Stocks rallied aggressively on Friday as investors digested the economic risks of sanctions. Inflation numbers hit levels not seen since 1982…but investors expected it.
It’s a mad, MAD world. Saber rattling is a way of life between Russia and the West. So it was, prior to the fall of the Soviet Union, and so it has been ever since, albeit with a different nuance. Those of us born prior to the 70s grew up with the threat of nuclear war. It was in the movies, on television, in cartoons…it was all over. There were those fallout shelter signs all over the place, which also served as a stark reminder that in a flash second…well you know. Someone finally came up the with brilliant idea of mutually assured destruction (MAD). That means both the US and the former Soviet Union have so many nukes pointed at each other that a nuclear war would end in total destruction on both sides. In other words, nobody can win. So then, why even bother to start a war which you will not only lose, but will assure the total destruction of your country? It’s ugly, but it has served to keep the nukes on the shelf for some time. Sometimes, as I am walking through the streets of NYC, I spot one of those old yellow and black fallout shelter signs, and they are inevitably covered in a rust patina. So, MAD has done its job, even obviating the potential for a conventional war between superpowers. As the Cold War matured, the world began to weaponize capital. Peaceful superpowers traded freely between themselves, building great wealth for their citizens. The non-peaceful-at-the-time Soviets were not invited to the party, so its citizens suffered while great wealth was created in the West. Eventually, it was economics that brought down the Soviet Union. The West didn’t gloat, but rather, quickly embraced its former foes. More resources and more consumers meant more wealth…for everyone.
I won’t get into all of them in this passage, but one of the basic tenets of economics is more is good. So, no matter who you are or what continent or backwater you hail from, you want…more…just like the rest of us. Money, which can be translated into just about everything from water to chocolate cake to food to security to mega yachts, etc. Therefore, I am sure that you agree, at a basic level, more money is good. Naturally then, less money is bad. Remember that weaponization of capital from above? We see that coming into sharp focus once again in the wake of Russia’s unprovoked attack on Ukraine. Surprised superpowers found themselves scrambling through their old playbooks for a solution. Nukes? No way, that leads to MAD. Conventional war? Hopefully not, because that could lead to nukes and MAD. How about an economic war? It worked before, so why not deploy it once again?
Last week, the first few salvos were launched from the West targeted at Russia, Putin, and his oligarch pals. When it became clear that Russia would not relent, a second and even a third salvo was launched over the weekend. I have been writing a lot about how cutting Russian energy supply could add further pressure to the inflation problem which is now confounding most developed economies. We have also learned that Russia is the world’s largest supplier of wheat. Russia and Ukraine together make up around ¼ of global exports. Commodities prices, which have been on the rise due to prevailing economic conditions, stand to go higher yet as the sanctions bite. Russia and its ally Belarus are the 2nd and 3rd largest global producers of potash, which is a key ingredient in fertilizers. Did you know that Ukraine accounts for some 10% of steel imports in Europe? Cutting off Russia from the world’s major currencies and banking facilities is really the equivalent to removing supply of all these commodities from the world supply. Economics alert: decreased supply leads to higher prices; something that we have learned quite a bit about in the past year. So, as strategists turn to the final pages in their economic warfare playbooks, they are surely pondering the reality that dismantling an existing economic relationship comes at a cost, and it runs the risk of causing destruction on both sides…MAD. You see, the threat has never gone away, it has just changed its form.
LAST FRIDAY’S MARKETS
Stocks surged on Friday as investors factored in weaker than expected sanctions. The S&P500 rose by +2.24%, the Dow Jones Industrial Average jumped by +2.51%, the Nasdaq Composite Index gained +1.64%, the Russel 2000 Index advanced by +2.25%, and the S&P500 ESG Index climbed by +2.10%. Bonds gained and 10-year Treasury Note yields broke even at 1.96%. Cryptos climbed by +2.30% and Bitcoin edged higher by +1.51%.
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