The main lesson from BOTH World War I and World War II was that only military alliances can create world wars. Absent alliances, conflicts remain regional. In an age of nuclear warfare, never before has that lesson been more important. Per the terms of the Budapest Memorandum reached back in 1994, Ukraine relinquished its massive nuclear arsenal in exchange for security guarantees from the U.S., Britain, and Russia. Back then, NATO expansion was in its infancy and clearly no one predicted the circumstance that would lead to this inevitable crisis. It was epic hubris on the part of the West to believe that an isolated Russia would stand by passively while the former Soviet Union got absorbed into NATO.
Yet here we are. Not to say I condone this invasion of Ukraine, only to say that history predicted it would happen. For the record there have been NO successful invasions of another country since WWII where the smaller country was supported by a superpower. ZERO. Therefore, the expansion of NATO was at best totally pointless, at worst it has needlessly brought us to the brink of WWIII.
Now, these economic sanctions have taken hubris to an entirely new level of ludicrous. The West is in no condition to simultaneously marginalize China AND Russia into submission. Which is what they are attempting right now.
Both of those countries have a past history of repudiating capitalism for its failure to bring broad based prosperity to the masses. Now history is repeating itself. Globalized capitalism has failed those countries, which is why they are repudiating it. Globalization has also failed the rest of the planet, but unfortunately we live behind an Iron Curtain of hubristic denial. We think they don't get accurate information, when we are as blacked out from the truth as they are.
In this coming week, on the same day that Russia is widely expected to default on its debt, the Fed is widely expected to raise interest rates. The last time Russia defaulted on its debt, the Fed CUT interest rates .5% in the Fall of 1998 to stave off global meltdown.
In addition, the last time Chinese markets were in free-fall - in 2015 and again in 2018, the Fed STOPPED raising interest rates.
Chinese stocks are now below the level of the last Fed pivot in 2018 and Chinese junk bonds are bidless:
In other words, U.S. policy-makers are now trapped by their own epic hubris. Which means that investors are trapped as well. There are literally no pundits right now warning of the insane amount of risk that is NOT priced into these Disneyfied markets. Why? Because the initial impacts of Fed tightening via their balance sheet has seen global markets ex-U.S. basically collapse. In addition, global Tech stocks have imploded with the U.S. Nasdaq closing this week in a bear market, at the very BEGINNING of a rate hike cycle. And the dollar is screaming higher demolishing global currencies. In other words, U.S. broad based indices have so far been spared. If like most pundits, you only look at the S&P and Dow, one would conclude things are not so bad. The rest of the world however is already below the pre-pandemic level. Meaning the entire pandemic rally was nothing more than an end of cycle bull trap.
These three trends I mentioned above - global market collapse, Tech stock collapse, and dollar rally will accelerate in the coming weeks. And when that happens U.S. broad based indices will not be spared. Nor will the housing market, and every other market on this planet.
The circumstances prevailing at this juncture are eerily similar to what abided in 2008:
A simultaneous interest rate shock, asset collapse shock, oil shock, and inflation shock. All attended by rampant denial. The major bonus this time around being epic hubris and sanctions.
In summary, the masses believe they are witnessing the second collapse of the Soviet Union. However what they are really witnessing is the collapse of Globalization.
In real-time.
And soon, it won't only be Russian Oligarchs hiding their yachts.
