Sett on global tensions: the Badger of Broad Street

As we listened to the radio this morning I was asked by Mrs Badger to explain how bad the mounting horrors of Ukraine and Gaza will be for the markets. I surprised her by answering in terms of “limited”. She was quite shocked.

Since the Global Financial Crisis of 2007 it has become a matter of faith that markets are inherently evil. Bankers should be punished for everything and anything. Speculators destroy economies. Blame financiers for everything… so say our very wise political leaders – and since we elect them, they must be right.

Yet the ongoing tragedies seen over the weekend are nothing to do with markets. They both represent political failures that beg the question why they were ever allowed to develop in the first place. Meanwhile, David Cameron is on the wires warning that City firms dealing with Russia will be punished.

For the life of me I really can’t understand what Europe thinks it was doing, or was likely to achieve, in Ukraine (except getting mired in an incredibly complex and bitter sectarian division). Europe has proved unable to agree on any sensible approaches to share the costs of economic recovery across the periphery of Southern Europe, so why does anyone think it has a plan that would be financially acceptable for a country as bankrupt as Ukraine? 

What is the solution? Ukraine is clearly not going to involve European or American boots on the ground, so the Russians are going to remain offensive and stall any “Blue-Hat” UN involvement. It beggars belief that none of the political geniuses who run the European Union’s diplomatic service foresaw that pressurising Ukraine to join Europe would not antagonise Putin. That Baroness Ashton blithely assumed Angela Merkel would stand up for Ukraine and not engage in “Germany first” engagement with Russia was naïve. Not when €30 billion of German exports to Russia are at stake.

So what is likely to happen on the markets now?

Markets don’t have a sense of moral judgment. But they do present a view on the future value of assets given their perception of circumstances. The fact that Russian stock markets and Russian bonds have seen relatively small declines highlights the fact that markets believe it’s unlikely Russia will suffer much from the charges of mass murder being leveled against it. Nope… markets expect further compromise and European disunity.

A few months ago many market commentators speculated that Russia would find itself in serious economic difficulty following its land-grab in Crimea. They foresaw trouble for Russian energy exports and there was much discussion about how American largesse with shale oil would replace the gas pipelines. We expected to see Russian companies suffer as their access to global growth was sanctioned.

Instead, we’ve seen Russia sign a massive gas deal with China (although it’s a few years down the road). We’ve seen Putin glad-handing other EM leaders at the launch of the new non-Washington-centric BRICS bank. And we’ve seen utter fragmentation among the west with European countries still jumping into bed with Putin for reasons of national interest. The West looks weak. Putin’s domestic stock rises higher and higher. 

In the 1930s it was called appeasement. What do we call it today? The unanticipated consequences of poorly formulated foreign policy?

Does that mean we should rush out and buy Russian assets on the dips? There are a number of hedge funds that have been doing exactly that – taking the view markets will over-react to the news. Or do you take a longer term view that America will be forced to get tough as it sees the humiliation to its global prestige? What does that mean for the mighty dollar if Ukraine proves conclusive proof of America’s diminished status on the world stage?

Or do you imagine the very very worst?

One interesting perspective I heard this morning was that the success of Russia taking on the “West” in Ukraine will inflame further Middle East fanaticism, causing the collapse of Saudi Arabia and a new outbreak of intensive Sunni/Shia warfare across the whole region between Iraq and ex-Saudi proxies. Immediate consequences would include a massive global oil spike and immediate end to the current lethargic global recovery.

So what’s the trade of the week?

Normally, I’d always go straight to the Gold trade in times of rising global unpleasantness, but it’s not looking a convincing buy yet. I understand Indian farmers aren’t buying gold for their daughters’ weddings because they fear an El Nino year means a bad harvest!

Badger