The New Morgenthau Plan
"80 Years Too Late"
The morning after the outbreak of the Ukraine War/Special Military Operation in 2022, I emailed a Ukrainian friend of mine about my thoughts on the matter:
It appears that this is not only a war against Russia, but a dual war against Russia and Germany…
Since that time, we’ve witnessed the destruction of the Nord Stream Pipeline …
… an Act of War which replaced cheap Russian Pipeline gas with expensive U.S. and Persian Gulf Liquified Natural Gas. Unlike the old Russian Pipeline system, the new LNG architecture requires a substantial underground storage system to maintain sufficient gas supplies during the winter when there is not enough LNG capacity to heat the country. Let alone run Germany’s significant and energy-intensive industrial base.
With the recent destruction of Natural Gas Infrastructure in Persian Gulf, the storage injections have been running close to historic lows, which suggests that Germany can (barely) make it through the winter if present trends continue. Albeit at a much higher price than previous years. Here is a chart of the current natural gas injects, mapped vs. high-low-average storage level:
The extremely high cost of LNG creates a situation where German Industry pays 5-6x the cost of an equivalent amount of U.S. Natural Gas. As the supply disruption from the Middle East continues, the supply and price shocks should get significantly worse.
Amplifying the LNG Shock are Germany’s recent decision in 2023 to permanently decommission its remaining Nuclear Plants.
The resulting energy crisis and inevitable destruction of the German Industrial Base brings back memories of the 1944 Plan put forth by Secretary of the Treasury Harry Morgenthau, which presented an architecture for Post War Germany where Germany Arms and Industry would be eliminated and replaced with a three separate “pastoral and agrarian” micro-states under the military domination of the Western Powers and the Soviet Union.
After its release, the Morgenthau Plan was extremely unpopular with the American Public, creating an uproar. As a result, President Roosevelt conveniently forgot that he had made the plan public in the first place:
About this pastoral, agricultural Germany, that is just nonsense. I have not approved anything like that. I am sure I have not. ... I have no recollection of this at all.
Despite its rejection at the time, and its replacement by the wildly successful Marshall Plan which rebuilt German Industry as a bulwark against Communism, a few holdouts still think the United States would have been better off under the draconian features of the Morgenthau Plan. One hardened SpreadHunter trader whose Dad was wounded on the second day of the D-Day Invasion Force in 1944 said that the new Morgenthau Plan was “a good idea but 80 years late.”
Unlike 1945, today’s German Deindustrialization Program will leave agriculture severely impaired along with industry, since the Middle East Crisis is also triggering massive shortages of fertilizer along with Natural Gas.
What is the best way to trade this unfortunate situation?
Despite the Energy Shock, the EWG German Sector ETF is trading close to all time highs. This suggests that a bearish position using Put Options or Long Put Vertical Spreads might be a good way to speculate on the current negative headwinds. Earlier this month we experimented with this trade in our R&D account but got shaken out with a small loss. At this point in time, doing nothing and monitoring the situation seems like a good idea. The big advantage in shorting the German Market is that the negative impacts of recent events should hit Germany a lot sooner than they hit the United States.
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