Europe on Tilt - Doomberg

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Europe on Tilt

“In times of war, hand all the leverage to your enemy, then complain loudly when they
use it.” – Sun Tzu (probably)

In last Thursday’s piece, The Dead of Winter, we introduced the concept of Doomberg’s
Law of Antilogic™ under which the current slate of Western leaders can be counted on to
select the worst possible path at every critical decision point of the ongoing energy crisis. 
We then used this framework to predict that Europe’s leaders would implement policies
that would delay necessary demand destruction, attack its energy suppliers, and trigger an
outbreak of protectionism within the EU.

To be sure, the piece was a little on the cheeky, provocative side. Many disagreed with our
assessment, claiming the crisis was vastly overblown, that elevated German natural gas
storage levels eliminate the worst possible outcomes, and that, although this winter will
certainly be a tough one, Europe would muddle through and emerge from this crisis an
even stronger union.

Last Friday, we had the honor of participating in a spirited discussion on the topic
organized by the venerable Grant Williams (@ttmygh). Using the relatively new and
innovative online public meeting tool Twitter Spaces, Grant brought together the always-
brilliant Luke Gromen (@LukeGromen), geopolitical expert Marko Papic (@Geo_Papic),
and yours truly. The resulting discussion also included a late (and unfortunately
abbreviated) appearance by Sir Steven Wilkinson (@SKNWilkinson) and was listened to
by 13,500 people in real-time. Incredibly, as of this writing, the replay is approaching
200,000 listens. Grant later published the conversation, free for all listeners, on his
podcast stream, available here.

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Just hours before the event began, and shortly after the energy markets in Europe closed
for the weekend, an incredible announcement crossed our Bloomberg terminal: Russia’s
energy giant Gazprom would keep the critical Nord Stream I pipeline closed
indefinitely, dealing a devastating blow to Europe’s energy plans for the upcoming
winter. Here’s how the New York Times described it (emphasis added throughout):

“Gazprom said on Friday that it would postpone restarting the flow of natural gas through a
closely watched pipeline that connects Russia and Germany, an unexpected delay that
appeared to be part of a larger struggle between Moscow and the West over energy and the
war in Ukraine.

The Russian-owned energy giant had been expected to resume the flow of gas through the
Nord Stream 1 pipeline on Saturday after three days of maintenance. But hours before the
pipeline was set to reopen, Gazprom said that problems had been found during inspections,
and that the pipeline would be closed until they were eliminated. It did not give a timeline
for restarting.”

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The news set off a frenzied panic of policy pronouncements from European political
leadership which resoundingly validated our Law of Antilogic™, although the speed of
the complete collapse in prudent thinking surprised even us. With each passing day,
Europe risks crossing the point of no return. What catalyzed the most recent escalation,
what new policies are being rolled out, and what can be expected in the months ahead?
Let’s dig in.

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Putin is freezing (pun intended) Europe’s allocation of his natural gas through Nord
Stream I in direct response to one of the craziest policy proposals we have ever
encountered. Holding virtually no leverage whatsoever, the Group of Seven (G7)
countries, which include the UK, Canada, France, Germany, Italy, Japan, and the US,
announced on Friday that they had reached an agreement among themselves to
enforce a price cap on Russian oil sold on the international market. In their delusion,
the G7 leaders want to instruct half the world’s population on what they should pay for
property that the G7 does not itself own. Here’s how the Washington Post reported on the
story:

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 “The leaders of the Group of Seven industrialized nations announced Friday that they will
impose a price cap on Russian oil, aiming to undercut the Kremlin’s finances while keeping
energy flowing to the West.

The price cap plan, a top priority of U.S. Treasury Secretary Janet L. Yellen, aims to slash
the huge energy profit Russia is using to finance its war in Ukraine without creating price
shocks that could cripple the global economy.”

Janet Yellen looking to choke off Putin’s revenue | Getty

Janet Yellen is an economist with no direct experience in the private sector. Prior to her
current position, she only ever worked at the Federal Reserve, in cushy university jobs,
and at a think tank. No wonder she thinks her magic wand has power in the real world —
a place she surely has never visited. There is also no evidence that the G7 leaders have
thought through how such a proposal would work in practice or the unintended
consequences that would surely follow. By bluffing away their credibility on sophomoric
gibberish, the G7 simultaneously laid bare its vulnerability to the countries not currently
sanctioning Russia and gave cover to Putin to further cut off energy supplies to Europe.
He didn’t waste much time in pressing his newfound advantage. Further down in the
same story, we can directly connect the dots to the gas freeze announcement that swiftly
followed:

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 “Top Russian leaders have repeatedly warned that they will retaliate against the price cap.
Europe remains highly dependent on Russian energy, and an escalation in hostilities could
exacerbate the economic crisis already facing the Western allies. Later Friday, Russia’s
state-owned oil firm Gazprom announced that it would not resume natural gas shipments
to Germany through its Nord Stream 1 pipeline, as it had been scheduled to do, though the
company blamed a newly detected leak for the delay.”

The panic that ensued in European capitals over the weekend was reminiscent of the
depths of the Great Financial Crisis, only this time it was power producers being bailed
out instead of the banks (it is not lost on us that, should the power producers not be bailed
out, the banks would surely follow them down the insolvency drain – they still might
ultimately end up there). Here’s how Reuters described it yesterday:

“European gas prices surged, stocks slid and the euro sank on Monday after Russia halted
gas flows via a major pipeline, sending another shock wave through economies in the
region still struggling to recover from the pandemic.

European Union governments are pushing through multi-billion euro packages to

prevent utilities buckling under a liquidity squeeze and to protect households from soaring
energy bills.”

The story goes on to describe how Finland will provide €10 billion in assistance to its
power producers, Sweden will kick in the equivalent of €23 billion, and Germany has
offered a multibillion-euro bailout to power utility Uniper. Bloomberg later reported that
Uniper might need as much as €7 billion this month to stave off insolvency and that the
German government would most likely provide the funds. This follows on the heels of the
near-collapse of Austrian power producer Wien Energie, which required a €2 billion
injection to keep afloat last week. We expect virtually all governments in the Old
Continent to follow suit, as contagion risk triggers an all-too-familiar response by the
authorities.

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 Uniper | Reuters

We are also witnessing the predicted rollout of massive stimulus checks in an effort to
cushion the blow for ordinary citizens and small businesses alike. On the first day of her
new role, news broke that British Prime Minister Liz Truss is considering a £130 billion
bailout:

“Incoming Prime Minister Liz Truss has drafted plans to fix annual electricity and gas bills
for a typical UK household at or below the current level of £1,971 ($2,300).

In discussions with her team and government officials in recent days, Truss has settled on a
mechanism that will avert the massive increase in energy bills that is due to kick in at the
start of next month under the existing pricing system, according to officials and advisers to
Truss who were briefed on the plan. The policy could cost as much as £130 billion over the
next 18 months, according to policy documents seen by Bloomberg.”

Yesterday, we learned that Truss is considering another £40 billion in aid for small
businesses. This news comes on the heels of Germany’s proposed €65 billion relief
package, which German Chancellor Olaf Scholz promised would be at least partially
funded by – wait for it – taxing the so-called windfall profits of energy companies.

Antilogic™ writ large.

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We sympathize with the plight of ordinary citizens in Europe and cringe at the roll-out of
policies that will only postpone much-needed demand destruction, elevate the nominal
price at which it ultimately must occur, distribute the cuts in highly inefficient ways, and
drive a massive inflationary pulse into economies already reeling from runaway prices.
Goldman Sachs recently predicted inflation could reach 22% or more in the UK in the
coming months, an analysis that was published before the rollout of the aforementioned
relief packages. Germany is in no better shape – below is a chart that plots 30 years of
Producer Price Index (PPI) data:

We close with perhaps the most disturbing news of the past few days. Not satisfied with
wrecking Europe’s energy markets, EU leadership is proposing to grant itself
extraordinary powers to intervene across its entire economy, a move which amounts to
a giant step toward full-blown communism. Here’s how the Financial Times reported it:

“Brussels is proposing wide-ranging powers to require businesses to stockpile supplies

and break delivery contracts in order to shore up supply chains in the event of a crisis such
as the coronavirus pandemic.

Draft legislation seen by the Financial Times would give the European Commission
considerable leeway to declare an emergency, triggering a series of interventionist
measures aimed at preventing product shortages in critical industries.

Businesses are unhappy after being briefed on the plan, which is intended to protect the
single market from supply shocks.”

The staggering incompetence of the current slate of European leaders is only outdone by
their hubris. Imagine surveying the current dystopian scene of economic wreckage and
concluding that more government intervention is the best path forward. With each dose of

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Antilogic™ administered in European capitals, the region brings forward its inevitable
day of reckoning. At this pace, it won’t be long now.

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