Macro micro trader

While I have spoken a lot about markets with the help of various charts, today I won’t be taking any help of the charts and would focus on what I believe is likely to occur over the period of next few months and years.

I would break my points in the following different categories:
1) Geopolitical impact
2) Economic impact
3) Humanitarian impact
4) Markets

While a lot has been spoken and written on all these topics already, but as most of readers are retail traders, I would focus on guiding them on some of the nuances of it and how it is likely to affect us all even if we may not have any position in the markets

1) Geopolitical impact: Everyone knows by now that who stands where in this Russia-Ukraine crisis, but there are certain long term pieces of this puzzle which are getting shaped in this war. While many believe Russia has been alienated or cornered, there are certainly friends who are standing by Russia, although diplomatically so. Two important countries among those are China and an unlikely friend, India.

While China and Russia have been behind each other on various topics and India has been seeking Russia’s help on various geopolitical issues surrounding its border with Pakistan, both the Asian countries have not openly criticised Russia over its invasion in Ukraine. Not only that, both the countries abstained from voting in favour or against Russia in UN’s condemnation of Russia’s invasion. Some key media outlets in both the countries have been broadcasting views that favours Russia. Popular opinion on many social media platforms have started pointing on various instances when Russia backed and supported India on international platforms as and when needed and pointing out the duality of US and Ukraine even if the act Putin has initiated is contrary to India’s core belief of non-violence.

Irrespective of what happens in the future and what would be the outcome of this war, this war stitches some pieces together which would shape how the world behaves and reacts over the period of next few decades. One of the key aspects – China would get another foothold geopolitically and economically while India moves away from the West in a piecemeal manner.

2) Humanitarian impact: This one is far more important and will have far more reaching impact over decades and perhaps centuries to come. Hear me out. What Putin is doing or Xi has been intending to do has been on the minds and hearts of billions of people around the world – Being hyper-nationalistic and be recognised as the most powerful in the world. Populism started sweeping the world ever since The Great Financial Crisis of 2008. The public at large has been very angry and disheartened with the administration in major part of the world ever since. That’s the reason why Trump, Le-Paine, Five-Star movement, Modi et al happened. The disbelief and anger against the administration, capitalism and the world order has long been there, no one leader was able to shake it up.

No wonder Putin has got support from the populist mindsets around the world. Even Russia has been financially sanctioned, the popularity and machoism he has got is something that won’t disappear in a jiffy. What happens in this war and whether Putin wins or Ukraine is able to defend its territory is a different question altogether and nobody has sure shot answer to that. But what will certainly prevail and would gain more currency is the populist mentality. The mindset of “We are superpower”, “We are better and stronger”, “We don’t care about this old world order” et al will grow louder and stronger. If Putin wins, this mindset will only give them more momentum. And even if he loses, the torch-bearers of populism will take what they have to out his defeat and move on with their own models in an albeit different way.

The world that cares for human emotions, love and compassion would sorely miss itself. No one would be more happier than me if this view stands out to be utterly nonsense and the world goes back to the peaceful days of non-violence, love and care for each other. But I’m really not sure thats going to happen. The torch that Putin is holding currently won’t go off in an instance. There are others who have this very mentality of changing the world order. And that’s where the problem lies. The people with populist mindsets don’t stop until they lose completely or prove their victory.

3) Economic impact: By now a lot has already been written and said about the economic costs of this war and much of it is already visible by the way some of these asset prices have reacted. Stocks sinking, pricing in slowing growth, commodities rallying, pricing in the supply side shock amid already choked global supply chain. All this in the midst of what the global central banks were already worried about soaring inflation. I don’t even need to comment about the stagflation fears which have become real now.

The real worry, though is how long will this last? Given that Russia isn’t relenting and nor has Ukraine lost it as of now, it doesn’t look like its ending anytime soon. What happens if it drags on for weeks and months? I would suspect, if this war and its related complications go on for even 1-2 more months, the related supply shocks would last for far longer than that. Which means global growth, which was still recovering from COVID-19 related shocks, would face another big setback to crawl back up on the back of high and sticky inflation, eating up on consumers’ pockets. Fed trying to rescue supply side problems with making money more expensive? I don’t envy Jerome Powell’s chair anymore.

4) Markets: The longer this war lasts, the worse it is for the markets as this results in more sticky inflation and shallow growth for the world economies. Although, the markets across the board have been highly overvalued and the correction in the stock prices has started even before the war started. But I am not sure if this correction would end with the ending of the war. Remember, this correction that started was never about the war or even inflation. It has always been about valuations and market cycles. The cycle has not completely turned down into despair and agony yet, as explained in this first article I published.

This would happen only when the valuations are far more cheaper than one could even imagine. For that too happen, markets would need to correct far more deeper than where they are yet. From valuation point of view, SPX should be anywhere between 12-15x their TTM earnings, as against 24 currently. Whether this would happen NOW or before another leg of a bull run is something for the markets to tell. But long term wealth creation would happen when one gets an opportunity to buy stocks when SPX reaches those distraught PE levels.

It may or may not happen this year, but it would happen for sure. Till then, patience is the name of the game.