Markets and Ceasefires

Two items today: the economic side of things and the obstacles to a ceasefire.

Markets

The big question was of course how the market would deal with the war in Ukraine. It is clear that every asset would have to undergo a repricing and it seems like that is happening, somewhat different from when Covid hit where markets bounced back after a short but deep dip. The most interesting thing here is oil which had gone solidly out of fashion with our impending green energy transition. A consequent lack of investment in new oil infrastructure put extra pressure on already strong and growing global demand with rising prices well before the war. Now with disruptions in and sanctions on Russian deliveries prices have spiked. Oil is back and is on fire. And what is worse, it is now driving geopolitical discussions with the US possibly lifting sanctions on Iran and talking with Venezuela. These were two heavily sanctioned rogue nations only yesterday, but the need for access to oil may change that in a heartbeat. Biden can ill afford a stalling economy with mid-term elections coming up, keeping energy prices under control is key to his own and his party’s overall popularity. Real energy transition is at least another 20 years away (not my number but an educated guess based on what I see and hear) and the current upheaval may change that scenario once the oil taps are full on again globally.

But it is not just black gold, all natural resource prices from gas to grains to tin to gold, you name it, are rising. At the same time tech is taking a dive, a trend already palpable during the first two months of this year, but now we are seeing some real pullback which, truth be told, may have been time anyway. The chart above is a view of the last three months. For me the question is if this will filter down to the venture and seed investing scene, in previous crises early stage tech does follow larger market trends. When I look at my portfolios I see wild movements across most sectors and interestingly particular strength in dividend paying telecom stocks. This is however a snapshot, the chart above is for the past three months by the way. It will be hard to figure out where the markets will settle in the long run, as the situation on the ground changes every moment there will be a lot of uncertainty and investors never like that. Short term trading opportunities, yes, long term value creation, a lot harder.

Once thing appears to remain strong: housing. Interest rates are still low, liquidity is still high and with people on the move from one area to the other demand for real estate will not exactly subside. The one sector that is in dire need of a correction refuses to do so. But think about this: compared to Ukrainians who have been bombed out of their homes most people in Europe and North America are still very well off. Think that through and see where you can allocate some of your wealth to help those in real need. If we have to pay more for some gas to finally stick it to Putin, then let’s do that.

Ceasefire

Like me, many of you must be wondering why it is so hard to broker a ceasefire between Ukraine and Russia, if only to alleviate the civilian suffering. A key reason is that Russia is ruthless and keeps the bombing going regardless of any humanitarian considerations. Earlier this week a Kremlin spokesman pointed to four core conditions that would need to be satisfied so that an immediate ceasefire can take effect. In short, Ukraine is to:

1. Cease military action;

2. Change its constitution to enshrine neutrality;

3. Acknowledge Crimea as Russian territory;

4. Recognize the separatist republics of Donetsk and Lugansk.

The core problem in this entire conflict is that Russia does not view Ukraine as an independent state. It is seen as some sort of renegade province which has always been a part of Russia. If you think about that you can see how any negotiation, but in particular with the proposed conditions, will simply not work. They provide a devil’s dilemma for Zelensky. For starters the idea that Ukraine is to let Putin dictate the contents of is constitution is so absurd as to completely ignore the entire proposal. If it were implemented it would deprive Ukraine not only of its self-determination, the country would literally be neutered so that in any potential future arms conflict its neutrality would make it very hard to defend itself against any foreign intruders. Given the sacrifices being made today by all Ukrainians it is even unthinkable to consider this, but it may find some supporters in the West who would like this whole thing to be over and done with. Putin is telegraphing them no doubt. And then to recognize key parts of its territory as parts of Russia or independent states is ignoring Ukraine’s internationally recognized borders. It can be discussed of course and it may provide an opening, but it feels almost like a Molotov-Ribbentrop move by signalling that carving up Ukraine would do wonders for world peace. But it is the first condition that makes it clear how surreal this discussion even is: Russia is the one as the aggressor that should cease military activity instantly, not Ukraine. Ideally both, but that means both are equal which Russia does not believe to be the case to begin with. You get my point.

Ceasefire update: another urgent reason to cease hostilities is Chernobyl.