A year ago this week the Russians officially recognised the breakaway republics of the Donbas and triggered a ‘Special Military Operation’ (SMO) that in turn triggered a spike in risk premia that shocked markets. While this was subsequently over-shadowed by the widespread rise in discount rates as central banks everywhere started tightening, the first anniversary of that speech risks a major escalation of hostilities. After a strong start to the year, this is something we don’t think is currently in prices.
The year has begun well for most investors with a near perfect inversion of 2022 as everything that went down (more or less everything except the $) has bounced, with some particularly painful short squeezes as the oversold positions saw some mean reversion. This has certainly helped the market mood, but we would caution against over-extending into a shift in fundamentals – even though that is what is starting to happen. These are largely market mechanics – short squeezes and sector and market re-weightings to get ‘in line’ with some renewed short dated option activity thrown in. But the real question remains not whether or not we are in a new bull market, but rather whether we have fully exited the bear market. More specifically, whether there will be a second earnings driven leg. For the record, we think if there is it will be mild and limited to those stocks, sectors and countries that benefitted the most from a decade or more of interest rates at the wrong levels. So far, stock specifics have largely confirmed this, but as we rolled the February to March options last week, there was clear signs of weakness, suggesting that somewhere in the markets there is a message of caution. We are watching the $, which is bouncing from resistance, but beyond the technicals we are wondering about risk premia more generally.
We believe that there are short term risks to a reversal in the discount rate again and in particular the risk that on the first anniversary of the announcement of the Special Military Operation (SMO), Putin announces an escalation of the war in Ukraine. We have consciously avoided speculation on the progress of the war since the only insight that we have is that we have none and that almost all information from all sides is in some shape or form best considered propaganda. We know from our work in markets that just because every source says the same thing does not mean it is true and an objective assessment of the western narrative over the last 12 months confirms that much of what we read is promoting a narrative and that the best observation is that of Ben Hunt and the Epsilion Theory team “Why am I being told this? And why now?” (The revelations on Nordstream 2 being a case in point this last week).
On this basis and having developed a series of sceptical non Western narrative sources over the last 12 months as a counterpoint to the western media, we are interested to see both camps pointing at a serious escalation coming in Ukraine – a risk that markets seem to have ‘parked’ somewhat. Many of these sources do not pop up under conventional browsers, being presumably blocked for ‘mis-information’, but I was intrigued by this new sub-stack that has just appeared this month under the name Simplicius The Thinker. To be clear, we have no idea who this person is, but the writing is dense and seemingly very comprehensive and while they are clearly pro Russia (or perhaps just anti US) many of the facts they report are coming from both sides – especially as we look between the lines.
We do not have a a view on Ukraine other than that the narrative is changing and that we don’t think that markets are looking ‘over here’ right now. That’s a risk.
There is a series of posts on the coming Russian Offensive, while in their latest post with the unsubtle title of Major War Confirmed Imminent they note the following:
- Putin is now going to speak on February 21, the anniversary of his speech that recognised the breakaway republics and set the ‘legal’ process to announce the SMO.
- The Duma has a meeting the next day, suggesting Putin may be announcing things that require ratification
- Biden is scheduled for a meeting in Poland with Zelensky the same day raising risks of escalation further
- Both sides are talking about an accumulation of 300 Russian helicopters and 450 fighter jets as well as 1800 tanks and 4000 armoured fighting vehicles at Russian bases. Meanwhile Ukraine reports Russian troop build ups at the border of a size not seen since a year ago including building of large field hospitals
- An 80km convoy of Russian trucks is heading north from Mariupol.
- Putin met with Belarus President Lukashenko in Moscow yesterday at the same time as Wagner troops were spotted in far West Belarus.
- Wagner and others complaining that artillery shelling in support has died down – implying stocks of ammunition are being built up ahead of an offensive.
Now, we have no idea if this could be a bluff, but it feels unlikely that risk premia will go down this week.
