Sanity & Reality Check
Sanity & Reality Check
Keeping up with the madness
As the world tumbles toward catastrophe, I felt the need to do a quick recap of recent events and call out insane decisions and actions.
Some of them close to home and some far away.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." - Ernest Hemingway, Esquire 1935
The goal is not to make for a depressing article, but to keep track of what is happening and to NOT become numb to the madness.
Instead, we need to call out war hysteria loud and clear.
Baltics & Nordics
Small countries with absolute dependency on foreign assistance to survive militarily should try to be on as good terms as possible with their neighbors. This does not mean they should not join alliances able to protect them, but any unnecessary provocation should be avoided.
Unfortunately, the Baltic states (where I live) do not seem to realize that. Instead, a strategy of maximum provocation to “look tough” and a self-serving internal politics move by the local elite are trying to anger the big Russian bear next door.
Or for that matter, aggressive position toward China, for no clear reason at all.
And for no strategic purpose at all…
Lithuania defies China over Taiwan ties in new Asia strategy (we are speaking of a country without a real Navy to begin with, located on the other side of the planet regarding the Indo-Pacific region).
Latvia to deport nearly a thousand Russians who failed to meet immigration law requirements.
Ministry: Russian citizens' right to vote in Estonia a threat to security.
Estonian Lutheran clerics protest expulsion of Russian Orthodox bishop
Finnish defense minister wants a complete ban on Russian real estate transactions.
From deporting 80-year-olds deemed “security risks” to moving almost 1-century memorial to dead soldiers or expelling cleric and interfering in religious matters, none of these actions are helping anyone.
Real history is complicated, and populist narratives should not be used to make people hate each other.
And religion should NEVER be weaponized.
Warmongering & Draft
For that matter, the last few weeks/months have seen a concerning and VERY coordinated media blitz to prepare the population for conscription, draft, and a major war.
I however have suspicions that this wave of push for conscription has as much to do with Israel’s war as with Russia, considering the timing.
UK
Australia
Germany
Eastern & Northern Europe
NATO
USA
Attacking Iran?
While Russia is the “official” reason, a draft would be equally useful for dragging Europe into helping Israel and the USA in the Middle East.
And the amount of unhinged takes by US leaders keep rolling.
Nancy Pelosi: Protesters calling for a ceasefire in Gaza "is Mr. Putin's message... Make no mistake, this is directly connected to what he would like to see... "I think some of these protesters are spontaneous and organic and sincere. Some I think are connected to Russia."
And while I was editing this article, more news kept piling up.
3 US soldiers got killed in either Jordan (official version) or illegally occupied Syria (according to Jordan’s own government).
In response, the US bombed 85 targets in Syria and Iraq.
US declines to rule out hitting targets in Iran, Jake Sullivan says (Politico)
As a reminder of times with more competent leadership that knew when to call it quits, Ronald Reagan set a different example. He withdrew from Lebanon after Iranian proxies killed 241 marines in the 1983 Beirut barracks bombings. He understood that emotions aside, US Presidents must weigh the national interest higher than foreign interests.
I am afraid we do not have people like that at the helm anymore.
All these occurred with rather ineffective strikes on Yemen, and the Red Sea is still mostly closed except to Chinese, Russian, Saudi, and non-Western ships. Nor can the overall readiness of the Western fleet be called impressive.
British warships lack firepower to attack Houthi land targets
The UK's flagship aircraft carrier suffers new misfortune and won't lead major NATO exercise
But don’t worry, we are told it does not matter…
Israel
Speaking of Israel, the country seems stuck in a death spiral of escalation, with so much blood already spilled that only more conflict and total victory or even genocide seems to become the only acceptable outcome for all parties involved.
Escalations included not only an attack on Lebanon but also on Iran.
Iran is now a ‘legitimate target’ for Israeli missile strikes, senior minister says
Nir Barkat tells the Telegraph that Israel can afford to keep fighting and as ‘big as the crisis is, it is also a really big opportunity’ (emphasis is mine)
Common Israeli or pro-Israel takes are turning rather hysterical and openly calling for genocide, including high-profile influencers or ministers in power:
“We are fighting against human animals”. This is how Israeli Defence Minister Yoav Gallant announced what he called a “complete siege” on Gaza, following a surprise attack by Hamas on Israel. Israeli Defense Minister Yoav Gallant has ordered a “complete siege” on Gaza, saying authorities would cut electricity and block the entry of food and fuel.
From Human Rights Watch “Israel: Starvation Used as Weapon of War in Gaza“ & Mass Peace Action":
Energy Minister Israel Katz, who reported that he ordered the cuts to electricity and water, said on October 11:
“For years, we have given Gaza electricity, water, and fuel. Instead of a thank you, they sent thousands of human animals to butcher, murder, rape and kidnap babies, women and elderly people. This is why we have decided to cut off the supply of water, electricity and fuel, and now, the local power plant has collapsed, and there is no electricity in Gaza. We will keep holding a tight siege until the Hamas threat is lifted from Israel and the world. What has been will be no more.”
Katz said on October 12:
“Humanitarian aid to Gaza? Not a switch will be flicked on, not a valve will be opened, not a fuel truck will enter until the Israeli hostages come home. Humanitarian for humanitarian. Let no one lecture us about morality.”
On November 4, Finance Minister Bezalel Smotrich declared that no fuel must enter Gaza “under any circumstances.”
Yogev Bar-Shesht, deputy head of the Civil Administration, said in an interview from inside Gaza, “Whoever returns here, if they return here after, will find scorched earth. No houses, no agriculture, no nothing. They have no future.”
Mark Regev, senior adviser to Israeli Prime Minister Benjamin Netanyahu, said that Israel had been depriving Gaza of fuel since October 7 to strengthen Israel’s position when it came to negotiating with Hamas on the release of hostages. “Had we done so [allowed the fuel in] … we would never have gotten our hostages out,” he said.
The core of the problem is that Israel is indeed in mortal danger, both as a state and as a population.
And let’s remember that genocidal rethoric from the Palestinian side have been going on for decades as well, nothing is black and white here.
At this point, both Israeli and Palestinian populations seem to see their conflict as existential, with a large majority agreeing to this idea, and the first side to committing genocide “winning”. This draws gruesome parallels to the Yugoslavian civil war or Rwanda.
Hard to visualize how to de-escalate from that point. Here more than anywhere else, the madness of war seems to have gotten a strong hold on the population and not just the politicians.
Internal divisions
Texas
The stand-off between the federal government and Texas (and half of the US States and most of the Republican Party) over illegal immigration seems to have mostly had for consequence the cancellation of LNG projects. Which will screw up Europe's energy supplies, but it is better than outright hostilities.
Still, bad optics to see the US so divided by internal issues while engaging directly or indirectly in multiple wars in Ukraine, Yemen, Israel, Syria, and Iraq.
Hungary
Let’s not be accused of anti-Americanism, and look at European disfunctions too.
Brussels threatens to hit Hungary’s economy if Viktor Orbán vetoes Ukraine aid.
Brussels has devised a confidential plan to escalate tensions with Budapest, indicating that the EU could harm Hungary's economy if it obstructs new aid to Ukraine at this week's summit. The strategy, revealed in a document obtained by the Financial Times, outlines explicit measures to target Hungary's economic vulnerabilities, jeopardize its currency, and undermine investor confidence, aiming to impact "jobs and growth" unless Budapest lifts its veto on aid to Kiev.
Farmers
Meanwhile, the access to Paris was locked by an almost complete blockade by farmers and other “peasant class” people.
The union of French farmers wages a 5-day siege of Paris starting on Monday, January 29 by blocking all highways into Paris. Taxis are also demonstrating throughout France with blockades. The A13 motorway towards Paris is blocked at Rocquencourt.
While Bruxelles looked remarkably similar to the Maidan Square in Kyiv. And similar protest are flaring in Germany, Romania, Poland, etc.
Rise Of New Politics
Meanwhile, ascendent far-right parties in Hungary and Romania are openly discussing getting back Ukrainian territories populated by ethnic Hungarians and Romanians.
And the AFD in Germany, with 25% of voters, is under the threat of a total ban and is officially discussing a “Dexit” to see Germany leaving the EU.
Trade Wars & economics
Almost forgotten in the background, all EU economies are sliding into a recession triggered by inflation, rising rates, and high energy costs.
The US hit on January 3rd the 34 trillion debt mark, only 3 months after the $33T, 2 years after the $30T, and 4 years after the $24T mark.
Not quite a full exponential yet, but nothing that multiple wars could not solve I guess.
And the trade war with China is going as many expected (unfortunately, no competent forecaster was present in the US government):
Western nations need a plan for when China floods the chip market.
EU to investigate 'flood' of Chinese electric cars, weigh tariffs
Conclusion
First, let’s clear the air a little. I still think that a full-blown WW3 is not yet certain. For a few reasons:
No matter how delusional, the US/West/NATO/EU leadership is starting to realize how limited their actual hard power is. The more Yemen or Syria prove an almost untractable problem, the less likely they are to pursue a larger war in Europe or in Taiwan.
Russia is in full mobilization, but also shows signs of economic issues slowly building up. While possible, it is not desirable for Putin to engage in many more years of warfare AND at a higher level of engagement.
The ideal situation for Russia is a full capitulation from Ukraine, followed by a tense Cold War with the West. Which is also why further provocations bringing no strategic advantages is so unwelcome.
China is basically winning by not doing anything and can keep building up strategic industries, secure supplies, and increase its military power slowly, but steadily.
It can navigate the Red Sea by just not getting involved.
It gets discounted oil & gas from Russia just by doing business as usual.
It sees the US get entangled in the Middle East at no cost.
“Never interrupt your enemy when he is making a mistake.“ Napoleon Bonaparte
So, short of a horrible miscalculation by the USA, Russia, Or China, we should not see a Great Power conflict.
And as long as propaganda doesn’t take the best of people…
However, in my opinion, there are 2 large-scale military events we might witness soon.
A collapse of Ukraine frontlines, driven by running out of men & ammunition, internal dissension (Zelensky vs Zaluzhnyi especially), and weakening support (partly due to internal infighting both in the EU and the USA, partly by redirection of military power to Israel).
An expansion of the conflict in the Middle East, as Iran is clearly WANTING a war:
The USA is wholly unequipped mentally to imagine that Iran actually wants war, and cannot be threatened away. But it has been preparing actively for it for at least 4 years since general Qasem Soleimani’s assassination.
The very wide theatre of operation, including Israel, Lebanon, Syria, Iraq, and Yemen makes for a perfect space for Iranian-backed forces to harass the US forces.
Strikes on Iran would have a limited impact and would cement the political control by the Iranian theocracy.
The evolution of missile and drone technologies gives an advantage to the defender stronger than at any time in decades, if not a few centuries.
The age of expeditionary military campaigns is coming to a close, with Anti-Access/Area Denial (or A2/AD) a revolution in military strategy still not integrated by the Western generals, too used to total domination since 1989.
Investment Takeaways
This is bullish for US defense stocks, irrelevant to how the US economy can actually support it. It is likely that short of a sudden isolationist turn (unlikely), the defense industry will be the last one to see the money faucet dry out.
This is also highly inflationary, with massive risk over the Straight of Hormuz and the Persian Gulf oil exports (30% of the world’s supply). Which in turn is highly bullish for neutral energy producers, from Indonesian coal mines to South American oil companies.
This is also negative for international consumer firms, with plenty of Muslim consumers likely to boycott American companies as far as Malaysia or Indonesia: e.g. McDonald’s revenue misses estimates as the Middle East conflict weighs on quarterly sales.
It might even be bullish for Chinese stocks, as ultimately, no war over Taiwan would mean the current undervaluation of Chinese equities is not warranted.
And the more war against Iran by the USA, the less needed a war in Taiwan becomes for the Chinese leadership. Especially if Ukraine gets conquered as well, giving a poor image to Western military abilities and encouraging “peaceful reunification“.
If I feel this level of optimism (if you can even call my position that) suddenly turn unwarranted, I will warn my readers in advance, hoping to pull a second time the trick I did with Russian stocks a few weeks before the invasion of Ukraine.
But until then, I still think that a portfolio of energy, defense, and Chinese stocks is the most likely to outperform.
And would the timing turn out less than perfect, it is well to hedge against a global conflict, with an oil and defense boom matching the Chinese stock losses.
US equities, especially the “magnificent 7” tech stocks, are displaying now a fully 1929-style bubble behavior, with Meta up 20% in one day on news of a dividend yield of 0.1% and some share buybacks.
So if anything, on a 1-3 year horizon, I feel that ANYTHING but popular US equities will outperform the S&P500 index.