Trying to Make Sense on Why It’s Happening and Where It’s Going

Ian Bremmer and Mike Frazier

The rollercoaster on Wall Street continued this week. Uncertainty reigns supreme. The crisis in Ukraine has absolutely captured the attention of the people around the globe. The Ukrainian response has inspired as one of the greatest underdog stories on record. I can imagine Millions stopping and staring at the television as the largest nuclear facility in Europe was targeted with missiles. In so many ways, what we are seeing borders on the unthinkable and is so nonsensical. Unfortunately, it’s all very real. The price of Oil hit $116 this week, a level not seen since 2008. It was $90 just two weeks ago and $75 to start the year. War and inflation are a dangerous combo. That’s the backdrop for today. There’s so much going on.

Commodity prices soared again this week. The war in Ukraine keeps fueling fears of supply crunches. Commodity prices increased by the most on record, which dates back to 1960. It’s believed to be the biggest increase to start a year since World War I. Wheat jumped to the highest level in a decade and a half. Remember, Ukraine and Russia account for a quarter of the world’s wheat exports. Crude Oil and Natural Gas prices keep spiking as many shun Russian supplies. The price of wheat in Paris rose 38% this week to record €400 a ton. In response to the current environment, the EU went as far as to say it intended to more than double the amount of gas in storage before next winter to reduce its reliance on Russian supplies.

Opinions are everywhere. These days, with social media and the web, it seems everyone’s an expert. But I value knowledge and experience. I covet it. To better understand what is going on and where things might be headed, I spent considerable time on Zoom calls with some of the most knowledgeable and experienced thinkers on geopolitics and politics. I had the benefit of engaging guys named Panetta, Bremmer, Carville and Rove. The impacts are broad – economically, politically, militarily, socially and beyond. The Market touches all of these things. At this point, answers are few on the subject of Russia and Ukraine. Here’s what I’ve gathered thus far:

A natural question is simply, why is this happening? It’s very complicated. But Ian Bremmer, Founder of the Eurasia Group and G-Zero Media, does a phenomenal job of explaining things. He pointed to the year 1994: Post Soviet collapse. There were 15 newly independent states that emerged. 4 of them had nuclear weapons: Russia, Kazakhstan, Belarus and Ukraine. 3 of them relinquished their nuclear capability under the Nuclear Non-Proliferation Treaty (NPT) with guaranteed protection from the United States, the United Kingdom and Russia. No surprise, Russia kept their nukes. No surprise, Russia keeps violating its commitment to the NPT.

When the Berlin Wall fell in 1989, the United States became the lone Super Power. That’s a big role with a big responsibility. Democracy won; Or so it seemed. Standing alone at the top makes for a large target for bad actors and those who disagree with you. Ever since, rogue nations have tried to challenge the US to see how far they could go. Policing the world as lone Super Power is expensive and taxing. Over the years, American supremacy faced greater and greater resistance around the globe. September 11th was a major moment. The seemingly endless wars in Iraq and Afghanistan weighed heavy. American might was becoming more fragile. Past powers and new powers were in search of a different way. Russia and China have been designing a new world order.

Russia is decisively still a 20th-century economy. It is heavily dependent on fossil fuels. Russia feels left out in globalization. The Eastern Bloc of the former Soviet Union largely integrated into NATO and the European Union. Not Russia. Putin blames the US for this. Ukraine was stuck in the middle. All Ukraine did was want a democratically led nation. Putin clearly doesn’t want that. Putin’s regime is threatened by a freer-thinking Ukraine aligned with the West. The thing is, Ukraine was never going to be invited to NATO. It’s also clear that Putin will stop at next to nothing to prevent it.

Vladimir Putin thinks the US is weak. This seems to be the common opinion. Feeding off America’s war fatigue and its polarized internal fighting, he saw the opportunity. He had already taken Crimea in 2014 with very little resistance. The tactical mastermind seems to have miscalculated this time. Putin thought Ukraine would fall quickly and easily and the West would allow it. He vastly underestimated the global response. Putin did what Bush and Obama couldn’t do; Unify Europe to respond. Even the Swiss took sides. This has become a serious problem for Russia.

According to Bremmer, Western leaders don’t believe that they’ve declared war against the Russians. President Biden pledged long-term support for Ukraine during his State of the Union, and European leaders continue to look for ways to help Ukraine and punish Russia without actually entering the war. But to Putin, the US sharing real-time intelligence with Ukraine, NATO providing weapons, and crippling the Russian economy are acts of war. Sending boots on the ground to defend Ukraine or imposing a no-fly zone would be even riskier. That’s why NATO keeps saying troops are not on the table. At least they aren’t right now. It seems like everything has to be on the table, because the risk of not doing enough is too great. Not everyone agrees with that though.

The invasion is going in a very bad direction. Looking at this objectively, it appears as though Russia’s military is not as competent as people thought. But they are very capable of brutality, with size and scope. French President Macron spoke with Russian President Putin on Thursday. Macron came away convinced that the “worst is yet to come.” Vladimir Putin seems committed to taking Ukraine, with whatever it takes. That is the great danger. There’s no clear off-ramp. According to most knowledgeable on the subject, Russia’s military is not going to fail ultimately. Russia has a 10 to 1 advantage against Ukraine in military might. Russia appears intent to double and triple down. The attack on the nuclear facility is evidence that everything is in play.

So what are some solutions? None of them are particularly attractive right now. Where’s the climb down? How do leaders land a punch on Putin? He’s been declared a war criminal now. There’s no good option. There is no clear off-ramp.

Sanctions? There could be more coming. Russian Energy has not been slapped yet, which is where the pain will really be felt. There could be less, if Russia retreats. Sanctions can come off as quickly as put on. There’s a very high bar though. A reverse in sanctions seems highly unlikely.

Doing a deal with Iran? Iran sees an opening. That could get 2 Million barrels of Oil onto the Market instantly. That would send prices lower. It would clearly come with entanglements and a whole lot of skepticism.

Negotiations are not going well. Ukraine is clearly winning the information war. Zelensky has done a masterful job with messaging. He has been out on the Streets and sending videos from the bunker, showing resolve. Putin remains in his isolated office outside Moscow. Protests keep increasing, even in Russia, as well as around the globe. Opposition is building. Bremmer says the only way to get rid of Putin is if his inner circle turns. There are some signs of fraying inside the Kremlin. Putin has not treated his people well.

What about China? China does not want to pay $100 for Oil. The new Chinese-Russian strategic relationship has these nations closer than any other period in five decades. But China finds itself in a difficult spot. How much did China know about Russian plans? That remains unclear. It is unlikely that China was totally surprised by the invasion. It is however likely that China was surprised by the aggressive, coordinated response by the West. The Chinese silence had been somewhat telling. China finally broke said silence by saying it is “gravely concerned” about the safety of Ukraine’s nuclear plant after Russia attacked it. There has yet to be any condemnation for the actual invasion though. China also abstained from voting for sanctions and the removal of Russian troops at the United Nations.

I repeat, there is no clear off-ramp for this crisis.

Where’s this all headed? There will be trend and policy changes. It’s already happening. Defense spending is jumping, more than it has in years. It will continue. Russia launched a land war in Ukraine, in 20th-century style. But much of the New Cold War will be fought in cyberspace. Cybersecurity spending will continue its ascent. Fossil fuels are the past, present and foreseeable future. They are essential for economic stability, efficiency and profitability. That’s now. Renewable: Everyone is moving faster toward renewables. It’s undeniably the future. Nuclear is an obvious solution too, but they’re not doing it. Supply chains: They’re moving closer to home. They need to be shorter and safer. They will also be more expensive. Costs will have to be measured in price as well as in predictability and national security.

China and Asia still need to be prioritized. Post WWII was structured for the United States and Europe while the rest of the world fell in line, to an extent. It doesn’t work with a growing China and emboldened Russia, who have been left out. Free trade is coming to an end with more protectionism. The result is setting up to be 2 zones; one dominated by China and the other the US.

The West is currently overwhelmed. China will take advantage of it. Sanctions hurt and China is squarely focused on its economy. It’s watching what’s happening to Russia very closely. Both underestimated Western resolve. What’s China’s ultimate goal? Reduced US power and influence. It appears they want a Beijing-oriented global economic system, dominated by the Yuan. China’s big risk right now is they force the West and rest of the world firmly back to the American way. It’s happening. It seems to be backfiring on Russia and China. One really important fact: Russia needs China much more than China needs Russia.

Gas is transitional. You don’t want to be the last country to dominate fossil fuels. The post-carbon world is the future. Sustainable technologies are just beginning and the infrastructure is being financed and built aggressively, and the Market is following that. History has proven that Americans get it right when they identify the next big theme and then throw all their money, energy and ingenuity into it. It’s a pretty powerful playbook.

Back at home, Americans are tired and fed up with Washington and politicians in general. Ukrainian President Volodymyr Zelensky has captured the attention and emotions of the American people in a big way. Leadership is a powerful thing. He’s showing guts and determination, standing up for the Ukrainian people and what they believe is right. There’s no such unity when it comes to American leadership. It’s been the case for decades really. American politics have become so toxic. But listening to Karl Rove and James Carville, two staunch political strategists to their respective parties, it’s nothing new. They pointed to periods early on in our nation’s history, with ruthless tactics surrounding Jefferson and Adams. Politics were equally toxic leading up to and after the Civil War. Political divide is as old as the nation itself. The current environment just happens to be amongst the most divided in its history.

Politicians play games and are in it to win it, seemingly at all costs. I found it interesting that Karl Rove gave credit to President Biden in getting our allies to rally around the cause. Of course it came with a criticism; It took too long. He also stated that the blame goes beyond Biden, through both Trump and Obama. He said that Putin sensed weakness, but the Europeans actively responded in a way that few anticipated. Public reaction is leading the political reactions. That’s important.

Midterm elections have been brutal for new Presidents. It’s certainly been the case for the previous administrations. James Carville said that if the midterms were a week ago, Democrats would have lost 5 Senate seats and significantly more in the House. The issue in Ukraine could change this. Maybe. Rove was quick to point out that the primary focus is on Zelensky, not Biden. He believes the midterms will likely be driven by inflation and the direction of country. He reminded Carville of his famous quote: “It’s the Economy Stupid.” They laughed. It was nice to see these guys getting along with respect. It’s a long way to November.

The US Economy is certainly at risk from these inflationary pressures. But all indications are it’s still chugging along right now. There was a much better than expected Job Report for February. 678K jobs were created last month, well ahead of the 400K expected. The unemployment rate slid to just 3.8%. The participation rate actually increased to 62%, the highest since Covid. There were the fewest number of Americans taking state unemployment benefits since 1970. It’s definitely going back in the right direction. That is important. Interest rates fell meaningfully off this print. You see, more workers in the Economy should help stem the wage inflation. It has been spiking the last few months as companies struggled to find workers to meet the strong demand. It’s a start.

That said, Food and Energy prices remain very elevated. Crude Oil and other commodity prices have jumped as the war in Ukraine intensifies. The re-opening of America is taking shape again. With all the things going on in the world, a strong American labor market should provide some added strength to the Economy.

Don’t forget the Fed. Chair Powell testified on Capitol Hill this week and said a ¼ point hike was coming at the next meeting. That removed the fears of an aggressive ½ point hike, which the Market had priced in just 2 weeks ago. Powell acknowledged that the situation in Ukraine brings tremendous risk and uncertainty to the Economy. He also said inflation is showing signs of peaking in certain areas. Food and Energy are not among them. Powell acknowledged that the Russian invasion could lead to the reshaping of Western economies due to the effects of financial sanctions. Europe is facing it hard, with energy prices skyrocketing. Europe could very well be falling into recession right now.

From an investor standpoint, it seems like there are 2 paths ahead. One is the more optimistic Bull case. The other is the Bear. It looks like this:

Bull Case:
The Market is oversold. Stocks fell in January and February as the risk of invasion grew. Investor sentiment is as negative as it’s been since the Covid crash. That’s a contrarian indicator that generally occurs around bottoms. The time is now to buy the news on the Russian invasion as it was well telegraphed and largely priced in already. The sanctions will not be as harsh as expected to the Global Economy and this conflict will resolve itself in rather short order. Geopolitics won’t derail the Fed rate hikes, but they will be less aggressive and have a more measured tightening pace. Covid cases are down 90% from the pandemic peak, high-frequency indicators picking back up and Corporate America is anticipating an accelerating recovery in the Spring and Summer. The American Consumer is in strong shape with approximately $2.5 Trillion in savings and wage gains from a tight labor market. 2022 earnings face tough comparisons, but still experience better than expected growth. That’s pretty optimistic. We see some of this playing out, but not all.

Bear Case:
Regardless of what’s going on in Ukraine, Fed rate hikes are coming and will be aggressive and front-loaded. The Market is not ready. The Yield-Curve is flat and is showing signs of inverting. The Fed tightening will be too much for the Market triggering a growth shock. Geopolitical tensions cannot be ignored this time, given the potential return to Cold War order. An extended period of violence and resistance in Ukraine sucks the economic growth from NATO nations. The geopolitical tensions will exacerbate inflation pressures and trigger demand destruction. Earnings growth is slowing and wages are seen as the next pressure point for profit margins. There’s still no sign of meaningful capitulation as equities continue to attract inflows. The Market won’t bottom until the “Buy-the-Dip” mentality gets wiped out. This is clearly a negative set-up, which cannot be ruled out.

So where do things stand for the Market? This is our sense: The Stock Market is in a tight range right now, between 4100 and 4500 on the S&P. That translates to roughly 32K and 35K on the Dow. Frankly, it’s held in quite well considering the risks and pressures but still feels pretty weak below the surface. The situation won’t likely resolve itself without some more clarity. Our work suggests that the lows hit a week ago were significant. Geopolitical uncertainty remains a big overhang. There are so many moving parts around Russia and Ukraine, particularly what might constitute an acceptable off-ramp for Vladimir Putin, if any. There’s also the issue with the Fed. Spiking commodity prices are stoking the already high inflation. There’s real risk of an economic slowdown just as the re-opening of America is starting to gain some traction again. A breakout or breakdown will be driven by the ultimate outcomes. We are prepared for the volatile price action to continue, with a Plan A and Plan B.

The Land of the Free and Home of the Brave need a united public with shared values and a vision. That’s what Ukraine is working on. It’s the American Experiment that is 246 years old. It’s imperfect, by design. The fact that our Founding Fathers admitted it upfront is perhaps its greatest strength. It’s better than anything else out there.

There is some serious stuff going on out there. We continue to navigate through the uncertainty and are doing it together.

Thank you to those who made it all the way through. My fingers wouldn’t stop.

Have a nice weekend. We’ll be back, dark and early on Monday.


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