So, what do you want from me? Sometimes you gotta reach for the glibly obvious (or obviously glib).
I won’t recount the headlines in detail. Y’all know the score. Putin went in. Hard. Told everyone to huck off.
We responded with sanctions.
But one sanction we haven’t – yet – pulled off comprehensively — is to bounce the Big Bear off SWIFT: The Society for Worldwide Interbank Financial Transaction(s). Lots of talk about this, but some members of the Society have objected (unanimity is needed), and, later, Wall Street itself came out of its chilled hibernation to express its disapproval of the concept.
SWIFT has hovered around the periphery of my professional awareness for, well, a long time. But I’ve never had to use it; they could kick me out and I don’t think I’d care.
And I’m not even sure that SWIFT rises to the dignity of being a Society at all. I suspect that it only calls itself one to lend an element of panache to its acronym. And let’s give them this: SWIFT is a pretty cool acronym – particularly for a generic (if essential) financial communications portal.
While we’re on the subject of names, I’ve often wondered about the Sir-name of Vlad the Invader. Putin. As in RasPutin. I once asked my favorite Russian History expert if the two could be related, whether that current headline grabbing KGB meanie might not even be a direct descendant of the Mad Monk himself.
A little context is in order here. My own last name – Grant – was a gift to my grandaddy at Ellis Island. He arrived as a Granovsky, or some variant thereto (yes, my friends, I carry some Russian blood). So, if my own people were subject to a nomenclatural truncation, might not the same also apply to Supreme Leader of Moscow? Even without the Ellis Island bit?
My friend assured me that I was wrong on this score. OK, fair enough. Putin bears no relation to Rasputin, but they do share some characteristics. Both are hard to kill; they shot, stabbed, poisoned, and drowned the latter, and he still wouldn’t die. And as for the former, he continues to annoy us and probably doesn’t need the Ras handle. He’s creepy enough on his own.
Because instead of pulling that tired old trick of ordering military action to protect his across-theborder constituents (kind of like the Nazis shooting up a radio station full of their own people and blaming it on the Poles as a pretext for starting WWII), he went straight for the jugular. Announced the whole smash: his intention to take over, subsume, the entire Ukraine, as his own.
Well, I didn’t expect this. And, admit it, neither did you.
But now we’re stuck with this mess. A mess, as it happens, on top of a mess, which rests on top of another mess. And so on, and so on and shoobie doobie doo.
Sort of like covid in 2020, this well-telegraphed assault on an already precarious global equilibrium took everyone by surprise. So, what, other than worry, do we do now? Well, I don’t want to state anything that might shock y’all, but I believe extreme caution in order.
There’s nothing nuanced about that sentiment; risks to our peace of mind, clarity of thought and portfolio returns have taken a great leap forward — in every direction imaginable.
By way of transition, the Great Leap Forward was a program instituted by Mao to effect dictatorial increases in agricultural production in the People’s Republic of China. Wherein Mao decided that, rather than letting folks alone, he would force them into communes, shove shovels, rakes, and implements of destruction in their hands, and order them to produce.
The result? No, not an Alice’s Restaurant Mass-a-cree. Instead, widespread, historic famine. He claimed it never happened, then blamed the climate, then the people, then profiteers.
(Gratuitous aside) Sound familiar?
Back in them days, we were all nearly certain that either Russia or China was gonna blow us up, and about the only comfort we could take was that they hated each other more than they hated us.
Now, they’s apparently in cahoots, which may be the biggest problem of them all, because they are in ideal position to help each other. China can fund a Russia that is cut off from Western financing. They can import Ural Region fossil fuel products, which: a) they need; and b) are the economic engine behind Putin’s program (whatever that ultimately may be).
There also – perish the thought – might be a quid pro quo in place between these historic enemies, under which China would surreptitiously support this Uke riff, and Russia would then do the same when (as is probably inevitable) they march in and grab Taiwan.
And they will be glad for the help. Because, just as Putin is finding out that the Ukies are not overly\ inclined to roll over and get stiffed on this here deal, Xi may just learn that the Taiwanese are also inclined to fight, and that oil may be needed to put down these, er, counter-revolutionary notions.
And nothing for nothing, but as I mentioned, published reports suggested a promise from Putin that he wouldn’t send his tanks into the former Soviet satellite until those magnificent Beijing Olympics had concluded. They ended on Sunday. Russian tanks began to roll towards Kyiv on Monday.
None of these musings are original, and mostly it’s all just adding spit to the biggest spit-balling cycle yet to emerge in this spitball year of 2022. But the threat to semis is worth a closer look:
Semiconductor Source Breakdown:
Many of y’all already knew this, but Taiwan produces most of the semiconductors that bring to life our smart phones, video game consoles, automobiles, and respirators. No semis; no Alexa. And what in heaven’s name are we gonna do without Alexa?
Also bear in mind that one company alone – Taiwan Semiconductor (The big outer ring on the left), is responsible for half of those silicon wonders. We’d be hard-pressed to lay an embargo on them as a newly repatriated protectorate of the People’s Republic.
And while we ponder such niceties, we may want to consider the contours of our laying down a big fat embargo on products issuing from PRC itself. I would be particularly about pharmaceuticals and other medicines. Available literature places their market share of antibiotic production above 90%, but these figures are in dispute. What is known is that they make ALL our Ibuprofen (upon which I live) and fentanyl (which I, but not others, can live without).
Our problems at present have shifted from China to Russia, and, to my way of thinking, markets, which have a great deal riding on the doings just above the Black Sea (among other vexing matters), should pay particular attention to several imponderables.
For now, investors don’t seem to have a clue as to what to make of it all. As the rockets flared, “risk off” was on. Then, improbably, they seemed to settle in. Bought themselves some stock on Friday, and, for good measure, sold off some commodities and other asset classes impacted by the action.
I’m thinking, come what may, that we just experienced an upward jolt in inflationary expectations. Lots of stuff was in short supply when Putin was simply threatening nastiness, but not acting upon it, but now it seems to me as though the pricing pressure on economic goods and services is not only more acute but will likely extend further into the future.
This puts the Fed in a bind of epic dimensions. It wishes to fight an increasingly ominous inflation scourge and can only do so through liquidity-draining interest rate increases. Growth, already elusive and now under additional pressure, may disappear altogether. Prospects for a soft landing – the taming of P without causing a recession — are approaching the threshold of infeasibility.
My guess is that the Fed praying for some price relief from unlikely, unreliable sources such as OPEC. I reckon we’ll see. It’d be nice if they increased production to help us out. But one way or another, the boundary conditions of plausible price levels — for products ranging from energy commodities to wheat and (see above) microchips — place our Central Bank at a locus where it may need to choose between the risks of deep recession and hyperinflation. It may get both.
Meanwhile, we’re through the earnings and quarterly macro data seasons, so all portfolio management eyes are likely to remain fixed on the psychodrama unfolding in Eastern Europe.
It’s not a good look. The Fed is certainly capable of using the crisis to yet again put off the inevitable – moving funding costs within Hubble Telescope visibility of rationality. I don’t think they will do this, and, if they don’t, portfolio managers must do battle in an environment of rising rates, slowing economic expansion (or worse), and “Code Red” geopolitical tensions.
We also appear to be no closer to an end to the MLB lockout but won’t cry no tears about this.
Meantime, what I can offer, by way of risk management guidance, is as follows. Strip your portfolio down to the basics. Focus with laser clarity on your best vetted themes. And nothing else. Expect heightened, bi-directional volatility regimes to continue. Don’t get cute on the short side, because this is a trap that has been set for you, and one you should seek to avoid. The short squeezers are out there, inviting you into their lair, whereupon, if you allow it, they will crush you.
Instead, if you’ve got access, send out a few SWIFT messages. It’ll do you no harm and may be good for the soul. Being 1/4th Russian, I’m not sure if I’m locked out or not, but expect to be soon.
And look on the bright side. Risks have taken a great leap forward, but at least it’s not The Great Leap Forward, which caused the death of > 50 million, due to starvation. Let us rejoice in this.
And now, if you’ll excuse me, I’m going to take some Ibuprofen. While I still can.
TIMSHEL