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Ukraine Update

February 22, 2022

I am getting questions about Ukraine. Below, I share what I am seeing and doing. I am also offering an “ask me anything zoom session” about this topic later today, if it’s helpful, and tried to pick a time that works for Asia, Europe and the US. To be sure, it is hard to offer clarity given how fast things are moving and my views will evolve as the facts do.

Before diving in, for subscribers less familiar with me, a bit on where I am coming from. I started my career in Russia and lived there from 1991-1994. I’ve studied the economy and traded their markets and also met many of the policy-makers. I speak the language. I have a mother-in-law in Moscow; her sister lives in Ukraine. That doesn’t mean what I am saying is right, it’s just perspective.

Below is my summary.

  1. Putin invaded Ukraine. The post-WW2 order was based on not forcibly changing borders. Putin is challenging that system. He did it before in Crimea, but by the time the West realized what was going on it was too late. Now he has done it again. I had thought Putin would continue negotiating. I was wrong. I now believe there will be a tragic, unnecessary possibly significant loss of life.

  2. The West (US and Europe) face a choice. They can either confront a thug or not. They could confront Putin by sending in offensive weapons, pumping money and special forces advisors into Ukraine, though I am not a military strategist. If the US and EU don’t confront a thug, it is repeat of something between the 1930s and Yugoslavia in the 1990s. This then leads to a further crumbling of US influence and, more generally, rule-of-law. A weak response is akin to the US response to Syria when they used chemical weapons and the Afghanistan pull-out. A strong response is more akin to what happened when Iraq invaded Kuwait and 9/11.

  3. If the US doesn’t confront Putin, he will take more territory. Putin sees the US as weak, doesn’t recognize Ukraine as a legitimate government, believes he has sanctioned-proofed his economy and that Germany is too dependent on Russian energy and too uncomfortable after its role in WW2 to put up much of a fight.

  4. Putin is unhinged and armed, thus very dangerous. If poisoning and murdering enemies, arresting the opposition, invading Crimea and parts of Georgia were not enough to be concerned, listen to his speech yesterday. The YouTube link is here. I was shocked. This speech is divorced from reality.

  5. Ukraine is dysfunctional, corrupt and the leader is not equipped to negotiate this well. To read much of the American press, Ukraine is the innocent lamb and Russia the wolf. It is more complicated. Ukraine is almost as corrupt as Russia and Zelensky has done little to combat it. If the US starts to pump more money and weapons over there, some of it, maybe a lot, will likely be stolen. This is not D-Day. The US faces least-worst choices.

  6. China is absent. While conceptually Russia’s ally, China’s fundamental principle is non-interference in sovereign nations and Russia is clearly violating this.

  7. In terms of investing, the big forces are:

  • The Ukraine crisis.

  • The Fed tightening. This will continue despite the invasion. Inflation is outside the Fed’s comfort zone and the Ukraine crisis will likely lead to higher energy prices and maybe even more Fed tightening.

  • The ebbing of Covid. This is a positive force and will lead to a continuing economic rebound, particularly in sectors, like travel that are in a depression.

  • Longer-term, the tech/AI revolution.

  1. What I am doing with my money. THIS IS NOT INVESTMENT ADVICE, it is transparency.

  • Reducing risk. As the geopolitical risks widen, markets become more volatile, so I hold less of them. I don’t think geopolitical crises are predictable. I hold no Russian or European assets.

  • I lowered my stock exposure from about 24% to 19%. I hold mostly US banks, non-Russia emerging markets and stock pickers at this point.

  • I cut bond exposure from -40% short to zero. I had been short long-term US bonds. I am now flat long-term bonds, still short short-term (2-years and less) and long bonds in Australia and China.

  • Long commodities and commodity producers, roughly 20% long.

  • My logic: There is a chance we now get a strong NATO response to Russia at the same time the Fed is tightening. That’s bad for stocks and bonds. At the same time, inflation and the risk of interrupted Russia energy supplies might drive commodities higher.

  1. Dial in details: 12 PM New York time, 7 PM my time in the Mediterranean. I’ll explain the above a bit more and answer questions if you have them. I’m sure a lot more will be clear even in the next 12 hours. Zoom ID: 883-3037-2427. Passcode: 479035. Please do not forward this email!