Sell the Rumor, Buy the Fact

  • The Russian invasion of Ukraine was weighing on the stock, bond, and crypto markets.
  • As it happened, though, all those markets were up yesterday.
  • I’ve got an unpopular opinion about this.

Happy Friday!

We’re here – barely – after a tumultuous week in Europe.

And Asia may be next, although I’m not sure the Chinese will gamble on America being busy in Ukraine.

The Taiwan Semiconductor Company is just too important to American tech companies for the US Navy not to do something.

However, one thing I should’ve seen coming was the markets making a decent recovery once the Russian invasion actually happened.

Usually, it’s “buy the rumor, sell the fact.”

But investors were positioned short prior to the invasion.  So this time, they need to buy (back) the fact.

We saw this with the Trump election in 2016.

Mark Cuban infamously called a market crash.  The markets did sell off until Trump actually won.

You remember what happened next, don’t you?

Oh, happy days of mean tweets, cheap gas, and 4% GDP growth.

Jesus wept.

Now he’s probably just shaking his head.

As Pooty-Poot runs amok in Ukraine, the current occupant of the Oval Office is still wondering why it doesn’t have any corners.

Quick Market Snapshot

Yesterday, though volatile as all hell, didn’t end on a down note.

In the charts above, we’ve got the SPX (top left), Nasdaq (top right), and Bitcoin (lower right) all up on the day.  (That’s the final black bar.)

In the lower left, you’ve got the US Treasury 10-year yield going slightly down.

Ok, so there was a little bond buying yesterday for safety.  Fair enough.

Am I still concerned the stock market can sell off heavily from here?

Yes.

In fact, I think we’re in for a rough ride in the second quarter (April to June, inclusive) this year.

Nevertheless, the markets didn’t crash yesterday.

I think that’s because a lot of short positions were bought back to take profits.

With all that said, I expect a recovery in the third quarter.  And here’s where I’ll get unpopular.

Europe Simply Can’t Afford This (Energy) War

Here’s a chart of the made-up currency known as the Euro (versus the USD):

My son Micah tells me this chart is going from the upper left to the lower right.

And that means the trend is down.

With a weakening (and some would say, fake) currency, energy is getting way too expensive for the Europeans.

Combine that with Germany freezing – yes, the German government used that word – the NordStream 2 pipeline and mothballing its nuclear reactors, and the picture only gets darker… and colder.

I bet you’re no longer wondering why Germany only sent some helmets to the Ukrainian Army!

Clown World Missile Crisis

Let’s face it: if the US didn’t want to put missiles on Ukrainian soil, this whole thing never would’ve happened.

It’s the reverse of the Cuban Missile Crisis, really, and what we need is a nimble, face-saving solution, like in the old days.

Just as JFK pulled his missiles out of Turkey (albeit very quietly) in return for Russia pulling its missiles out of Mojitoland, diplomatic dexterity is required.

And the situation is urgent, as the last time I checked, Cuba doesn’t have a heating problem.

Thankfully, we’ve got some time, as summers are hot in Europe.

So here’s what I think will happen.

Lots of huffing and puffing

UEFA – the European soccer governing body – has just pulled the Champions League Final (the Super Bowl of European soccer – out of St. Petersburg.

There are already calls for the Russian Grand Prix to be canceled.

Drunk European sports fans – the majority of its registered voters – think this matters and will be satisfied “something is being done.”

No Army, No Foul

The US will not put troops in Ukraine, as that will thoroughly upset those Europeans who want a demonstration of “soft power.”

And it’s not like any European country has a functioning army.

So the bloodshed will be kept to a minimum, provided Russia doesn’t occupy Ukraine.

If Russia does, all bets are off.  The Ukrainians will defend their country with everything they’ve got.

Russia Pulls Out With a Job Well Done; Europe Forgives, US Forgets

If Russia can do the one thing the US can’t seem to do – get a win and get out – they will have secured their weak, southern underbelly… and probably will still keep the gas flowing.

A little bit.

See, they’ve got to make sure Europe hurts.

“Sure, Europe, you can build alternative sources, but we’ve got your cheap energy right here.”

That’ll be the message.

Europe will take the bait.  They’ve simply got no other choice

And it’s not like they want to fight Putin anyway.

If the US weren’t pulling Europe’s strings, Europe and Russia probably would’ve cut a viable, long-term deal about buffer zones and security guarantees ages ago.

But the US can’t have that while it’s clinging to the outdated Wolfowitz Doctrine.

Oh, and those sanctions… don’t work.

With Russia de-dollarizing and stymying sanctions everywhere they go, Russia doesn’t even care about sanctions anymore.

There are plenty of buyers for their energy and wheat.

And did you notice Germany negged the US request to exclude Russia from the SWIFT payments system?

That’s the USD payments system.

The EU wouldn’t be able to pay Russia for its energy, and Russia couldn’t pay Europe for any of its imports.

A ban on Russia using SWIFT could also accelerate the use of China’s rival CIPS system.

And it would deal yet another blow to the US dollar’s status as the global reserve currency, which would accelerate the move to cryptocurrencies.

Wrap Up

Here are some of the Interweb’s best concerning the situation:

On a more serious note, I’ll leave you with some important words from University of Chicago political scientist John Mearsheimer, who in 2014, authored an article — “Why the Ukraine Crisis Is the West’s Fault.”

My colleague Brian Maher, who writes the Daily Reckoning, yesterday quoted this piece from Mearsheimer’s article:

The United States and its European allies share most of the responsibility for the crisis. The taproot of the trouble is NATO enlargement, the central element of a larger strategy to move Ukraine out of Russia’s orbit and integrate it into the West…

Elites in the United States and Europe have been blindsided by events only because they subscribe to a flawed view of international politics. They tend to believe that the logic of realism holds little relevance in the 21st century and that Europe can be kept whole and free on the basis of such liberal principles as the rule of law, economic interdependence, and democracy.

But this grand scheme went awry in Ukraine. The crisis there shows that realpolitik remains relevant — and states that ignore it do so at their own peril. U.S. and European leaders blundered in attempting to turn Ukraine into a Western stronghold on Russia’s border. Now that the consequences have been laid bare, it would be an even greater mistake to continue this misbegotten policy…

Putin’s pushback should have come as no surprise. After all, the West had been moving into Russia’s backyard and threatening its core strategic interests, a point Putin made emphatically and repeatedly…

Imagine the outrage in Washington if China built an impressive military alliance and tried to include Canada and Mexico in it. Logic aside, Russian leaders have told their Western counterparts on many occasions that they consider NATO expansion into… Ukraine unacceptable, along with any effort to turn [it] against Russia…

In essence, the two sides have been operating with different playbooks: Putin and his compatriots have been thinking and acting according to realist dictates, whereas their Western counterparts have been adhering to liberal ideas about international politics…

The United States and its European allies now face a choice on Ukraine. They can continue their current policy, which will exacerbate hostilities with Russia and devastate Ukraine in the process — a scenario in which everyone would come out a loser. Or they can switch gears and work to create a prosperous but neutral Ukraine, one that does not threaten Russia and allows the West to repair its relations with Moscow. With that approach, all sides would win.

Though the world got a bit more serious today, have a wonderful weekend!

All the best,

Sean

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