What Happens Now?
Last week Russia invaded Ukraine - this will affect you in more ways than you think. Also: Financial Hiroshima, Canary in the Coal Mine? and Don't Ignore Wheat.
In today’s letter:
Last week Russia invaded Ukraine - this will affect you in more ways than you think.
I’m amazed by how quick and forcefully western leaders have reacted to Putin. But is there something they’re not telling us - is this a “Financial Hiroshima”?
Tidbits: Canary in the Coal Mine? and Don’t Ignore Wheat.
Enjoy.
What Happens Now?
Last week Russia invaded Ukraine - this will affect you in more ways than you think.
Financial Hiroshima
The West has responded to Putin with unprecedented force - sanctions, swift ban, removal from tech services etc. With financial and technological means we are under the impression that we can control countries like Russia and China.
But what happens if Russia and China decide that they don’t like this - and hit us back where it hurts? What happens if they decide to constrain their resources?
Russia is one of the largest producers/exporters of gas, oil, coal, wheat, corn, palladium, aluminium, nickel, copper, fertilizer, titanium, neon, etc.
China basically has a monopoly on rare earth and is a large producer/exporter of magnesium, cobalt, lithium, copper, nickel etc.
That would be a serious blow to us - our economies would quickly seize to function.
We’ve kept doing business with Putin even though he was clearly not a good guy to cheaply build our own economies. The trade-off was systematically building our economy around commodities controlled by Russia and China - and in the process handing over a staggering amount of power to them.
We were incredibly naive/arrogant to think that everyone would play by our rules and not have their own agendas. Putin saw a vulnerability and exploited it.
We’re now dependent on Russia with no (short term) alternatives - how systemic is that risk? It would explain our leaders’ reactions of historic proportions.
Are we dropping the financial equivalent of “Little Boy” in Russia in an attempt to end this conflict before they decide to take us out?
Canary in the Coal Mine?
Is there risk of financial contagion from Russia to the rest of the world?
Eurostoxx banks closed -8% on Friday, March 4th. Is credit starting to reflect counterparty risks as well?
Credit Suisse 5y CDS below - and UBS, Citi, Morgan Stanley etc all have similar looking charts. Seems like concern is growing about who is sitting on what. Is this a Lehman moment?
Don’t Ignore Wheat
Wheat is a pretty unsexy commodity, but it’s making headlines because of its strong price rally. While this might be easy to ignore - history has taught us that this is a pretty scary situation.
End
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