Geopolitical Developments: Biden’s Caution Rings Of Appeasement, With The Future Increasingly Seen As The 1930s Replayed

Myopia in markets and geopolitical strategy are horrifically symmetrical as both investors and Joe Biden hope for the best in the Ukraine and somehow consider this a prudent strategy. I see this myopia coming home to roost shortly, if not for the world at large then to global investors in the form of lower equity prices. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my short-term technical reading of key stocks in the S&P 500 is still bullish. There is one negative factor across global asset classes. Gold is signaling inflation fears. Consequently expect the rally to fizzle out when the S&P 500 hits 4550, setting up for a major downturn toward month-end.

Biden’s strategy of cautious calibration is fraught with risks and relies on hope rather than action. Instead of standing up to Putin and calling his bluff, risking all in the process, Biden is pinning hopes on the Ukrainian military, Russian self-restraint, Russian incompetence and Chinese rationality. The first three of these are 50/50 propositions, making it likely that simply calling Putin’s bluff is the most meritable strategy Biden has, but isn’t entertaining. Here is the strategy in detail, and the problems I see:

First, Biden is simply hoping that Ukraine can limit Russian ground gains, using what NATO has supplied and its own tenacity in concert with Russian incompetence and poor preparation. Biden hasn’t supplied everything Ukraine has asked for in large part because he wants Putin to restrain himself from going all-in. To date the Russian military has largely targeted military sites and tried making the invasion a ground war — consequently the Ukrainian Air Force is still flying and Ukrainian casualties are relatively small, while civilian atrocities have been few (though horrific and implicating Putin as a war criminal). Solitary acts of Russian incompetence may be responsible for the attacks on hospitals and shelters, or Putin may be using these few attacks to show the world what he is capable of if he went all-in. Biden is hoping that Russia continues to limit air and long range strikes so as not to target civilians and destroy Ukrainian infrastructure (since this what Putin’s ground troops would need), By refusing some of Ukraine’s requests, Biden thinks Putin will stick with his ground war strategy despite huge Russian losses and humiliations.

Given Ukraine’s fierce resistance this scenario would leave Putin very little to negotiate with unless his military suddenly learned from their mistakes and starting going on the offensive in the north of the country. So Biden is also hoping Russian incompetence doesn’t end anytime soon. The result of this would be mounting domestic unrest in Russia as body bags came back and sanctions destroy basic human welfare. That would hopefully catalyze a palace coup, at which point Biden negotiates with the inner circle to free Alexei Navalny and make this long-time regime opponent kingmaker. Sanctions would then be lifted piecemeal as Navalny’s people directed a purge of Putinistas, implementation of democratic processes and deregulation of civil society. Of all the dependencies the lack of a clear alternative to Putin is most troubling as it redounds back to Putin’s favor here and now.

Navalny is a man of courage and brilliance, but sadly he is not leader of the diverse opposition Putin faces. Navalny is largely liberal but also a mild xenophobe and a nationalist who believes in gun rights and that migrants are a problem. These mild contradictions can be smoothed over and endemic to all politicians, but they have also kept Navalny from gaining the wide support and admiration of the Russian people that he clearly deserves. He started his anti-corruption drive because as a young man he bought Russian stocks and found it impossible to get accurate information, and learned politics and journalism from there. He is capable of gaining popularity because he is not only courageous and liberal but also a writer who uses humor, and his suffering is widely known. But this can’t be guaranteed, and a less principled player could supplant him and lead Russia down the garden path, making Ukraine just the beginning of a global upheaval.

Then there are the other scenarios. If Putin changes strategy by targeting civilians or using chemical/biological weapons, Biden hopes China will refuse to help him. This would cause significant unrest as word got out to the Russian people that Putin can’t solve the economic depression with their older brother’s trade and aid. Ordinary Russians presumably would be less gullible and more open to real news because sanctions makes them laser focused on their basic needs. But whether China obeys the West or finds ways to avoid sanctions and help Russia is an open question. And were China to flat out reject the West, as irrational as that is, the result would be sanctions on China and the effective withdrawal of the leading trading nation from the global economy, putting the world into a major recession and harming Biden’s ability to get anything done.

And if Ukraine were to start losing militarily and Russia gain more negotiable assets without targeting civilians or using WMDs, then Biden is left with the hope Putin immediately presses for settlement in order to get sanctions removed. Nothing Putin is likely to offer would be worthwhile or trustworthy so Biden presumably would refuse to take off sanctions, and now XI Jinping would be more keen to come to the victorious Putin’s aid and let Biden sanction China at his peril, hoping the world blames Biden for the ensuing recession.

Or if Putin brought in a full scale military invasion, then Biden calibrates by sending MiGs and other planes and materiel to force more Russian casualties, hoping to cause unrest and a palace coup. But a full scale invasion might result in quick Russian victories, putting paid to this hopeful scenario. And if Putin threatens WWIII or to attack NATO, then presumably Biden rallies the USA to go to war, and calls Putin’s bluff, at which point either the world ends or Putin becomes Khrushchev II and is soon taken out.

It’s easy to praise Biden’s caution and efforts to relieve Ukrainian suffering as shrewd but moral statemanship, but it’s more salient to recognize the parallels between his actions now and those that let Putin keep Crimea, or even more profoundly, with appeasement in the 1930s. Biden has underestimated the effect of this war on public opinion across the US and Europe, and is missing an opportunity for the people to show that western values are worth risking everything. I see Putin going to the brink for any of several reasons and forcing us where Biden would rather not go. Putin would be foolish to risk his life and posterity when he can take the gamble of threatening MAD. In the meantime the suffering and possibility of global food shortages continues. The markets are clearly on the side of optimism, but I foresee this coming to an end shortly as well.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.