Endtimes For Putin Are On The Horizon But The Markets Are Discounting The Horrible Uncertainty That Hoped-For Event Would Unleash: The Geopolitical — Stock Market Connection

The Fed’s decision tomorrow feels like a pivotal moment for the global economy but even if the Fed doesn’t signal another large rate hike in November the world will still be hostage to the grave uncertainties in Ukraine. There is simply no way to game out the scenarios that could play out this winter, and when investors can’t assign probabilities they become bearish and complicate matters by battering equity markets. The long slog in the S&P 500 since January 4 testifies to the multifaceted nature of this pessimism and I see this only intensifying over the Autumn. Notwithstanding yesterday’s rally the volatility risk premium points to a market fall over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks: inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes: the US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to fall over the next few days as we head back to the June lows in a stairstep pattern of big declines and small counter-rallies.

Uncertainty over the future for both Ukraine and Russia hurts equities since Western policies have been reversed and sentiment towad decoupling from China has grown, both of which make it hard to predict global growth. More ominously, the rise of the far right in places as diverse as Sweden and Italy resurrects memories of European catastrophe. Key to any investment plan is assigning probabilities to both the hopeful and dreadful scenarios that could ensue from the War, and to that end Brookings held a panel yesterday on the implications of the War. The consensus was that the noose is slowly tightening on Russia and Putin, which is both good and bad news. Specifically:

1) Putin hasn’t tried to mobilize vast Russian resources via a draft, which implies he is highly incentivized to bring tactical WMDs to the brink of the War. And if the West doesn’t back down, he may well use them. I believe that the concerns voiced by Narendra Modi and Xi Jinping last week were intended to warn Putin not to use nukes.

2) Ukraine fooled Russia into thinking they were launching an offensive solely in the South, allowing them to recapture territory in the Northeast. Ukraine has cleverly won the information war and its military has been creative in mixing and matching weapons systems and letting low level commanders improvise, the complete obverse of the Russian military experience. Ukraine has further benefitted from a mobilized population that is still reeling from the shock of losing Crimea in 2014.

3) Sanctions put on Russia back during the Crimea annexation have so weakened Russia today that its army is performing badly in Ukraine from every perspective.

4) While Russia can turn off the taps of oil and gas some of its fields and infrastructure can’t be easily turned on again, so Putin’s energy war on Europe diminishes Russia in the long term.

All of this adduces to the fact that only a victory in Ukraine can reinvigorate popular support for Putin, and given the deep malaise setting in the country an assassination or coup looks inevitable regardless of how much repression he winds up inflicting on the people. The key risk has shifted to whether it’s the right wing or the liberals who pick up the pieces once Putin is ousted. A right-wing follower of Putin would clearly have negative consequences, but even if a liberal took over the world would be terrified of the likely unrest this caused among the nationalistic crowd. This is one reason capital assets are being repriced, and will likely overshoot any reasonable level given by the future course of interest rates. Only when uncertainty erodes in Russia can we be sure a move back to the old highs is feasible.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and SPXU, all of which still nets out to a meaningful short position in equities.