Watching Russia’s barbaric invasion of Ukraine is the proverbial car accident scene: It’s horrific, yet you can’t turn away nor unsee it.
Putin’s mind-boggling stupid decision to invade Ukraine may go down as one of the worst miscalculations in history. It’s not possible to predict the war’s final outcome since no one is really sure of Putin’s true mental condition. However, absent a nuclear WWIII, this egregiously ill-advised military blunder could relegate Russia to deeper third-world status for years, maybe decades.
I got to thinking about other epic miscalculations in human history as a frame of reference for Putin’s current folly. No surprise, the Google machine produced a master list in a matter of seconds.
In my mind I had already pegged Hitler’s failed invasion of Russia in 1941 as one of the dumbest miscalculations ever. Napoleon’s failed invasion of Russia in 1812 was also really dumb; France has been a benchwarmer country ever since.
Another one I had not contemplated was Russia selling Alaska to the US in 1869 for a pennies-on-the-dollar sale price, not long before gold was discovered. They’d like to undo that dumb transaction for sure.
It’s interesting how Russia has played a central role in several of history’s dumbest geopolitical mistakes, on both sides of the ledger.
Back to 2022, everything that Putin purportedly wanted to accomplish in this unprovoked war - annexing Ukraine, destroying NATO for good, cementing his hold as dictator for life, restoring respect for Russia and flexing its “vaunted” military – are all failing and it appears it will likely cause the exact opposite outcomes.
Moreover, Putin has been revealed as the inept despot and war criminal that he is. Come to think of it, that sentence would look good on his tombstone, hopefully sooner rather than later.
Putin had reason to be overconfident before the invasion. Presidents Bush and Obama both folded like cheap suits when Putin bullied his way into illegally seizing Georgia (2008) and Crimea (2014), meting out nonserious sanctions against Russia and issuing stern press releases.
After Biden botched the US withdrawal from Afghanistan last summer, Putin had to believe he could waltz into Ukraine and annex it the first weekend.
Biden is no Churchill, but his excellent work cobbling together a global coalition to rally NATO and impose severe economic sanctions on Russia should be commended. Russia’s economy is now in a full coma and the impressive array of sanctions may effectively box in Russia from future bad behavior for a really long time.
I heard a great joke over the weekend, told by a Russian: What device won’t fit into a human belly button and doesn’t buzz? A Russian built belly-button buzzer, of course. The Russian economy was backwards before the war, running at the size of Texas’s economy despite its 145 million residents. They grow wheat, distill vodka, make fertilizer, mine nickel and drill oil/gas – and that’s about the extent of their economy. This “great” military power with nukes and cosmonauts can’t even feed it's citizens.
Russia is a rounding error in the world economy, but the loss of the handful of their chief exports will cause some more global inflationary discomfort for a while. We’ll survive, plus Tito’s vodka tastes just fine.
Paint me an optimist, but I foresee several positive developments once Russia withdraws from most/all of Ukraine recording a humiliating military defeat:
- NATO gets a new lease on life and will be better funded by all of members.
- A new Marshall plan will emerge to help the brave Ukrainians rebuild their country from the ground up, perhaps eliminating the country’s endemic corruption problems.
- Likely regime change in Russia. Does Gorbachev have grandchildren?
- Even if Putin doesn’t suffer a food poisoning accident, Russia will be contained indefinitely via economic sanctions. Their role as the world’s premier bad actor appears over.
- Europe will finally develop a sane energy policy based on nuclear, renewables and natural gas, independent from Russia.
- The US will encourage more drilling for clean-burning natural gas and more pipelines to foster major natural gas exports to Europe (I dream).
- China is already re-evaluating its alliance with Russia and may think twice, maybe three times before it pulls a similar Taiwan invasion stunt.
These are especially fun times to be a wealth advisor. It’s tricky enough in “normal” times to divine the future moves of global capital markets. Dumping a European war into the mixing bowl has changed the outlook recipe for sure.
Our current working view is the Russia-Ukraine military conflict ends soon. Putin’s fate will determine Ukraine’s borders and the degree / duration of the energy crisis. If he survives and Europe stops buying Russian energy, we’re staring at $9.00 per gallon gas prices.
So, world energy prices will gyrate based on the Russia / Europe geopolitical poker game. Ukraine, which has the most fertile soil on the planet, should still have time to get a lot of wheat planted for the 2022 growing season, removing some pressure from world grain prices.
Back home, the Fed Reserve is now in full sprint mode catching up to the runaway US inflation they’ve fostered. Short term interest rates will run up fast in 2022; it remains to be seen if the US economy can withstand the rising cost of money.
We don’t see a recession unless the Fed is forced to push short term rates up to the 4-5% range to tame inflation, which is always possible.
Inflation was already on fire in 2022, Russia poured more gas on the flames. Stagflation is now the headline concern, which defined as elevated inflation coupled with low growth, even a recession. We remain optimistic the US economy is on a solid footing as its rebounds nicely from the pandemic and can handle higher inflation for a while longer astride normalizing monetary policy.
We remain fully invested in real assets and value stocks, avoiding investment grade bonds and growth stocks. Municipal bonds, especially high yield, however, are starting to look attractive.
Until next time, go, Ukraine, go...Tim