Rabobank: Can You See The Fat Tail Risks?

By Michael Every of Rabobank

Obviously, markets are all a-Twitter after Elon Musk’s decision to buy 9.2% of said social media company and, presumably, stop it being a vehicle for censorship. That may matter a lot to Western society over the long run. Will even former President Trump get his Twitter account back, or if he will prefer to bumble along with Truth social, which is hardly taking off so far? He seems to be doing far better in the polls by NOT tweeting all the time, so who knows what the outcome will be. Will we also re-open doors to debate (and trolling, screaming, doxing, and pile-ons) on now-taboo topics? I ask, as today someone is complaining their article on high rents was banned from being shared on another social media platform…. because it was unfair to landlords(!) If we have to censor, could we not at least have a policy of redirecting to articles blaming those really responsible – central banks?

It’s a particularly live question in Australia where the RBA –who can always find a panoply of reasons why house prices are soaring, but their rates policy is never one– will today be examined for signs of life by the markets to see if it might actually raise rates at some point again soon.

Markets are also looking at energy prices heading higher again, and more pressure on the EU to act on Russian energy, which it will discuss tomorrow. Yes, just words for now. Yet Germany just nationalized Gazprom’s gas storage unit in the country, which holds 25% of total capacity, which is a significant deed. So is Poland and the Baltics appearing close to sealing their borders with Russia to all goods going in and out.

On words, deeds, and Russia, I need to share an article, ‘Что Россия должна сделать с Украиной’ (‘What Russia Should Do With Ukraine’) from state media published Monday. The original link is no longer working for me, which perhaps isn’t a surprise when you read it. Translated highlights include:

“…besides the elite, a significant part of the masses of the people, who are passive Nazis, are accomplices to Nazism. They have supported the Nazi authorities and indulged them…The just punishment for this part of the population is possible only as the bearing of the inevitable hardships of a just war against the Nazi system.

The name Ukraine can seemingly not be retained as the title of any fully denazified state formation on the territory liberated from the Nazi regime. Denazification is inevitably also deukrainisation – a rejection of the large-scale artificial inflation of the ethnic element of self-identification of the population of the territories of the historical Malorossiya and Novorossiya begun by the Soviet authorities. Unlike, let’s say, Georgia or the Baltics, Ukraine, as history has shown, is unviable as a national state, and attempts to ‘build’ one logically lead to Nazism. The Banderite elite must be liquidated, its re-education is impossible. The social ‘swamp’ which actively and passively supports it must undergo the hardships of war and digest the experience as a historical lesson and atonement.’

In short, this is a call for the removal of Ukraine, not just parts of its territory, or EU or NATO membership. It also implies terrible violence at a time when Russian state TV, with no irony, states the footage of atrocities in Bucha “…was done by professionals, probably British. They’re the best in the area of information operations. [They know how] to place the bodies correctly, do everything correctly, create a nice picture for the necrophiliac Western consciousness.” They even allege that the town of Bucha was chosen because it sounds like “butcher” in English. That is the level of homophone conspiracy theory now on state TV.

Yes, I also know there is twaddle, clickbait, shilling, activism dressed up as journalism, and/or outright lies and censorship –such as Hunter Biden’s laptop– in Western media and social media too. I poke at that where and when I can too. But pointing to that over calls for mass murder verging on the legal definition of genocide is straw-manning. One can logically oppose *both*.

Yes, this isn’t about markets – but if markets only trade (or write about) what is said or done about them directly, then they are no real markets at all. Think of what that article’s rhetoric means on a spectrum from sustainable de-escalation to the scenarios of global bifurcation now rolling out everywhere. Or don’t. Just don’t be surprised when markets then surprise you.

Yet as the Western needle moves on Russia we are seeing a flow of articles trying to ‘do a Nixon’ and argue China should be hugged tightly. Some come from Wall Street; some from US neo-realists; some from US think-tanks that accept lobbying money; and some from Guardian readers who think that the nicer you are, the nicer everyone else must then be. (A demographic well-represented in the US State Department by the way, especially in their Middle East team.)

For an example of all rolled into one, see ‘Don’t assume Russia and China are on the same page. The US can work with China’ from the director of Justice Is Global, a group against neoliberalism and nationalism –who might be surprised to know just how deeply ingrained both are in China– and a post-doctoral research fellow at the Boston University Global Development Policy Centre, which is so Bostonian and global its website is available in both English and Chinese. They conclude that if:

“…the escalating spiral of confrontation, insecurity, nationalism, and bloc formation continues unchecked, it threatens to unleash a global conflict that will undermine liberal values on both sides even more surely than current fears about the supposed “arc of autocracy”.

In other words, it is the West who started this all and are making it worse. Haven’t we heard that argument before?

Moreover:

“…it is not too late to choose a different path. Cooperation between China and the West, coupled with the acceptance of China’s peaceful rise, would increase China’s sense of its options and its willingness to take risks in line with other western priorities. That could include applying pressure to limit Russian aggression. Greater US-China cooperation on infrastructure and other global public goods would both benefit developing countries and point towards a just, sustainable and peaceful alternative to escalating great power rivalry. We should take China’s openness to this seriously.”

Again, we hear that a lot – but it doesn’t seem to be winning over the US, perhaps no surprise, or the EU, which is a much larger ‘tell’.

To show the benefits of free speech and looking well outside naval-gazing bubbles, Asia-watcher @Geringtuvia shares a video of Professor Song Zhongping, a military commentator for Phoenix TV, explaining:

“One could argue that [the Bucha massacre] was staged; after all, Zelenskiy is an actor doing what actors are trained to do… The suppression, warmongering, and joint strangulation of Russia expose the hegemonic thinking and practices of the US and the West, who will go to any length to achieve their objectives.”

We just heard that argument elsewhere – and recall messaging on Chinese TV is tightly controlled, not the polarized situation we have in the West.

Moreover, sociologist Li Yi, speaking to CCP cadres at Beijing’s Chaoyang District Party School on the lessons for China from the Ukraine War stated:

“We need to reunify with Taiwan province as soon as possible with our overwhelming troops and firepower. The war between Russia and Ukraine has proved that, as I stated in December of last year, the campaign to liberate Taiwan necessitates the rapid elimination of Taiwan’s air force, navy, missile forces, and armoured forces. Simultaneously it demands cutting off water, electricity, mobile phones throughout the island….

For the past eight years, Putin has been preparing for a showdown with the US and NATO in Ukraine in all aspects of Russian military, economic, diplomatic, financial, and social life, including the localization of key components… a full demonstration of what China should do. All China has to do now is follow suit.

China’s economy is ten times that of Russia’s, and it can accomplish these goals with ease and delight. It can, for example, sell $3 trillion in debt, withdraw $60 billion in gold, locally produce and reserve enough important spare parts for military and civilian use, and produce and reserve enough ammunition. A particular focus should be on producing enough ICBMs, hydrogen bombs, and atomic bombs. China should also locally produce and reserve enough food, withdraw state assets in the US, Japan, and Europe, and so on.”

And the messaging given to CCP cadres is even more tightly controlled than that for the public on TV.

Of course, some will say “He’s a sociologist!”, but weren’t greatly transformative thinkers Polanyi and Graeber both sociologists, not economists? Others, including myself, will point out that China cannot just sell its US Treasury holdings, at least not while it is tied to running large trade surpluses with the US; that selling $60bn in gold is irrelevant; and selling off state assets abroad doesn’t help it much geostrategically. Agri experts would also seriously question the projection that China can ever locally produce and reserve enough food – at least not and keep the diet it has now. For example, it made a huge US corn purchase yesterday. A US naval blockade of all goods going in and out of China, including agri, would also not be difficult to impose according to geostrategist Luttwak.

Meanwhile, the stocks of other key goods can be achieved: and the rearmament is clearly happening. And on key goods, and pertinent to both any secondary sanctions over Russia and hypothetical Chinese action over Taiwan, Bloomberg’s Shuli Ren shrilled yesterday: “Good Luck Trying to Sanction China’s 4,762 Little Giants” In other words, the West won’t dare act against China because it is too integrated into their supply chains, just as Russia is on commodities. And has that stopped Russia acting?

Can you see the potential fat tail risks?

For markets still trying to believe that everything will work out for the best “because markets”, and for humanists who believe the same “because people are good”, the key points are:

It’s arguably better to let everyone have their say;

Sometimes you need to look at what people are actually doing, not what they are saying; and

Sometimes you need to listen to what they are saying they are going to do.

Relatedly, and breaking news as I conclude, after the threat of more sanctions, the US Treasury just halted dollar debt payments from Russian government accounts at US financial institutions, according to a Bloomberg source. This policy is seen as forcing Russia to choose between draining its own remaining dollar reserves, spending new revenue, or going into default. Let’s see how the market unpacks that one: but isn’t the above choice one that every country faces regarding debt, and doesn’t Russia, like China, run a vast EUR/USD trade surplus?