Worse Before Better, Longer Than Shorter

On Monday morning, stock futures started to rebound sharply after the Kremlin laid out terms for Ukraine under which Russia would stop military operations. The terms against Ukraine seem quite harsh (they must change their constitution to enshrine neutrality, they must acknowledge Crimea as Russian territory, and recognize the republics of Donetsk and Lugansk as independent territories). Maybe Ukraine accepts those terms, just to end the bloodshed, but those conditions sound as bad as anything Russia demanded before the invasion and the invasion, as ugly and brutal as it is, seems to have united Ukraine against Russia, rather than making them want to back down. Where Are We Now? 1. Russia's initial attack was flawed in many ways. There are clearly not enough troops available to control Ukraine, if it is captured. 2. Much of the Russian problems seem to be logistical in nature. One of the retired generals I work with at Academy Securities, notes that tactics are for amateurs and logistics are for professionals while another pointed out that there is a big difference between trained vs seasoned troops. Both those statements go towards explaining the current status of the invasion. 3. The likelihood of a coup or some internal action within Russia to remove Putin remains low. While there is hope that something happens within Russia to stop this invasion, I doubt it happens. The civilian population doesn't have the arms that would be required to overthrow or even significantly disrupt the security apparatus in place. It is unclear, whether we like it or not, that any major military figure or oligarch would act against Putin. Putin, as a former member of the KGB is cautious, and dangerous. That makes him difficult to target. 4. Sanctions are stronger than expected, but potentially slow moving and may yet prove to be ineffective. We have sanctions in place with Russia, Iran, North Korea, and Venezuela, to name a few, where those leaders are opposed to us yet remain in power. The biggest surprise, and one of the most encouraging aspects, is the willingness of companies to impose their own forms of sanctions! This has been an important and impressive development. So, things are likely to get worse before they gets better - longer rather than shorter. It would be great to have a pleasant surprise, but even with Monday morning's headlines, that is likely just us fooling ourselves and has been a mistake many have been making since even before the invasion began. Economic Impact The economic impact could be severe and at this point seems underpriced. I expect economic problems to be worse and show up faster vs where I see consensus right now. We were in a high inflation environment with supply-chain issues even before the invasion started! That can only be made worse by what is going on, especially as the private sector might do more to slow the flood of commodities and raw resources out of Russia than the governments have done (so far). Germany and even the industrial region in northern Italy could experience further production problems in the very near future. We need to brace for worse numbers than we've seen already. Energy Prices I continue to strongly believe that in the aftermath of this: -- We will see accelerated timelines for building out sustainable sources of energy. -- We will see dramatic investment in existing energy production, transportation, etc., especially around any energy source that is deemed safe or secure. -- While the big-caps have returned to 2018 levels (Energy Select Sector SPDR Fund ), the exploration companies (SPDR S&P Oil & Gas Exploration & Production ETF ), the servicers (VanEck Vectors Oil Services ETF ), and pipelines (Alerian MLP ETF ) potentially have a long way to go. This isn't just about supply and demand, it is about energy once again being a national security issue (and if we really think about it, a global security issue). Food Prices This issue is only starting to get the attention it deserves. We cannot live without food and when the price increases are at the base of the agricultural pyramid, it will hit everything we eat over time. This really concerns me from a humanitarian aspect, as well as from an inflationary aspect, because there is little that can be done to avoid these costs. Russia and Ukraine produce somewhere around 25% to 30% of all the wheat exported across the globe. That is material, especially when farmers across the globe are having to deal with rising input costs (fuel and fertilizer to name a couple) and supply-chain issues of their own (parts for farm equipment, etc). Prices were rising before this invasion, and have now spiked. This could be a bigger story, from a negative perspective, than the energy issues. Monetary Policy Impact While the Fed might be less aggressive, they are still in tightening mode. Financial conditions are tightening ahead of the Fed, so they can likely hike less and shrink their balance sheet more slowly, but it will still be a drag on the market. Market Impact Expect yields to be rangebound, unless a resolution is reached. Corporate credit is neutral to me here. On equities, I remain bearish with the exception of the commodity space and anything energy related.

Worse Before Better, Longer Than Shorter

Rising food prices could be a bigger story, from a negative perspective, than energy issues.

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