We are in a trifecta.
The three elements are as follows:
- An intensifying shooting war in Ukraine, Russia, and Belarus, with growing ancillary war risks in neighboring countries and regions. We mustn’t ignore Kaliningrad on the Baltic and/or Russian intimidation of Scandinavian countries, NATO and EU members including Estonia, Latvia, Lithuania, and Poland.
- The global and intensifying cold war deployment of financial and economic tools unlike anything ever deployed in previous times. Putin has succeeded in uniting most of the world against him; they are either joining the financial/economic fight with outright actions or doing so quietly. Only a few small countries that are already subject to sanctions have supported Russia: Nicaragua, Cuba, Venezuela, Syria, etc. Others are abstaining, and that includes China. What happens with Iran remains to be seen.
- The Covid war is still a threat. Look at Hong Kong or South Korea. In the US we still have 1500 Covid deaths a day and our country has become complacent and cavalier about the disease. Epidemiologists observe packed trains carrying refugees and see a potential super spreader event. Closer to home, epidemiologists worry about how a politicians’ promoting ridicule for masking throws the immune compromised folks under the proverbial bus. This opposition politics also means some budget funding for public health is held hostage.
In our study of the history of pandemic shocks in economic terms, we have examined this trifecta starting with the first record of a pandemic in Megiddo, 3500 years ago. A common theme is the linkages among the three items: war, money, and disease. Through all of history these three elements were intertwined in every pandemic. Today, in March of 2022, history is making no exception.
We’ve written about the global finance war using Russia focused sanctions. This is the biggest issue impacting the financial markets and the globe’s economies.
We remain very overweight in the aerospace-defense sector of our US Equity ETF portfolios and also the healthcare and financial sectors have a heavy weight along with semiconductors. Banks and their regulation are now turned into an activity of war. So are cybersecurity and cyberattacks.
In a March 4 emailed commentary, Byron Callan of Capital Alpha Partners (https://www.capalphadc.com/team/Byron_Callan) offered an excellent geopolitical analysis, and he gave us permission to share his thoughts. He considered the implications of Ukraine’s situation for Taiwan:
We have been skeptical that China would launch an invasion of Taiwan in 2022–25, but an open question is how the Russo-Ukraine War changes Taiwan’s defense posture. Per “Military Balance 2022,” Taiwan’s 2021 defense budget of $16.2 billion was 2.1% of GDP. U.S. and European supplies of infantry anti-armor and anti-aircraft weapons may bolster arguments for Taiwan to take a similar approach to arming mass militias and/or territorial units… So-called “porcupine” defense postures could also be adopted with mass unmanned armored weapons, as have been discussed for the defense of Baltic states.
He continued, looking at what we know about the state of Russia’s air force:
…there were claims that two Russian IL-76 transports were downed with paratroopers, but we have not seen evidence of imagery of wreckage on social media. However, there have been images this past week of Su-25 and Su-34 aircraft that have been downed. We don’t know if this is by Ukraine combat aircraft or air defenses. If — and this remains an if — they were shot down by S-300V or 9K330 surface-to-air missile systems… it’s surprising that Russia hadn’t been able to suppress/destroy these and/or to defeat missile launchers with countermeasures. These are Soviet-era designs. Perhaps, as Justin Bronk of RUSI asks in this Mar. 4 essay, “Is the Russian Air Force Actually Incapable of Complex Air Operations?”
And then he tackled the larger question of Russia’s military competence:
We remain surprised by the degree of incompetency Russia is displaying in combat operations in Ukraine. These shortfalls range from logistics to lack of combined arms operations, poor air defense, poor morale, and tactics. In this Mar. 1 research note we offered three different post-Russo-Ukraine War scenarios to ponder. If sanctions remain in place, regardless of leadership, it could easily be 5–10 years before Russia can resume the modernization of its conventional defense forces. It will have to find alternative sources of machine tools that are supplied by European firms, there is likely to be a brain-drain of technical talent and lack of access to western technology will hobble advanced weapons. Russia’s conventional military force could be a wasting asset, as was Iran’s after 1979 and Iraq’s after 1990.
Russia’s ability to project military power much beyond its borders was already questioned, at least in a Rand Corp. report published in 2020 titled “Russia’s Limit of Advance: Analysis of Russian Ground Force Deployment Capabilities and Limitations.” Russia may take a page from Iran by placing more reliance on longer-range precision strikes to deter adversaries—but that’s a very different force than one that could invade other neighboring countries. Ambitions to modern ground combat units and the air force could be set back—significantly.
If U.S. and European intelligence agencies and analysts missed how poorly Russian military forces would perform, what does it say about assessments of the military prowess of China, Iran, and North Korea? China hasn’t fought a significant conflict since a brief war with Vietnam in 1979 and [it] didn’t go all that smoothly. Changes in those assessments are not going to be made public, but they could work their way into future threat assessments and defense plans.
We thank Byron for his permission to share his superb analytical work with our readers.
We will close with the depressingly offensive reports about two American Members of Congress who were speakers at a white supremist, pro-Nazi conference in Orlando at which the crowd cheered “Putin, Putin.” Here are links: “Rep. Marjorie Taylor Greene criticized for surprise appearance at white nationalist rally,” https://newschannel9.com/news/connect-to-congress/rep-marjorie-taylor-greene-criticized-for-surprise-appearance-at-white-nationalist-rally-gop-nick-fuentes-cpac-afpac-republican, and “Rep. Paul Gosar speaks at white nationalist event in Florida, skips in-person D.C. votes,” https://www.azcentral.com/story/news/politics/arizona/2021/02/27/rep-paul-gosar-arizona-skips-relief-bill-votes-talks-far-right-afpac-conference/6846801002/.
I am reminded of the 1939 rally in Madison Square Garden when the American Nazi Party assembled, with a huge a image of George Washington, flanked by America’s flag and swastika insignias, as the backdrop. (See “When Nazis Took Manhattan,” https://www.npr.org/sections/codeswitch/2019/02/20/695941323/when-nazis-took-manhattan.) That was in February of the same year that Hitler invaded Poland and triggered World War 2. Please note that these two Members of Congress face opposition from within their own political party as well as from the opposing political party. Their fate will be determined by the voters in their respective congressional districts. We wish those voters discernment.
These are extraordinary times with a complex trifecta. And we must add food inflation, supply chain disruptions, the Fed’s policy shift, massive displacement of refugees, and the ongoing climate change developments. Note that the Atlanta Fed GDP Now forecast is down to zero. And remember that before Covid, a penny a gallon was about a $1.8 billion annual tax on Americans. See: https://www.enotrans.org/article/how-much-money-would-a-gas-tax-increase-raise/.
It appears that the United States may be growing its resolve. We hope so.
David R. Kotok
Chairman & Chief Investment Officer
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
