The Ukrainian Tipping Point
Feb 24, 2022
One of the nice things about these articles is we don’t always agree. On this week’s Truth or Skepticism, Dylan argued the market, as evidenced by the level of volatility futures, is not overly concerned about the geopolitical situation with Russia. On the other hand, Josh sees a greater threat emerging.
Josh: I don’t think this is just about Ukraine. Putin isn’t an idiot. He’s explicitly stated the collapse of the USSR was the greatest mistake in history. He would not be making a move like this without tacit approval, or at least no objection, from China.
China isn’t imposing sanctions on Russia and they won’t. In fact, I think China is likely to move on Taiwan at the same time Russia is on the march in Eastern Europe. This is an attempt to divide the global economy into three main spheres of influence amongst China, Russia and the U.S, with a weakened Europe playing a smaller role. It will weaken U.S. power globally, a stated objective of both Russia and China.
Dylan: Objectively looking at the markets and volatility in particular, I just don’t see it. Volatility futures are not even half as high as they were at the onset of Covid. You’re talking about a massive disruption of the global economy. In fact, not just massive, but a sustained paradigm shift. If what you’re suggesting is correct, and I’m not saying you’re wrong, but if you are right, wouldn’t you expect VIX futures much higher?
Josh: The thing about Covid was, it was so fast and unlike anything we’ve seen. That’s why you saw the spike in volatility to such an extreme. Instead of saying vol hasn’t spiked to Covid levels, I would argue vol over-spiked at the onset of Covid and the subsequent rally we saw in the market attests to that.
I think the fundamental problem right now is everyone trying to dissect what Putin is thinking vis-a-vis Ukraine and missing the bigger picture. There are already reports of increased fighter jets flying over Taiwan. Both Russia and China are making a calculated gamble that we will not militarily defend both Eastern Europe and Taiwan. The American public is done with wars. And economically, a strong Russia and strong China put Europe in a precarious position. Europe is dependent on China for technology and, call it USSR 2.0, for energy. I’ll take the Russian/China team over Europe in an economic battle.
Dylan: Again though, as we’re talking it’s Thursday morning and Nasdaq futures just went positive. The Russel is about to do the same and the S&P is off just 1%. You’re an efficient market theorist, or at least I believe you are. The juxtaposition of that and what you’re suggesting with the geopolitical situation are completely at odds.
Josh: Hey, I could be wrong. I’m 48 and still have yet to crack the nut on walking so take my opinion for what it’s worth. But I’m looking at VIX futures and while the market has come back this morning, those are still up 7%. Either this rally we’re seeing doesn’t hold or I would expect vol futures to fall. And let me be clear, I hope I’m wrong. I just don’t think I am.
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