For decades, Europe’s business model has been largely structured around cheap energy and input costs used to produce good-quality manufactured goods to export around the world - Germany being a prime example of such business model. (View Highlight)
Due to globalization, ageing demographics and technological advances real output growth wasn’t necessarily spectacular and most importantly interest rates headed lower and lower over time. This led to another important development: a massive build-up in public and private sector leverage and the hyper-financialization of the West - including Europe. (View Highlight)
Putin’s strategy is clear: take away the cheap energy inputs from the equation, and a domino of negative consequences will unfold - economic output will materially suffer, but at the same time energy-driven inflation will roar its ugly head too. (View Highlight)
Once you can get your hands around cheap input costs, manufacture good quality stuff and export it to countries around the world - well, you are looking good. (View Highlight)
Zoltan Poszar from Credit Suisse calculates that roughly EUR 1.9 trillion of German manufacturing output (red circle in the middle of the chart) relies on only EUR 27 billion equivalent of Russian energy inputs (bottom-left red circle). (View Highlight)
And what happens to a highly-leveraged environment when the cost or the availability of this leverage (Russian energy in this case) drastically changes? The system becomes unstable, and because of the embedded leverage the negative reactions are not linear but rather convex. (View Highlight)