and more so as we dive deeper into an undeclared and, for markets, unrecognised economic war.

So let's look at some of the logistical dots that have just been plotted for us. (There a lot, so don't stop after just a few, or risk missing some of the best at the end!).

In the Middle East, the Red Sea crisis is getting worse: even if few are paying attention. Try to juice demand with large rate cuts into a supply squeeze and see what happens. The maritime aid flow from Cyprus to Gaza is now starting, but won't resolve distributional issues on the ground, and experts remain sceptical about the naval pier the United States has promised. President Biden just confirmed a $10bn sanctions waiver for Iran, who is backing the Houthis, weeks after making token military strikes on its regional forces (supposedly still ongoing) as payback for killing three US soldiers. In short, peace seems a long way off.

Russia reiterated it will use a nuclear weapon if threatened, even as Ukrainian drones destroy more Russian military factories deep into the latter's territory. Ukraine is also taking out Russian oil refineries: how many more of those before markets react? Yet the larger question is "where is Russia?" given various maps of it going round.

In Europe, the ECB launched an operational review which Bas van Geffen covers in detail here. There are lots of wonkish tweaks: one is the ECB will retain a strategic bond portfolio that includes SSA bonds issued by the European Investment Bank (EIB). At the same time, the EIB will soon consider investing in the EU defense sector.

As our SSA expert Matt Cairns notes, this comes post-Ukraine, pre-Trump, and mid German rejections of joint Eurobonds to fund arms spending. The use of the EIB may prove a path of ‘less resistance' given it already lends for dual use equipment like drones or helicopters. Agreement is likely to take time, and funding will only be raised gradually at first, but the EIB’s funding target is €60bn for 2024, with authorization of up to €65bn, allowing for upside flexibility. Going even higher would be a technical formality, although Matt considers this to be some way off politically. Yet the geopolitical backdrop is as urgent as Covid, which triggered past rapid action, given the long lag times to get defence goods flowing.

What one can also say is that such a development potentially looks like part of the radical European 'strategic autonomy' policy-shift framework we proposed back in December.

In the US, the BTFP bank support scheme has ended: and nothing bad has happened (yet). At the same time, the Fed overnight reverse repo balance has risen from $445bn back up to $522bn in two days. Meanwhile, Treasury Secretary Yellen stated she does not expect US rates to decline back to their pre-COVID lows. Indeed, as Bloomberg puts it: “The three-month rate, for example, will average 5.1% this year, up from the 3.8% projected last March, White House officials said. The 10-year yield projection rose to 4.4% from 3.6%. The latter projection might have been even higher but for the intervention of Lael Brainard, director of the National Economic Council, according to people familiar with the matter prior to the release.”

If so, how are real term cuts in Pentagon spending going to be reversed ahead? Where or what is the US version of the EIB? Or are others globally going to have to do far more to stay safe in a world in which the US deliberately does far less, as it looks more to itself first?

That’s as the TikTok divestment bill passed the US House of Representatives with a huge bipartisan majority and has key backing in the Senate from some quarters, even if the body as a whole is more conservative (read: has different lobbyists) than the House; and if it passes there, President Biden has said he will sign it.

So, China is livid. So are those who worry what happens next to social media. This all seemingly swelled up 'from nothing', but didn't, and where this impetus might be directed next introduces further uncertainty into some markets.

In which, Trump is reported as floating various hedge fund billionaires as potential future Treasury Secretary should he win in 2024; but also former USTR Lighthizer, who is now an avowed Hamiltonian mercantilist. Ever heard of bait and switch? Or Hamilton? Or mercantilism?

There is more than enough acronymic-financial logistics action here than I can cover in detail today. But the underlying direction of travel seems to be fairly clear, unless you are an amateur, have something to sell, or are George Costanza.