Geopolitical Developments: Russia Is The Bear That Guards Natural Gas And Stymies Western Democracy

Geopolitics are heating up in the Ukraine but are of practically no importance to investors this morning. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. The action in major currencies indicates the $US is weak. The US yield curve is bull steepening. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Oil is pointing to declining global GDP expectations. Expect the S&P 500 to be range-bound over the next few days.

This morning the markets are weighed down by fears that Omicron COVID will catalyze global economic deterioration and dampen earnings in 2022; I don’t see this happening but the next few weeks will yield the data that tells us where the global economy is headed. But even if Omicron is not profoundly worse than Delta or Alpha there are other issues that will force a correction next month. It was short-term inflation that worried the markets when Delta COVID surged, and this remains a major issue for Europe, China and much of the world. For Europe inflation results not only from supply chain disruptions but from energy supplies that Russia withholds. While Putin’s malevolence is easy to discern the ability of Europe to extricate itself from Russia is nil, in large part because Europeans veer toward the very statism that Putin embodies in Russia. For the US to enlist Europe as a true bulwark against the power of Russia and its erstwhile older brother China, it’s imperative to understand the fundamental reasons for Russia’s actions and the ideological choice Americans and Europeans can make to reset the nasty geopolitical trajectory the world faces.

Putin’s Russia is malevolent because it’s chauvinistic and this flows from the fundamental belief of the leadership and much of the literati and the Orthodox Church that Russia is the New Jerusalem. This chauvinistic self-assessment is easily substantiated by two factors: the abundant decadence on display in the West, and the historic role of Russia literature in illuminating the rich inner life of Russians, a cultural development that yielded the strength of character exemplified in the Russian defense against Nazism during WWII. Many Russians believe it was Russia’s wearing down of the German army that allowed the Allies to destroy Hitler and reset Europe toward prosperity and democracy just four years after nearly all of the continent fell to fascism.

Doestoyevsky, Chekhov and other Russian authors depicted Russians with a complex or mysterious inner life that propelled them to actions beyond self interest, religious or ancestral perspectives. This contrasted with European writers who argued for realism or naturalism that illuminated egotism and the need for individualist singularity rather than fortitude. The ability of the Russian people to suffer and emerge from disaster resilient is a defining cultural lodestone that makes many Russians disdain western individualism and the flamboyance that accompanies it. These Russians are effectively aligned with the western right-wing that seeks to overturn the liberal social order that underlies both popular culture and democracy.

While the case against the nanny state, Big Brother democracy and cultural decadence in the West is easy to substantiate, Russia will likely never rouse the western right-wing to overturn the liberal social order since Russia is too vulnerable on too many fronts. Russia has little defense against a global economic downturn, the cultural demand for renewable energy and an end to fossil fuels dominance, to rising democracy in its near abroad, or to internal public discontent against the leadership and the Orthodox Church. Russia is energy dependent and its banks too weak to finance new economy industries, as evidenced by credit rating agency Fitch’s assessment that Russia’s banking system is more vulnerable to COVID shocks because it’s taken less charges against loans since 2020, thus having more risky loans on its books now which would have to be written off if infection rates stay high. Chauvinistic propaganda has kept Putin in power but the cost of the Russian economy, as evidenced by the vaccine hesitancy toward Russia’s own “sputnik” vaccine. As Bloomberg notes, Russia depends on migrant workers to fuel old economy industries and the high death toll from COVID has constrained the economic rebound from 2020.

So Putin is hard-wired to use the Ukraine as a distraction that serves to both rouse patriotic fervour and to stymie the West. The Atlantic Council notes “Faced with the failure of his Ukraine policies, it seems Putin has now decided to dramatically raise the stakes and threaten Ukraine with a large-scale conventional war. Since October 2021, reports have been mounting of a growing military build-up along Russia’s extensive land border with Ukraine. Russian units have been moved into positions to the north, east, and south of Ukraine in a manner that experts believe is entirely consistent with preparations for a major offensive.”

The West can do little but continue sanctions as Putin foments suffering in the Ukraine, since Europe depends on Russia for energy. The only way out is a fundamental choice by Europeans to resurrect nuclear energy, and for America to stop all trade and diplomatic cooperation with Russia. Neither are likely due to European cultural divisions and American political divisions. Putin is here to stay and the erosion of Western unity and democracy efficiency is the result of his cyber wars, military wars and promotion of the strong state at the expense of individual liberty.

Yesterday I added to my position in the S&P 500 via the leveraged ETF UPRO. My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).