Geopolitical Developments: It’s Now Up To Putin’s Inner Circle To Stop The Insanity

An upweek for stocks is being partly undone this morning as dollar shortages around the world reflect the horrifying geopolitical developments caused by Vladimir Putin’s insane war on Ukraine. 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. Copper's chart is signifying global growth. The US yield curve is bull flattening. But there were also several negative factors across global asset classes. Gold is trading as a risk-off asset. Oil is pointing to stagflationary conditions. The action in currencies signifies $US strength. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.

Given that Russia was always intent on invading, to the shock of writers like myself, the optimal scenario would have been a swift efficient Russian takeover of Kyiv and the south-eastern section to form a land-bridge for Russian supply delivery. This would have minimized casualties, giving Putin the incentive to appear magnanimous in allowing humanitarian aid and showing off his success by pointedly not escalating tensions with NATO. Instead Russia is brutalizing Ukraine and showing grotesque inefficiency in carrying out its invasion, resorting to putting nuclear energy facilities at risk to scare the Ukrainians into surrender. Putin now vents anger and frustration and threatens escalation, drawing NATO deeper into unity and expansion to contain this irrational leader. The underlying issue is Russian military mediocrity, and it’s relevant to note the other mediocrity that I and everyone else misunderstood, namely Russia’s limited cyber capabilities. I believed Russia would hold off on cyber attacks outside Ukraine because of fear of disproportional retaliation, but increasingly it’s being reported that Russia may not have anything more than mediocre capabilities.

Time Magazine notes: “But as the invasion continues with few signs of any sophisticated cyber conflict, it seems less and less likely that Russia has significant cyber capabilities in reserve, ready to deploy if needed. Instead, it begins to look like Russia’s much vaunted cyber capabilities have been neglected in recent years, in favor of developing less expensive, less effective cyber weapons that cause less widespread damage and are considerably easier to contain and defend against. For instance, many of the cyberattacks directed at Ukraine in the past month have been relatively basic distributed denial-of-service attacks, in which hackers bombard Ukrainian government websites and servers with so much online traffic that those servers cannot respond to legitimate users and are forced offline for some period of time... It’s likely that the combined efforts of Microsoft, the U.S., and many other countries and companies to ramp up cyber defenses both in and outside of Ukraine has undoubtedly helped curb the damage caused by these efforts. But if Russia really had on hand a stockpile of previously undetected vulnerabilities and sophisticated malware designed to exploit them, these lines of defense simply would not be enough to prevent some significant damage and disruption... This interpretation seems further supported by the Russian decision to strike a TV tower in Kyiv, rather than trying to disrupt media and communications systems more effectively and less violently via cyber capabilities.”

It’s possible that we haven’t seen what Russia can do yet, and the next escalatory step could be a massive cyber attack on US and European infrastructure. But even MIT is sounding a skeptical note, with the Technology Review stating “Despite the chaotic environment, the seeming lack of verifiable major cyber operations coinciding with Russia’s invasion of Ukraine is one of the big unknowns looming over the entire war. Russia has launched devastating cyberattacks on Ukraine in recent years but so far has stuck with traditional warfare since its invasion. The question is whether it may still turn to cyber in the coming weeks and months as the war drags on.”

I continue to see every incentive for Russia’s intelligence and army leaders to take out Putin and stop this double catastrophe — the brutalization of Ukraine and the economic collapse of Russia. This weekend would be an optimal time for Putin’s intimidated inner circle to boldly step into the breach, but there is no suggestion in the media that is in the cards. Without it, the markets look set to head lower into March, as economic disruption and geopolitical uncertainty destroy global investor confidence.

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