Global Disorder
Investors are facing multiple crises that span the globe. The one captivating the most attention is Putin’s brutal invasion of Ukraine, the second largest country in Europe after Russia. With 43 million people it is the eighth most populous country in Europe. As we all are now aware, it borders Russia to the west. Ukraine has an ancient history. It has been continuously inhabited since 32,000 BCE. Its population now includes 78% Ukrainians and 17% Russians - the latter of which are gathered mostly in the eastern regions and Crimea. It has a long history of being dominated by foreign powers including the Mongols in the 13th century. For six centuries it was fought over and ruled by Poland, Austria, the Ottoman Empire, the Tsardom of Russia and most recently the USSR.
It briefly gained independence in 1917 as the Ukrainian People’s Republic but was then forcibly taken into the Soviet Union in 1922. In 1939 the Soviets annexed what is now western Ukraine. It again regained its independence in 1991 when the USSR essentially went bankrupt and dissolved. It retained close ties to Russia but began to make overtures to the West. In 2013 duly elected Ukrainian President Viktor Yanukovych abandoned ties to the West and drew closer to Russia. Popular protests, supported in large part by Western intelligence agencies and NGOs (non-governmental organizations), led to the ouster of Yankovych and the establishment of a new form of government (with legislative, executive and judicial branches) that once again leaned west - to Russia’s great dismay. This led Putin to seize Crimea in 2014 to protect Russian military bases there and retain access to its strategic warm water port. He also fomented insurrections in the eastern Donbas area by the majority Russian population and armed and supported its militia.
To understand why Putin would take the enormous political risk to launch the first massive land war in Europe since World War II, one needs to look at Russian history. It has twice been invaded by Europeans (Napoleon and Hitler) suffering millions of deaths. For this reason, it went to great lengths to bring the collar countries of Eastern Europe into its fold following WWII to act as military buffer zones to the west, as well as to enlarge its empire. When the USSR crumbled in 1991, Russian political leaders were humiliated. Putin has since described that event as the “greatest disaster in European history.” He also feared that the former buffer states might become a part of NATO bringing the Western Alliance to its doorstep. It is noteworthy that Eastern Ukraine is just 400 miles from Moscow. The prospect of Ukraine becoming a NATO member and stationing Western troops and their nuclear missiles that close to Russia’s capitol was unthinkable. Before the invasion in February of this year, Putin repeatedly sought assurances from Ukraine that it would never enter the NATO alliance and would instead remain a neutral nation. Ukraine’s President Zelenskyy refused Putin’s demand and NATO insisted that any nation is free to apply for its membership. The invasion quickly followed.
We need to remember the adage that “the first casualty of war is the truth.” Both sides of the conflict have commenced propaganda campaigns to support their causes. Therefore, everything that we read and see about the war should be viewed through a jaundiced eye. Certainly, photos and videos of the devastation and deaths that appear daily in the Western media are compelling. But Russian mothers grieve the same as Ukrainian mothers for their fallen sons. Russians did not vote in a referendum to go to war with their neighbor. Putin made that call supported by his military leaders. While the West reports that thousands of Russians have been arrested for opposing the war, we have no knowledge whether millions of others support it. And if they support it, is it because they have fallen for the Kremlin’s propaganda that Ukrainians are Nazis (a bizarre thesis in that the elected Ukrainian president is Jewish) and are murdering native Russians in the East? We know that Putin quickly enacted a law criminalizing all criticism of the war, discussing Russian military failures or otherwise spreading “fake news” - subject to imprisonment of up to fifteen years. [Simple test to determine whether you live in a repressive dictatorship: Will you be beaten, poisoned, arrested or imprisoned by government goons if you criticize your government or national leader?]
As we page back in history, we are reminded that the distinction between the “good guys” and “bad actors” is not always so clear. We in the US might remember (if we ever paid attention) that our government has routinely sought to foment “regime change” in foreign countries since the end of WWII. Lindsey A. O’Rourke recaps:
Between 1947 and 1989, the United States tried to change other nations’ governments 72 times. It includes 66 covert operations and six overt ones.Most covert efforts to replace another country’s government failed.During the Cold War, 26 of the United States’ covert operations successfully brought a U.S-backed government to power; the remaining 40 failed.I found 16 cases in which Washington sought to influence foreign elections by covertly funding, advising and spreading propaganda for its preferred candidates, often doing so beyond a single election cycle. Of these, the U.S-backed parties won their elections 75 percent of the time.My research found that after a nation’s government was toppled, it was less democratic and more likely to suffer civil war, domestic instability and mass killing [Libya, for example][1].
Even if we do not recall most of these seventy-two incidents, we probably remember that the US took the world to the nuclear brink in 1962 when it threatened to invade Cuba to remove nuclear missiles Russia installed there. The US invoked its “Monroe Doctrine” to claim the right to enforce its interests anywhere in the Western Hemisphere. Of course, there is no international rule of law supporting that claimed right. Nukes on the US southern border were intolerable and led to the US demand that they be removed under threat of invasion. Russia backed down and removed them.
Does the foregoing justify Putin’s brutal invasion of Ukraine? In a word, “No.” Ukraine is not a member of NATO and there is no assurance that it ever will become one. Western missiles were not in place on Russia’s western border and there is no assurance that they ever will be. Thus, Putin’s paranoia that both might come to pass at some uncertain time in the future (and his desire to recreate the Great Russian Empire) were no justification for his murderous onslaught. Germany’s newly elected (and newly outspoken) Chancellor Olaf Scholz told the Bundestag, Germany’s federal parliament, “Anyone who reads Putin’s historicizing essays, who has watched his televised declaration of war on Ukraine, or who has recently – as I have done – held hours of direct talks with him, can no longer have any doubt that Putin wants to build a Russian empire.”
What now? Putin cannot allow his forces to be defeated or drawn into a year’s-long quagmire as in Afghanistan or bring his forces home with his tail between his legs in a new humiliation. He would likely be removed from office and possibly imprisoned or executed. So, to save his hide he must be able to convincingly argue that he has secured some sort of “victory.” There are many possible outcomes. One is that Ukraine’s Russian-majority Eastern provinces get hived off to Russia and Ukraine formally accepts Russia’s 2014 seizure of Crimea. However, any armistice must also include Ukraine’s agreement to remain independent of NATO. One possible outcome is that Ukraine forms a new alliance with the remaining collar states whose goal is to remain neutral and trade with both Russia and the West under the domination of neither. The problem with this is that both partisans (East and West) would work relentlessly to tip the alliance to their favor.
We address this political situation at length because of its enormous impact on the world’s economies. Russia and Ukraine are the breadbasket of Europe and Africa. If Ukraine does not plant wheat this spring, there will be severe hardship in the Middle East and North Africa (MENA). Together Russia and Ukraine produce nearly one-third of the world’s wheat supply. And they produce 19% of the world’s corn. Russia is the fourth-largest producer of fertilizer. Ukraine is the largest producer of sunflower oil, followed closely by Russia. Both countries are major producers of essential commodities used throughout the world. Russia has the world’s second-largest reserves of tungsten, behind China, and is a major producer of nickel and aluminum. Russia has a lock-hold on titanium (essential in the aerospace industry, palladium (essential in the auto industry), and neon (essential for the production of computer chips). The world economies will suffer mightily if there are boycotts of essential goods.
The war, asset freezes and embargoes and their uncertain outcomes have spiked commodity prices. Here are two recent charts. Note that some prices started rising well before the war as seen in the aluminum chart on the right due to decades-long money printing by central banks.
The Financial War
In an effort to force Putin to withdraw from Ukraine, the West imposed draconian sanctions on Russia that include the exclusion of prominent Russian banks from the SWIFT money exchange system. That system allows large transactions between member banks. Being excluded from the system makes engaging in international commerce extremely difficult. In addition, many Western businesses have at least temporarily ceased operations in Russia, and many are boycotting its goods. The result of has been a dramatic drop in the value of the ruble that is causing pain to all of Russia’s citizens and shortages of foreign goods. The US has fired its monetary bazooka at Russia. However, Russia was prepared for this having watched the US employ the same measures against Iran, North Korea and other nations. In anticipation, Russia sold off most of its US Treasury bonds that it had held as international reserves and has been buying gold for decades for use in future international transactions. It has also implemented its own version of the SWIFT system – as has China. Russia is food self-sufficient and energy self-sufficient. It will be hurt by the embargo of foreign high-tech products and that will take a serious toll on its economy if the war is prolonged. Thus, Putin is motivated to quickly bring devastation upon Ukraine in order to speed its surrender.
One result of the foregoing is that the US’s dominance of the international financial system is at grave risk. The world’s powers have learned the lesson that their assets can be easily frozen because the US dollar is the world reserve currency, and every dollar transaction that takes place throughout the world must first flow through the US. If foreign powers create a substitute for the dollar to protect themselves from US bullying, such as a gold-backed or cryptocurrency, the US suddenly loses the ability to punish those out of Washington’s favor. The US would lose enormous political clout and would no longer be able to export its inflation onto the world, meaning that things would get much more expensive for Americans as they did for the Brits after the Pound Sterling fell from grace. It cannot be overstated how devastating it would be to the US for the dollar to lose its preeminent position. Société Générale strategist Dylan Grice described Washington’s recent barrage of sanctions as amounting to the “weaponization” of dollar-based money. “You only get to play the card once. China will make it a priority to need no USD before going for Taiwan. It is a turning point in monetary history.”
Andy Schectman agrees,
“The United States has militarized the dollar by restricting its use by countries the administration wishes to punish, such as Iran and Russia. A reserve currency is supposed to be available to everyone, not just the nations we choose. This is the death knell to the dollar. Countries around the globe are coming to realize that the U.S. cannot be trusted and that anyone can be locked out of the [SWIFT] system at a whim. We have driven Russia into China’s arms and we are their common enemy. If they released a gold-backed Ruble/Yuan, it would spell the end of the dollar as the world’s singular reserve currency.”David Stockman explains why,
The Precarious State of the US EconomyWashington’s Sanctions War may bring the demise of the petro-dollar regime in place since 1973. In fact, one of the core staples of the past four decades, and an anchor propping up the dollar’s so-called reserve status, was a global financial system based on the petrodollar: That is, an arrangement under which oil producers would sell their product to the US (and the rest of the world) for dollars, which would then recycle the proceeds back into dollar-denominated assets, especially US treasury and corporate debt. This explicitly propped-up the USD as the world reserve currency, by creating artificial dollar demand and in the process backstopped the standing of the US as the world’s undisputed financial superpower.Now the WSJ is out with a blockbuster report that “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan”. Such a move could obviously cripple not only the petrodollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia, but also undermine the entire dollarized global financial system. Yet under the latter Washington has relentlessly taken advantage of the dollar’s reserve status by printing as many dollars as needed to fund runaway Federal spending for the past several decades.These Saudi talks with China over yuan-priced oil contracts have apparently been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom.China buys more than 25% of the oil that Saudi Arabia exports, and if priced in yuan, those sales would boost the standing of China’s currency, and could set the Chinese currency on a path to becoming a global petro-yuan reserve currency rivaling the dollar.
The national average of gasoline prices was up 52% before the invasion of Ukraine. House and rental costs have skyrocketed since Covid showed up. Food costs have been soaring. New and used car prices are at record levels. Yet, on March 3rd, Nobel-winning economist Joseph Stiglitz declared that, “We are not facing an inflation crisis.” It is fascinating how ivory tower economists have no more grasp on what is happening in the real world than do politicians – or at least no willingness to speak honestly of the issues. Gerard Baker at the WSJ writes,
“Make no mistake, inflation is largely the fault of Putin.” Even by the high standards of political mendacity, the attempt by President Biden last week to assign blame for the acceleration of prices that began just over a year ago to a war that began just under three weeks ago is remarkable for its cynicism, its dishonesty and its desperationWolf Richter points the finger of blame in the right direction - at the Fed and Congress.
It is obvious to everyone but Nobel-winning economists and politicians that inflation was baked into the economy long before Putin surrounded Ukraine with his troops.What happens when $11 trillion of fiscal and monetary stimulus are handed out in 22 months? That’s how much it has already been: $4.7 trillion in printed money that the Fed threw at the financial markets and $6.6 trillion that the government borrowed and handed out. On top of which came the huge forbearance programs and eviction bans that allowed consumers to not pay their obligations, and not get their credit dinged when they fail to pay those obligations.There are a lot of consequences, including the worst CPI inflation in 40 years, the most splendid housing bubbles ever, along with spiking rents, and the hugest speculative asset bubbles ever with wealth inequality ballooning to the worst levels ever, and consumers, flush with [government handouts], who went on a huge spending binge, leading to the worst US trade deficit ever.
A major culprit is that “real” negative interest rates predictably led to reckless borrowing for non-productive purposes such as corporate loans to fund billion-dollar stock buybacks.
By continuing to keep the federal fund rate pegged at record negative levels, the Fed continues to this day to stoke the inflation fires - all while claiming that it is actively addressing soaring prices. History shows that it is necessary for interest rates to get well ahead of the inflation rate in order to bring the latter under control. By June 1981 former Fed head Paul Volker raised the federal fund rates to 20% in order to crush inflation that was running at 14.8%. Fed head Powell just timidly raised the federal fund rate a quarter of one percent (.25%) hoping to stem inflation that rages officially at 8% and in real terms at over 10%.
The solution for the tsunami of new money shot into the system that has blown bubbles in asset prices to the benefit of the financial elite, is to withdraw that money so that prices can return to levels that existed before the inundation. Powell will not do that. He knows that Volker’s action precipitated a steep recession that cleared the economy of its excesses. Powell does not want to clear the economy of its excesses. He has personally gained from those excesses as have his elite supporters. A deep recession would rout Democrats in the up-coming mid-term elections and likely the presidential election two years later. Thus, there is enormous political pressure on Powell not to do what is necessary but to appear as if he is trying to do so.
It is instructive to visualize the quantity of dollars that have been printed and squandered since 2008. We get so used to hearing about billions and trillions of dollars being spent for this or that that we lose sight of what that really means. Bear in mind that a trillion dollars is one thousand billion dollars. Even that is hard to grasp. So, study the depiction below and be stunned. You can easily hold $10,000 in $100 bills in one hand. A million dollars will fit in a briefcase. $100 million dollars sits on a pallet that would take a forklift to move. A billion dollars would fill a room with ten pallets of $100 bills. But a trillion dollars would require 10,000 pallets and cover a huge field with double-stacked pallets.
Source: Reddit
Recall that the US national debt just broke $30T. Picture the same field with pallets stacked 60 high! You might wonder how the Treasury, Fed and government are going to pay off such a massive debt. Do not worry. They have a plan. But they do not talk about it openly although Powell has hinted at it. They intend to continue to debase the dollar so that the US’ creditors holding the debt will be repaid in vastly devalued dollars. The small problem with that plan is that long before the dollar is worthless, investors will cease buying new Treasury bonds. That will force the Fed to do so with more trillions of dollars of newly printed money, the system will eventually implode, and we will find ourselves with a new form of government. “That’s crazy talk,” we hear you saying. Well, consider this: during 2020, the Fed purchased 80% of new US Treasury debt, the Bank of England bought 100% of new UK debt, and the European Central Bank bought 120% of eurozone debt. So, we are all well on our way to our ultimate destination – the Great Reset. Buckle-up! It is going to be exciting.
The NFT Craze
You have no doubt read about people spending millions of dollars buying NFTs. Some have been sold by the world’s largest auction houses. The first big one was Beeple’s (real name Mike Winklemann) digital representation of several thousand photos he took and made into a collage. Some daft person spent $69M to buy it. We assume that buyers think they are getting in on the ground floor of an exciting new opportunity to make easy money with no risk, like with Bitcoin. An NFT (non-fungible token) consists of two parts: “something” and an encrypted blockchain means of proving ownership of that something. If you own a house the something is the house, and the proof of ownership is your deed. If you own a car your proof of ownership is your title. Any sane person understands that the thing of value is the house or car. However, with NFTs the gullible believe that the high-tech form of title is the thing of value because it is a new whiz-bang method of establishing ownership. Two examples of themes that have been sold as NFTs are cartoon drawings of the “Bored Ape Yacht Club’s” denizens and highly pixilated sketches of pirates. While the theory of NFT’s has a sound practical use, the first people drawn to the technology prove the adage that “a fool and his money are soon parted.” Here are a few examples of the apes for sale - provided you have a few million to spare.
What is Money?
With government officials ever eager to buy our votes with promises of more “free stuff,” thereby debasing our currency, it is worth taking a moment to consider what is money. There was a very practical reason for its invention. It is not convenient to buy a new car by paying for it with a trailer truck-load of squawking chickens and it is not possible to store up long-term wealth by hoarding those chickens’ eggs. Long ago, Aristotle formulated the essential characteristics of sound money.
Durable – to be a “store of wealth” it must not be damaged by natural processes like rust, rot, or rodents or be diminished in value by acts of the issuer.
Portable – it must be easily transportable.
Divisible – it must be something that can be divided into denominations necessary to pay for a house or an apple.
Fungible – each unit must be as good as the next.
In addition, he asserted that sound money must have “intrinsic value.” In other words, the material from which the money is fashioned should be a worthwhile commodity “in its own right.”
Paper currencies can meet some of these requirements some of the time. But paper money always eventually fails because it has no “intrinsic value.” History is littered with hundreds of paper currencies that were debased through over-printing to the point of having no value at all. Thus, paper money is never “sound money” for long. Proof is provided to us regularly by the St. Louis Federal Reserve Bank. It issues reports and charts reflecting the changing purchasing power of the US dollar, see below. Note the trend. If you followed this trend since the Fed was created in 1913, you would see that the dollar has lost over 97% of its purchasing power. Thus, the US dollar has not served the purpose of being sound money and a “store of value.” Debasement of your money is an undeclared tax that you never stop paying.
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Important Message: The foregoing is not a recommendation to purchase or sell any security or asset, or to employ any particular investment strategy. Only you, in consultation with your trusted investment advisor, can select the strategy that meets your unique circumstances, investment objectives and risk tolerance.