Although Russia’s move to annex Crimea has the potential to dramatically alter the economic and political landscape of Europe, we’d initially assumed it would elicit only a fleeting yawn from Wall Street. After all, U.S. investors have proven time and again over the last five years that the only news they even remotely care about is whatever drivel happens to be emerging from the pie hole of the Federal Reserve chairman. Now we’re not so sure. Recently, investors seem to have grown schizophrenic. Recall that exactly two weeks ago, the Dow rallied 250 points to begin a new week even though there was no news to suggest Putin would back down. The blue chip index held onto most of that gain until last Thursday, when it dove 300 points. Little had changed in the intervening weeks. Europe and the U.S. were still at a verbal impasse with Putin, who showed no sign of budging, and Crimea itself seemed eager to accede.
Stocks Could Struggle
Now, with Crimea’s vote over the weekend to join Russia, will the U.S. stock market keep its cool? We’d bet against it, even though our technical forecast implies that a 1500-point rally in the Dow Industrials will unfold within the year. It’s too early to throw in the towel on that prediction, especially since last week’s slide barely dented the bullishness of the Dow’s long-term chart. But in the weeks and perhaps even months ahead, we wouldn’t be surprised if U.S. investors show uncharacteristic concern about events in Europe, especially if “Crimea fever” begins to spread to the Balkans and elsewhere . Meanwhile, although probably not one hedge fund manager in ten could locate Ukraine on a map, they’re going to be hearing quite a bit more about the region than they’d care to for the foreseeable future.
A Botched Response?
Nor will it be freedom, capitalism, human dignity, democracy and such that they’ll be worried about; rather, it will be the risk of a botched response by the U.S. and Europe that could provoke Putin to use economic weapons of his own. Not that he’s capable of undermining the dollar all by himself, as he has threatened to do in the past. But he has allies of his own, and they are undoubtedly eager to break the greenback’s monopoly status as a global reserve currency. This may be wishful thinking on their part in a world where the dollar is the only currency liquid enough to lubricate global commerce and a quadrillion-dollar financial shell game. But even mere threats by Putin against the financial status quo could rattle the world’s bourses, especially since their spectacular rise since 2009 has been achieved with flimsy financial tricks and fatally misplaced confidence. [Late note: It is midnight Sunday, and the S&P index futures were trading within a point of unchanged after having been down the equivalent of nearly 100 Dow points.]
Hi Chuck and all, I hear you about the house of cards, but offer a friendly reminder that said house of cards extends far beyond U.S. shores; 50% + of S&P500 earning are global, not domestic, and globally, overall, GDP is expanding, mostly out of Asia led by China….so the house of cards may go on for decades longer.
Another friendly reminder that Asia’s rise led by China’s rise and adoption of capitalism began only ten years ago from a base at a much larger scale than previous such expansions, namely the U.S. and Europe. Such expansions last into that 40-60 year cycle mark. I mean to clarify that the U.S. expansion began at GDP $2 trillion with a workforce of 20 million with a current workforce of 120 million at GDP $16 T. China on the other hand BEGAN its expansion at around GDP $7 T and today has 390 million in its still expanding domestic workforce. Much bigger scale.
Said points well leads to V’s point that China will indeed get cozy with other countries including Russia and make big plays to the chagrin of U.S. interests. China doesn’t feel warm and fuzzy nor beholden to declining U.S leverage, power and respect in the global economy.
As such, I fully agree with the assessment of many global institutions that world GDP will hit $200 T in the next 30-40 years, with China garnering a 40% of that total and the U.S less than 20% of that total. I would suggest, though we are all proven to be insanely bad at predicting what the future will look like in 20 years, that’s a plausible model of economic and societal developments in the coming decades. Always with the caveat that the U.S. /EU / China economic block does not experience some type of financial armageddon event.
Cheers, Mario