Ukraine-Russia Dominoes Still Could Fall in Ugly Ways

Last Monday I wrote Worse Before Better, Longer than Shorter. Little has changed since then. There is a glimmer of hope that Russian media is signaling the objectives are completed and a pullback would be in order. Putin is excellent at manipulation, so it is possible he is setting the stage, domestically, to declare victory and extricate himself. He basically needs to show a win and he might be using his own media to set the stage for that within Russia; consider that last week he banned exports of Russian oil to the West as he plays the public opinion manipulation game. It is very subjective and outside of my usual information channels, but I'm trying to get a sense whether he really is paving the path to some sort of pullback while saving face, or if this is just another in a long list of misdirection. Can there be enough pressure at home from the populace or the oligarchs that Putin chooses this path? It would be nice to think, but it seems out of character. China China is a lynchpin here. To the extent it continues to step up and buy Russian commodities, likely at a very favorable discount to spot markets for other suppliers, it gives Russia the wherewithal to survive the sanctions. China and the Chinese currency are beneficiaries, longer term, of the U.S. cutting off the SWIFT network to bad actors. I think China will not be overt, but unfortunately, they will support Russia by basically acting as their banker, making sanctions less effective. Second-order effects As I have conversations with corporations, with large asset managers and individuals, I keep learning about and hearing about potential problems facing the market. It is highly likely that markets are heavily underestimating second- and third-order effects from the invasion and the response to the invasion. Food is a first-order effect and I reiterate my view that soon we are more likely to be fixated on food problems than even energy problems. I hope I am wrong, but anecdotal evidence seems to point in that direction. On second- and third-order effects, I've heard everything from margin calls on the forward selling programs of commodity producers to car factories needing to shut down because of a single part that came from Russia, to neon production, apparently vital to the semiconductor industry, being concentrated in Ukraine and at risk. A lack of trust in the commodity market is wreaking havoc with trade. Those expecting to get paid on Russian bonds (corporate or sovereign) and who in turn would use those proceeds to pay others, is big and at risk. The list of possible Known Unknowns is long. The global supply chain was fragile before the invasion. I think the European economy (and ours) is likely to be hit bigger and faster than is currently priced in. Bottom line While there are some glimmers of hope I am a bit concerned that we remain with the intractable problem: Putin cannot win. Putin cannot afford to lose. So if he can't win, but he can't lose, what do we get next? Sadly, it leaves me in the worse-before-better camp, though desperately looking for signs that I'm wrong. On the economy and markets, I think even a resolution to the war will only provide a brief rally. Continue to trade this cautiously, though I'm yet to see D.C. embrace domestic energy production the way I think we should, and it is possible, just possible, the Fed turns dovish. While on the Fed, I am still flabbergasted that it didn't get hawkish a year ago, because I am not sure how it maneuvers this politically right now. Yes, markets needs support (even Treasury bonds are illiquid), but inflation is front and center. Good luck and be careful in this tricky environment. The weirdest fact I'm trying to get my head around is that Zoom Video , which has become a verb, is trading at a lower price than it did pre-COVID. That is an eye-opener to me.

Ukraine-Russia Dominoes Still Could Fall in Ugly Ways

It is highly likely markets are heavily underestimating second- and third-order effects from Russia's invasion and the world's response to it.

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