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Ukraine!

David R. Kotok
Thu Feb 24, 2022

“What people say, what people do, and what they say they do are entirely different things.”  – Margaret Mead

 
Ukraine!  
 
Our US Equity ETF portfolio is overweight the aerospace/defense sector. We have continued to emphasize the overweight for some time. We see no reason to change it. We see every reason to continue it. 
 
Europe and the old “Warsaw Pact” lines are one of the reasons. South China Sea and China-Taiwan are another. We do not expect any of the pressures on the US defense budget to prevail. We do expect the defense appropriations to be enlarged in 2023 and beyond. Footage of tanks makes for TV drama. Drones and cyberwarfare are the substance, and the American companies have an expanding role in protecting the Western alliance. We expect the overweight position to remain in place for some time.

 

Cumberland Advisors Market Commentary - Ukraine! by David R. Kotok


Putin doesn’t care about the economic impact on Russia. His citizens care but have little say in the matter. Former Australian Prime Minster Kevin Rudd used a term in a Zoom call that I was able to participate in. He identified both Putin and Xi as leaders who are seeing themselves as “men of destiny.” He explained how men of destiny become interested in geography. We agree, and that is why we are overweight the defense sector. From the time of the wars between Persia and Greece until today, 2500 years later, history has shown that leaders with power ultimately focus on geography.
 
Paul Schulte of his eponymous firm wrote:
 

He thinks himself absolute tsar of all the Russians. He has no one around him to counter his thinking. He is brilliant to take Crimea and then take Donbas and Luhansk. He is chiseling away. Wrecks Ukraine’s sovereign argument. And he can encroach slowly on these borders. The port of Mariupol is next. Ukraine would be smart to erect a 20-foot wall and make an east Berlin / West Berlin situation. These two provinces are so tiny that Biden would never be able to make a casus belli — you can barely see them on a map. Plus, Russia’s own Duma created them as sovereign states. It’s Orwellian language, but Putin is being the “peacemaker” here. And Ukraine is thrown off kilter and confused, making it vulnerable for further encroachment.

 

Ukraine! by David R. Kotok - Map of Ukraine.png

 
Fred Feldkamp sent the credit spread impacts:
 

This makes it appear (at least for now) that Putin decided to bankrupt Russian investors in an effort to increase his personal extortion plans.  10-yr rate up to 10.77% up from 9.4% a month ago (http://www.worldgovernmentbonds.com/country/russia/). 2-mo 11%, 30-yr. 10.62% (inverted from 2-mo to 30-yrs) (https://finance.yahoo.com/news/rouble-sinks-past-78-vs-121852090.html).

 
Paul Schulte added this sobering analysis:
 

A backup in yields? A slightly inverted curve? Who the hell cares. This is nothing when compared to the control of Ukraine. Falling stock market? Putin does not give a crap. 
 
MINING:
Ukraine is in the top 3 positions in Europe in the mining of  Uranium, Titanium, Manganese (12% of global reserves), Iron Ore, Mercury Ore, and Shale gas reserves.

Additionally, they they rank as the 7th largest in coal reserves.
 
AGRICULTURE:
In agricultural products, Ukraine globally is: 
 
2nd largest in barley
3rd largest in black soil 
4th in potatoes 
5th in rye 
5th in bees 
8th in wheat 
9th in chicken eggs 
16th in cheese 
 
Ukraine can feed a 10th of the earth’s population. 
 
INDUSTRY: 
In industrial capacity, Ukraine is globally:  
 
3rd largest exporter of iron
4th largest exporter of nuke turbines 
4th largest in gas production: 143 BN CU ME 
4th largest producer of rocket launchers 
4th largest exporter of clay 
4th largest exporter of titanium 
8th largest exporter of ores 
9th largest exporter of defense products 
10th largest producer of steel 
 
It is a great and terrible tragedy that Ukraine is not a great nation with a kick-ass army. Buffer states can never be great because [of] competing interests from powerful border hegemons in whose interest it is to create instability. Ukraine, Poland, Afghanistan, Mexico, etc. (I would also add to this list Cuba, Philippines, DRC, and Panama. The promotion of endemic corruption by the hegemon keeps these countries perpetual underperformers.
 

We thank Paul and Fred for permission to share their comments with our readers. 
 
As we said at the beginning of this quick missive, we remain strategically overweight in the aerospace-defense sector within our US Equity ETF portfolio.

David R. Kotok
Chairman & Chief Investment Officer
Email | Bio


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