Geopolitical Developments: Pessimism Is Realism Given the West’s Disunity Toward Russia And Ukraine

The War in Ukraine may well destroy Putin’s Russia and lead to exhilarating economic and geopolitical scenarios that bullish investors around the globe are rooting for, but if so it will come down to the resilience of Ukrainians rather than the qualified support given by the West. For now the pessimists have the upper hand as seen in yesterday’s massive reversal in the S&P 500. 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 bearish. There are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to fall over the next few days.

Biden’s vaunted provisions for Ukraine come too little too late for Mariupol, but his dithering since February 24 reflects not only his cautious strategy but the disunity within America’s closest allies in Europe. The old divide between Western and Slavic/Uralic/Baltic Europe is Putin’s trump card in Europe, but this time Putin is leveraging a bizarre reversal of the historical role of Mother Russia as protector of Eastern Europe. Now Russia’s enemies are its fellow Slavs and its Baltic neighbors, and Putin claims moral support from Mittel European statists ranging across the left (Germany’s Social Democrats) to the right (Italy’s neo-fascists and Hungary’s illiberal nationalists). Slavs and Baltics by contrast put political ideologies aside for the real world considerations of power and Russia’s long history of brutality.

As Carnegie Europe notes “Estonia, Latvia, Lithuania, and Poland, along with Slovakia and the Czech Republic understand what Russia’s invasion of Ukraine is about... Furthermore, because of their history and proximity to Ukraine—as well as their experience of living under Soviet domination—the publics in this part of Europe show few signs of weakening their support for Zelensky even if it means higher energy and consumer prices. These countries are also providing as much military support as possible to Kyiv.”

By contrast statists in Germany, Austria and Hungary are conflicted about Russia and stymying NATO from aggressively arming and financing Ukraine. The underlying reason is European statists’ fears of Russia is nearly equivalent to fears of America and its liberal influence, which has an individualistic and anti-statist thrust. Carnegie further notes “In Germany, Chancellor Olaf Scholz’s coalition government is now bitterly divided over what kind of military support it should give Kyiv. The Greens and the Free Democrats want to provide heavy weapons. But Scholz’s Social Democrats who are still wedded to a pacifist, anti-American, and Russia-friendly outlook, are stonewalling.”

The same is true for Matteo Salvini and his neo-fascists in Italy, though this is complicated by Putin’s other trump card in Europe, namely energy supplies and the attendant impact on inflation. For Europe to cut off Russian energy it must accept much higher prices and shortages of fuel, which lead to deep stagflation and a concommitant rise in interest rates. Carnegie further notes “The high price that Italy is worried about is an increase in interest rates... If the European Central Bank were to raise interest rates this would have a devastating impact on Rome’s ability to service is very high public debt. It is 147 percent of gross domestic product, the second highest among the eurozone countries after Greece.”

Putin is a strong believer in the state, which is how he melds qualified veneration for the USSR with the stronger veneration for Russia’s more liberal but imperial and war-like leaders (i.e., the Greats and the Terribles). Statists across Europe calculate that opposing Russia and helping Ukraine must be limited lest America gain too much prestige and thrust its liberalism ever deeper into the world psyche. Since China is increasingly reverting to its old statist ways and India’s Narendra Modi has no qualms in using the State to promote Hindu nationalism against anyone inside or outside of India, Europe’s statists see their cause as gaining and America’s as receding. Consequently they want a strong Russia but one led by a more peaceable and predictable leader than Putin.

The impact on Ukraine is horrific and the impact on global investor confident is dispiriting. I continue to expect equity markets to make lower lows while interest rates make higher highs, pushing Europe and the West closer to the recession that the statists vainly hope to avoid.

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.