War between Russia and Ukraine will trigger stock market crash and economic chaos

If you thought the stock market sell-off to start the year was ugly, brace yourself: Most of Wall Street’s elite investors are bracing for an even deeper shock to the market as the war in Ukraine drags on.

In my conversations with some of the biggest minds in finance, many of whom spoke with me on condition of anonymity to speak candidly about where the market is headed, a consensus emerged: Russia’s invasion of Ukraine has nullified your predictions for a “wash” of the stock market on hyperdrive. The murky global economic picture, clouded by supply-driven inflationary pressures, is now even more complex and uncertain. And the changes that turned some of the market’s high-flying winners into losers are becoming more pronounced.

“The Russian invasion of Ukraine accelerated the slowdown and accelerated inflation,” a billionaire investor told me.

beyond the massive


volatility

While the invasion will continue to inflict on the markets, the war is also forcing Wall Street into a frenzied gut check. It is not just the US government that wants nothing to do with Russia. It’s the Wall Street customer base too.

So the challenge for Wall Street’s biggest investors is threefold: build a portfolio that survives laundering, make sure you don’t hold Russian assets, and, for God’s sake, pay Russian customers back before old Uncle Sam lower boom. .

Market disorder and a ‘crushing recession’

Vladimir Putin’s decision to invade Ukraine added another shock to a year already defined by massive economic change. the


Federal Reserve

and other policymakers in the US have been trying to walk a fine line, raising interest rates enough to control historically high inflation without bringing the economy to a head.


recession

. Not much has changed: inflation so far shows no signs of slowing, and the Fed’s plans to raise interest rates to combat it mean debt is already getting more expensive and loans are more difficult to access. In turn, investors are becoming more risk-averse and punishing the stocks of companies that relied on cheap debt to fuel speculative growth, many of which were the darlings of our seemingly unstoppable stock market in recent years. two years. All of that adds up to a nasty stock market crash.

Putin’s war has not changed the shape of this market shift, but it is making the turn even more aggressive. Aside from “a re-rating of defense contractors,” the value investor told me, the stock market hasn’t fundamentally changed. It has only become more treacherous.

The lightning strike of Ukraine’s destruction and Russia’s expulsion from the global economy has created additional shortages in a world already struggling with shortages of critical goods, as well as the inflation these shortages have caused. The war is endangering the world’s supply of oil, steel, wheat, fertilizer and other basic products. Together, Russia and Ukraine export more than 25% of the world wheat supply. Russia is also a major exporter of fertilizers. The UN warns that this conflict could lead to a global food shortage. The food that remains will become more expensive, exacerbating inflation.

And then, of course, there is the energy. Russia was supplying the world with just under 10 million barrels of oil a day before Putin attacked Ukraine. Since then, the US has cut imports and the EU is working to wean quickly of Russia’s energy supply.

Russia is a major exporter of commodities, including oil and gas.

Russia’s oil and gas exports are being cut off from the rest of the world, which will drive up prices for consumers in the US and Europe. — especially low-income households.

castenoid/ Getty Images


Eventually, without technology from US and European companies such as Baker Hughes, Halliburton and Schlumberger, Russia too will have trouble extracting oil from its territory, geopolitical analyst Peter Zeihan has said. Oil prices have been all over the place since the invasion began, mostly rising in reaction to the carnage, with occasional dips as the market tries to calculate how much oil we’ve really lost.

earlier this week the international energy agency projected that Russian oil exports would fall by 3 million barrels a day for the next month, but one person I spoke with, a Singapore-based hedge fund manager who focuses on commodities, believes the avoidance of Sanctions will moderate losses as Russia transports its gas through countries. like chinese

“I think oil prices could go up a bit as these issues are resolved, but I would be surprised if prices were higher in June than they were just after the Russian attack,” they said. “I think some of this will be manageable as the Chinese figure out how to smuggle goods out of Russia, and they will.”

Meanwhile, low-income populations could face what the fund manager described as a “crushing recession.” In the US, low-income Americans spend an average of 8% of your household income on energy costs, from filling your gas tanks to keeping your lights on. In the EU, the figure can be as high as 12% in countries like Romania. Even before Putin’s attack, researchers estimated that 80 million homes across Europe struggled to stay warm, so when prices go up, it hurts.

“The problem Europe has right now is figuring out how to quickly reduce absolute gas consumption while at the same time figuring out how to help the most vulnerable people,” they said.

If the EU does not solve these massive problems, it risks forcing low-income citizens to choose between heating their homes or filling their stomachs. It risks eliminating shifts at manufacturing plants, further hitting workers’ wallets. There is a risk of political instability. Right now, the West’s top priority in supporting Ukraine is to maintain a united front against Russian aggression, but none of this is good for economic and social stability.

All of this amounts to a temporary but indeterminate period of chaos. The prices of necessities will rise furiously; central banks will fight inflation by raising rates; and money will be harder to find. While there may be money to be made as the turmoil resolves, the fundamental shift taking place in the market — an ugly and painful transition from growth stocks to value — hasn’t changed. The changes will only get wilder, as anyone trying to survive the knockout blow in mid-March bear market Rally can probably tell you. Without warning, the tech-heavy Nasdaq, which had been languishing, topped 8% in a week. In a market like this, it could easily crash even harder the next.

A rejection on Wall Street

While the economic and market fallout from the war in Ukraine will take months to unfold, Wall Street’s fight to offload toxic Russian assets began quietly but quickly after Putin’s invasion. Before Goldman Sachs started the exodus of the big banks from Russiabefore Citigroup and Deutsche Bank cut his losses and followed suitbefore hedge funds began to cut his Clients of the Russian oligarchs: Emails and phone calls flew across Wall Street, demanding that Russia be avoided.

“We can’t tell our clients that we put their money in Russian assets,” said Josh Brown, chief executive of wealth management firm Ritholtz Wealth Management, which oversees $1 billion in assets. “So we call our asset managers and tell them to take our exposure to zero.”

Calls like this set off a chain reaction that Russia cannot stop. Wealth managers like Brown call their asset managers, companies like Vanguard, for example, and tell them to get rid of any Russian holdings in their clients’ portfolios. These massive asset managers then call the companies that make the indices, such as MSCI, State Street (which makes the SPY index) or the London Stock Exchange (which makes the FTSE Russell) and demand that Russia be removed from the indices, erasing Russian investments from virtually all American retirement accounts and millions of investment portfolios. Because asset managers like Vanguard manage trillions of dollars, the companies that compile the indices comply. russian assets were thrown of the FTSE Russell, for example, on March 4.

Moscow Stock Exchange Russia

Russian financial assets, from stocks to debt and gold, have been excluded from the global system due to sanctions. This split in the financial markets will be difficult to undo.

Maxim Shemetov/Getty Images


This split in financial markets will be difficult to undo, in part because customers are unlikely to accept Russia any time soon, but also because Russian assets have entered something of a limbo. They have become part of a fire sale where customers can only window shop.

“Basically, whatever assets they have available have to go to zero and then become a write-off,” Brown said. “No one is buying these assets. Maybe you can sell them back to a Russian in three years, but for now there is no liquid market.”

This applies not only to securities, but also to physical assets that once made their owners very rich. When BP announced at the end of February that it would ditch its 20% stake in Russian oil giant Rosneft, a veteran hedge fund manager, who had just expressed his guilt about taking profits in a wartime stock market, told me simply, “That doesn’t mean anything.” In your decades of running money, you can’t sell something that no one will buy. You can’t just drop billions in investments and walk away. No one in their right mind would simply relinquish ownership of the assets and write off the stake as a loss. But these times are not like any other.

It turns out that when there is a war, actually can just go away. Especially when it appears that Russia is isolating itself from the global financial system, or as the billionaire value investor put it, “filling up North Korea.”

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