Beginning of Cold War II?
Board: Macro Economics
Russian armed forces seized control of Ukraine's Crimean Peninsula on Saturday, March 1, 2014 after an "invitation" by Sergei Aksyonov, head of the Russian Unity Party, the Autonomous Republic of Crimea’s newly-appointed prime minister.
The population of Crimea is 90% ethnic Russian and the Russian Black Sea fleet is based in Sevastopol. Russia's invasion was reminiscent of the "anschluss." In Feb. 1938, Nazi Germany invaded the Sudetenland (in today's Czech Republic) ostensibly to protect a German-speaking population.
Russia's President Vladimir Putin in 2005 described the collapse of the Soviet Union as "the greatest geopolitical catastrophe" of the 20th century.
About 80 percent of Russian gas exports to Europe pass through Ukraine. Europe, in turn, depends on Russia for 40 percent of its imported fuel. This makes Europe's stake in the outcome of the current crisis far greater than the U.S.
Ukraine would have been close to default even without the events of the past few weeks. Moody's Investors Service downgraded Ukraine's government bond rating to Caa2 from Caa1 and assigned a negative outlook on Jan. 31, 2014. The disruption to the government and economy is growing worse by the day. Russia has terminated its financial support of the Ukraine government.
Ukraine is threatening war against Russia, a losing proposition if there ever was one.
Ukraine Puts Troops on High Alert, Threatening War
By ALISON SMALE and STEVEN ERLANGER, New York Times, MARCH 2, 2014
SIMFEROPOL, Ukraine — Ukraine put its military on high alert Sunday in response to Russia’s move to seize control of the Crimean Peninsula, and it threatened war against Moscow if the Kremlin made further incursions into Ukrainian territory as Western powers scrambled to find a response to the crisis.... [end quote]
Hopefully, this Black Swan will not morph into World War 3 in the way that the first 2 world wars were initiated by similar events in that general geographic region.
It is quite possible that the situation will begin Cold War 2. The U.S. Defense Department may balk at pruning back military resources (as proposed last week) and may request an investment in a missile defense system. If so, the U.S. could incur significant costs.
The U.S. might extend financial aid to Ukraine, which could also be costly. Needless to say, neither the U.S. nor the Euro zone (which actually has a very big dog in this fight due to energy dependence) has a bunch of excess cash sloshing around just itching to support a large, highly-indebted country outside our current sphere of influence ;-).
Of course, discussions of the politics should be taken to the Political Asylum board.
What impact will these events have on investors?
The Control Panel does not show any impact from these events, which happened after the Friday trading ended.
The SPX hit a new high last week, re-setting the "mungofitch 99-day rule" count to zero on bullish. The market is back to its risk-on trade, with money shifting back to stocks and high-yield bonds from Treasuries and the USD. Stock market internals were positive. Gold has been rising for weeks.
The Fear & Greed Index is back up to Greed. The oscillations of this index were very regular in 2013, a year with no crises. Swings into Extreme Fear in 2013 were buying opportunities. Swings into Extreme Fear in prior years were extended since the crises were real and would have had systemic impact if not for extreme monetary support by central banks.
It's too early to say how the markets, including the international markets, will respond to the invasion of Crimea. There are so many potential scenarios and the main geopolitical actors don't know yet how this will play out.
Shifting back to the U.S., new Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee last week.
Here’s the most important thing Janet Yellen said today
By Ylan Mui, Washington Post, February 27, 2014
“Mr. Chairman, let me add as an aside that since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it's difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”... [end quote]
This is Fed-speak for "The economy is slower than we expected. If growth slows further the Fed may delay the taper."
This made news. However, the taper is a red herring. Actually, the Fed continues to buy assets rapidly. At this rate, the Fed will own $4 Trillion in assets (about 1/4 of U.S. GDP) within a year. Any decrease in the rate of growth (let alone divestiture of assets) would dramatically decrease demand and depress asset prices.
The METAR for next week is very uncertain. If not for the events in Ukraine, the METAR would be clearly bullish. The longer-term METAR would depend upon whether the economy picks up (especially real estate) once the spring weather begins.
However, the Ukraine situation is a black swan event. The Great Game of geopolitical balance could be shifted, with eventually dramatic consequences...or not.