Putin did you Miscalculate
Sitting Around the Table
March 3, 2022
S&P 500 4,363
Crude Oil $109
Putin – Have you lost your mind or did you just miss-calculate?
The situation in the Ukraine has become a major dominating factor in the world’s financial markets. War has that effect on investors. What we are seeing now was unnecessary and at the same time completely predictable, and we are living with the sequence of a series of events, and it may go on and on with unintended consequences down the road that are much bigger than anything we can foresee today.
As an example Putin in rattling his saber is talking about potential nuclear events happening. He warned the West that “we will see consequences the likes of which we have never seen before.” Obviously that can only mean a nuclear event. Is he too young or simply uninformed to know the history of the Cuban Missile Crisis, which became the closest American has ever come to launching a nuclear war? So close that every year since 1962, the Pentagon puts together its best minds in different rooms, one set of people represents the US and the other set the Soviet Union. They then proceed to replay the Missile Crisis, and a strange thing happens.
In 60 years of doing this, the result is always nuclear war. This leads the thinkers to believe that it is so strange that only during the actual situation was peace achieved. In the war games, one side always launches.
This is because history always lies about the Cuban Crisis. History is always written by the victors and thus the bias is always on our side.
So the first question with the Missile Crisis is would Khrushchev have put those missiles into Cuba had Richard Nixon been elected and not JFK in 1960. The answer is NO. Khrushchev feared Nixon the Eisenhower disciple. You also notice that the Soviet Premier never tried to do anything while Ike was in office. No, he waited until Ike retired to Gettysburg and then went after JFK with a vengeance. He challenged him in Cuba during the Bay of Pigs, Laos, the Berlin Wall, the Missile Crisis, Viet Nam and on and on. He even challenged JFK at the Vienna Summit Meetings in June of 1961 berating the young President. As JFK walked out of the meeting with sweat pouring down his forehead, the patrician elder French President, Charles DE Gaulle, took the young JFK by the arm and said, “Mr. President, remember whatever happens, France will be with you, until the end.”
Now we are faced with another bully, only this time he has thousands of nuclear weapons at his fingertips. Not a good thing to have to confront, and thus he rattles the saber in a way considered unacceptable by normal international behavior codes. You don’t’ mention nuclear weapons, ever. It is an untouchable topic. He’s even brought up Hiroshima and Nagasaki in his statements. Putin clearly is not a good guy. So what does he want?
He is ashamed that the former Soviet Union has fallen to its current level in the eyes of the world. An empire no more with an irrelevant economy only good for selling its natural resources oil and gas to outside bidders because they can’t use them internally because nobody wants to buy their goods and services. His armies are outdated and still utilize World War II type thinking. Look at it yourself. He’s got a 40 mile supply line stuck for days on the road to Kiev. They are sitting ducks for any kind of NATO attack that would devour his forces in 60 minutes with hundreds of Javelin Missiles and other anti-tank and anti-armor weapons that we used for target practice. In the old days it was said that Russia’s armies were basically alcoholics and it was probably true then and remains at least to some extent true today. They are clearly not up to prime time.
But this invasion of the Ukraine, IT CHANGES EVERYTHING. And that is what Putin doesn’t get yet and may not for a while. Think about it.
In launching an unprovoked attack on a sovereign European country and democracy, Russia is likely to face long-term diplomatic, trade, financial, and economic consequences. So long as Russia is governed by Vladimir Putin or individuals with motives akin to his, it will be ostracized and separated from the ability to engage in global markets for many goods and services, including most investment instruments.
The notion of the BRICs—Brazil, Russia, India, and China—as the secular drivers of global economic growth and investment returns long ago lost much of its cachet. Now, irrespective of the outlooks for the other three, Russia will be excluded from any such investment thesis. Russian government debt and significant chunks of its corporate debt and equity securities have become off-limits for global investors. That’s partly because of U.S. and European sanctions, but also because fiduciary considerations (“governance”) will not permit many institutional and private investors from considering Russian securities as eligible financial holdings. That fact will only change when Putin and his followers are no longer in power.
The Russian invasion of Ukraine will also lead to a significant rethink of global security, including energy security. Russia is the third-largest producer of oil in the world, the most important provider of natural gas to Western Europe, and a leading global supplier of other commodities. Ukraine is also one of the world’s three great bread baskets, a major grain producer alongside North and South America. Assuming no quick resolution of the conflict, including a full withdrawal of Russian forces, buyers of energy and other natural resources from Russia and Ukraine will need to diversify their suppliers.
The clearest example is in Western Europe, where energy policy is likely to shift toward liquefied natural gas (LNG) delivered from North America, the Middle East, and Africa to reduce reliance on Russian pipeline supplies. Debates will grow about the need to rethink nuclear fission power and ultimately to explore the prospects for fusion. Wind, solar, and energy conservation will also take on renewed interest.
Investors, of course, also want near-term clarity and abhor uncertainty. Until such time as warfare is replaced by diplomacy, markets will remain vulnerable to bouts of volatility. Late last week, markets recovered sharply, mostly on the belief that sanctions will not have adverse impacts on global economic activity.
With Swift access being withdrawn and the Russian Central Bank’s ability to prop up its currency undermined, a range of difficult outcomes will ensue. The Russian economy will be hobbled, the ruble will go into free-fall as the exchange rate skyrockets, and there may be a run on Russia’s banks.
It should be investors’ baseline assumption that Russian energy exports will be disrupted, leading to higher prices for consumers and businesses everywhere. Moreover, if an act of war disrupted the flow of natural gas via Ukraine to Western Europe, price spikes would be compounded by distribution disruptions that could even risk European recession, with severe implications for U.S. exporters.
The jump in global oil prices related to the conflict is akin to an adverse global aggregate supply shock. It simultaneously increases inflation and damages growth.
That raises fundamental challenges for central banks.
Surging energy prices will compound already strong price increases in food, transportation, commodity, and industrial-goods markets, where energy is an essential input. It seems likely that other prices—those captured in core measures of inflation—will also follow higher. After all, the pandemic, global supply-chain disruptions, and accelerating demand have already unleashed strong increases in many wages and prices, which makes it easier to pass along higher energy and commodity prices.
Yet those same price increases are likely to outstrip wage gains. Now that U.S. consumers have drawn down savings to pre-pandemic levels, the risk is rising that flagging purchasing power could slow consumption. That concern is greatest in Western Europe, where households and businesses are also confronted by the greatest security threat since World War II.
So, will central banks choose to fight inflation more vigorously, or will they instead focus on potential challenges to global growth?
Recent comments by Fed officials indicate that an overwhelming majority of Federal Open Market Committee members remain undeterred in their assessment that monetary policy must be tightened to slow inflation. Apparently, it will require a significant adverse shock—for example, a much larger decline in world equity markets and a corresponding reduction in investment and consumer spending—for the Federal Reserve to change course.
The calculus for the European Central Bank is more problematic. Unlike an energy self-reliant U.S., Europe is dependent on Russian natural gas. The ECB must therefore be more attentive to potential weakness in consumer and business spending given uncertainty. It must also be prepared to respond to a massive supply shock in the event Russian energy supplies are disrupted.
The bottom line is that while the Fed is freer to focus on fighting inflation, the ECB must proceed with greater caution.
Still, both central banks share a common focus on inflation expectations. If already high inflation, now compounded by surging oil prices, results in a jump in long-term inflation expectations, both the Fed and ECB would tighten aggressively. Thankfully, that is not now the case. Market measures and surveys indicate that businesses, investors, and households continue to expect inflation to recede over time. But watch this space closely—few data points merit closer attention than inflation expectations.
All of which brings us to the investment implications of current events. History is kind to the idea that conflict-induced market selloffs are buying opportunities. In the terribly unfortunate language of Warren Buffett, investors should be prepared to buy when there is blood in the streets.
But we caution strongly against making decisions based on pithy statements. Even if, as we desperately hope, a cease-fire and peace can replace war in Ukraine, global equity market recoveries are apt to be brief and moderate. Here’s why.
First, market declines this year have been modest. A broad correction, defined as a 10% fall in major equity indices, has not yet occurred but is close if you measure from the peak.
Second, equity valuations remain above long-term averages despite clear signs of slowing earnings growth, high inflation, and a greater willingness by various central banks to tighten monetary policy. Historical comparisons, therefore, are naïve. Few of those oft-cited conflict episodes resemble today’s multifaceted investment challenges. Markets may rebound if the war in Ukraine comes to an end, but the bounce is likely to be unimpressive.
It is far more likely that risk-adjusted returns have peaked. Gains will be more modest and volatility higher. That outcome is probable irrespective of how events in Ukraine play out.
Finally, it is worth emphasizing that Russia’s invasion of Ukraine does not signal an end to global investing nor to emerging markets. Russia was never a major driver of globalization, whether in trade or finance. Its place in the BRICs acronym was always more out of convenience (BRIC’s sounds more solid than BICs). It was never fundamentally based. Asian and other dynamic emerging economies were always more important drivers of long-term global economic growth and investment returns. For most portfolios, the disappearance of Russia will hardly be felt.
So think about the preceding narrative in your investment considerations. Play our stocks and remember, NO MARGIN. You do not need that increased risk associated with MARGIN. Own your stocks for cash. We will have more to say shortly.
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• When the Fukushima nuclear reactor broke down after a Japanese earthquake resulting in a tsunami how many people do you think died? The answer is no one died initially. Sixteen workers subsequently died, probably because they were not sufficiently protected in terms of the gear they were wearing. What went wrong at Fukushima is that the engineers God Bless them who designed the facility, built the water coolant tanks adjacent to the Pacific Ocean in order to get the water from the ocean more easily into the reservoirs. Hello, anybody home? Did anybody consider that the nuclear reactor was designed to last 75 years and that the Japanese islands including the location of this reactor occupy an area known to have seismic activity?
Isn’t it obvious that over a period of 75 years this is a sufficient long period of time that one should expect a seismic event during that time? The answer is yes, and therefore why should anyone be surprised that a tidal wave swept up and hit those water tanks overwhelming them and creating a problem which is what happened. Had the tanks been moved a couple of hundred yards, they would have been above the water line where the wave hit and been okay. This is why we say, go nuclear, but if you go nuclear you must make sure everybody uses the same safety standards employed by the US Navy which has remained nuclear problem free for 75 years.
Notice Fukushima was built right on
the Pacific Ocean, not very bright
- Let’s go to Chernobyl, the one that scares people the most. This was the Ukraine, 1986. It is known that 31 people died immediately, and a total of 60 people since then. Now there are all kinds of statements being made that thousands will die over the decades from the fallout. This is as yet unproven and certainly unverified. The problem is that the Soviet Union is involved and historically with all due respect to them, they are NOT the most reliable of witnesses to their own problems. The Soviets are not known for their safety standards. After all, they just invaded the Ukraine and they started shelling the Chernobyl nuclear power installation. You would think a junior high school student would have better common sense than that.
Chernobyl – Engineers did not think through
The planet earth can only lessen the impact of global warming by moving to nuclear energy immediately and big time. There is no time over the next 30 years or so to attempt to achieve meaningful global decreases in fossil fuel emissions via solar or wind energy. It’s pissing in the wind.
France right now is 80% nuclear. Germany and America should begin deploying French reactor technology while we once again develop our own nuclear reactor designs. Bill Gates has advocated this. There is no time to waste or even think about it. All men of good cheer including the Greenpeace movement have it wrong. Our coastal cities will be lost while waiting for solar and wind to save us. The time it takes to change over electrical infrastructure to solar and wind is at least 4 decades as per history. It is simply not going to happen and the stakes are very big. This is why Elon Musk who advocates and has made his fortune with electric cars is saying go nuclear and you should too. Please read the Musk article below at your convenience to understand better.
Elon Musk Wants Nuclear Power for Europe amid Russia – Ukraine War
Tesla Chief Executive Elon Musk’s Twitter feed often reads like a stream of consciousness or an indirect interior monologue used extensively by celebrated English writer Virginia Woolf.
It mimics the non-linear way in which Musk’s brain works. Not surprisingly it is also filled with contradictions.
He defies convention and this time was no different.
It has been more than 10 days into the Russian invasion of Ukraine and the controversial billionaire, in a series of tweets, has appealed to Europe to “restart [its] dormant nuclear power stations” in a bid to strengthen their borders.
As a crusader for clean energy, Musk’s plea to support nuclear energy that creates radioactive waste is befuddling.
Experts at environment group Greenpeace USA say, “Nuclear energy has no place in a safe, clean, sustainable future. Nuclear energy is both expensive and dangerous.”
After Oil, Musk Is Now Pro Nuclear Energy
Musk recently tweeted, “Hopefully, it is now extremely obvious that Europe should restart dormant nuclear power stations and increase power output of existing ones. This is *critical* to national and international security.”
And added that, “those who (mistakenly) think this is a radiation risk, pick what you think is the worst location. I will travel there & eat locally grown food on TV. I did this in Japan many years ago, shortly after Fukushima. Radiation risk is much, much lower than most people believe.”
These tweets put Musk, who has put his weight behind electric vehicles, in a bind. In a world where everyone is trying to reduce their carbon footprint, Musk’s company makes vehicles that run on an electric battery instead of an internal combustion engine.
While nuclear energy is a non-renewable energy source that comes from the nucleus of atoms. But nuclear plants have gained a bad reputation after a series of bad accidents including Fukushima and Chernobyl.
Last week, Russia captured the largest nuclear power plant in Europe located about 350 miles southeast of Kyiv, in Ukraine, and sparked fears of a nuclear disaster bigger than Chernobyl.
European nations have been reevaluating their relationship with nuclear energy with Germany closing three of its six nuclear power plants on December 31, last year, Switzerland shutting one of its five nuclear power plants in 2019 and Belgium vowing to end its dependence on nuclear energy by 2025.
Musk Called for More Oil Production
Musk’s remarks came a day after he backed the increase of oil output.
Musk was quick to admit that this was counterproductive with respect to his own business.
Oil prices soared to a 14-year-high to touch over $130 a barrel, as the threat of a potential ban on Russian oil imports became imminent.
Investors are worried that the rise in oil prices will destabilize the market hurting U.S. stocks.
“The gallon of gasoline at the pump has exceeded the $5 threshold in California, a new reality that scares many Americans, at least those who do not have electric vehicles or hybrid vehicles,” TheStreet reported earlier.
If gasoline prices everywhere hit $5 a gallon, it will further increase overall cost of living for Americans that are already reeling under the impact of inflation.