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Markets React to Russian Aggression

February 28, 2022

Last week was a really long short week as volatility took off after the President’s Day holiday. Obviously, the catalyst to the volatility was the military attack of Ukraine by the Russians with all sorts of wild speculation about the start of World War III.  The Chinese flexed their military muscle by flying in Taiwan airspace again which added to the image of chaos breaking out. Even “Little Rocket Man” Kim Jong-Un of North Korea got in on the game with another rocket launch into the sea near the Pyongyang international airport. The stock market recovered very well by the end of the week and some of the commodity panic moves in crude oil and gold eased off implying that the worst may be over.

But there are serious concerns going forward no matter how well asset markets recovered at the end of last week. The conflict in Ukraine certainly isn’t over as there are still reports of fighting and no one knows how this will turn out. There are many other factors that may affect the world’s economy and markets as well – the flow of energy all over Europe among the most important. The Western banking powers are in the process of taking Russian banks off the SWIFT system which would paralyze them from international transactions. Consequently, the financial markets in Russia are melting down. Here is a look at the Russian Ruble…

This is devastating short term for the Russian people. Many citizens back in Mother Russia are fearing for their livelihood as sanctions from the West have initiated panic including bank runs for cash. So clearly this acquisition by Russia isn’t going as smoothly as that of Crimea from 2014. This situation looks a little more like the situation in Georgia, where Russian military forces were removed after peace talks in 2008 but then continued to move the border of Russia further into Georgia.  But there was a worldwide economic challenge at that point and this time around things look much worse in Russia and there are at least some protests within the Russian Federation against this conflict.

Of course, this entire conflict is way more nuanced than simply Vladimir Putin is the boogeyman. Although there can be no mistake of the Russian attempt to expand its empire, the expansion of NATO from the West is considered aggression by the Russians. We do our best to avoid political discussions and keep our analysis economic – so as of the writing of this post, the Russians are in “peace talks” with leaders from Ukraine. Stay tuned…

As far as how all of this will affect our investing in the western world, the obvious question is what will the Federal Reserve do next? The financial markets have been assuming that the next action will be interest rate hikes. Some pundits have been talking about hikes as many as eight times this year. We were never in the camp that interest rates would go up that much and at this point we are wondering if the Fed will put rate hikes on pause until more order is restored. Keep in mind that since the Lehman Brothers’ scandal in 2008, central banks around the world have purchased $24 trillion in assets (corporate bonds, sovereign bonds, asset-backed securities, stocks, ETFs, etc.) and placed them on their unaudited balance sheets in the ether in the sky. Maintaining the valuation of these assets and the remainder of assets in the marketplace has become a self-imposed mandate of the Federal Reserve and other Central Banks around the world. We see them being much more cautious raising interest rates into an environment that has already taken the froth of the top of the “asset bubble.” Frankly, some of the growth stocks have sold off so aggressively because of potentially higher interest rates that some financial managers are already starting to bargain hunt.

Good news from the American perspective comes in from the treasury auctions of last week. Our treasury is still issuing trillions of dollars in debt and foreigners were here in droves last week to purchase those notes and bonds. The world is still clearly in the camp of maintaining the U.S. dollar as the world’s reserve currency! We are cautiously optimistic that the conflict in Ukraine will soon be in financial markets’ rear view mirror. But that does not mean rush out and sell your gold…

Regards and good investing!