Few expected Ukraine to put up such a fierce fight, least of all Vladimir Putin. Despite his overwhelming advantage of firepower and troops, he and the rest of the world might have known better, given the reputation Russian soldiers of all stripes earned in battle during the last century. Setting ethnic Russians against one another was bound to produce a bloody battle rather than an overnight victory such as Bush achieved shelling Baghdad. As a result, Putin has had to pull out all the stops with a veiled nuclear threat in order to show the world that he has the power to decide the war’s outcome if and when chooses.

However badly he wants to re-unite the republics under the flag of Mother Russia, fulfilling what he regards as the destiny of a once glorious and powerful USSR, Putin could never have been eager to have Russians spill each other’s blood in his quest to rewrite history. It has cost him a reported 4,300 troops already, with corresponding losses on the other side, significant physical damage to Ukraine’s physical infrastructure, and an enormous refugee crisis for the country’s civilian population.

Nukes? Yeah, Sure…

Putin reportedly has put nuclear forces on standby, but the possibility he will use them seems remote. Supposedly, the Russian leader is already considering talks with Ukrainian President Zelensky, even though casualties so far are just a small fraction of what they’d be if a nuclear device were to be used. Putin had seemed astute enough in the past to avoid making idle threats, especially grandiose ones, but in this instance he has shown himself to be no better at wielding a big stick than Biden.

In these weekly commentaries, I usually attempt to predict how U.S. markets will react to the significant geopolitical events of the day. Since no one other than perhaps Fox commentator Victor Davis Hansen is capable of hazarding a respectable guess about what the invasion will bring in its wake, we might expect U.S. stocks to open with somewhat more confusion than usual this evening. How will a CNN junkie, with a presumptive average IQ of 86, trade the news? That is the question you must answer if you want to get the jump on index futures as they start the new week. My guess is that shares will open at least moderately lower and grope their way to the usual, criminally rigged bottom sometime in the early dawn on Monday. The invasion of Ukraine is just a top-of-the-card UFC fight as far as the blithering morons who mainstream the news to a world equally clueless about how to react to it are concerned. My market advice is to take the odds and buy stocks on weakness.

Prepare for Deflation 

______ UPDATE (Feb 28, 1:29 a.m. EST):  ​I spent the evening with a woman whose well-informed take on current events has caused me to reconsider my remarks earlier this evening concerning the effects of Ukraine on the markets. From a geopolitical perspective, it would seem that the cause of peace can only benefit if the world succeeds in getting the schoolyard bully to back down.  That’s assuming Putin hasn’t flipped his lid, as many seem to think, and goes for broke with more annexations in Eastern Europe. But a quite plausible alternative scenario suggests that Putin’s defeat would provide only a brief respite from events that could lead to global economic depression and a world war fought over oil.

The price of crude is up 6% tonight at $97 a barrel, underscoring the credibility of this threat. It has reminded us that however plentiful underground sources of crude oil and natural gas, disruptions in the distribution network could cause both to become scarce overnight.  On top of scarcity, a steeply rising dollar will make energy even more expensive for every country other than the U.S.  There is also a strong possibility that Russia, whose economy is based largely on energy resources, is headed into bankruptcy.

Choking off Demand   

 All of these factors are massively deflationary, and anyone who suggests otherwise — i.e., that rising oil prices and more supply chain shortages will cause inflation to steepen — is not thinking clearly. Although it’s true that higher oil prices will raise the cost of nearly everything, this will eventually choke off demand, bringing on deepest recession (a.k.a. Depression). That would cause financial assets that are hyperleveraged to energy resources to implode, deflating a $2 quadrillion derivatives edifice as well as paper assets that lie outside this market.

A given at this point is that U.S. stocks are in the early stages of what stands to be the worst bear market in history. That, too, would be powerfully deflationary, as would the collapse of home prices that have risen to absurd levels in the last year.  Most deflationary of all, however, is the strengthening dollar, which is raising the real burden of debt for virtually everyone who owes them, including Uncle Sam.  This is one more reason why I continue to hold fast to my prediction that the next move by the Fed will be to ease, rather than tighten.

Concerning my advice to buy stocks on weakness, I hereby recant it. The thieves who make their living manipulating stocks in the wee hours might succeed at exhausting sellers sufficiently to propagate a short squeeze on Monday, as suggested above. But the much larger force will be a bear market that began with the record high achieved on the first trading day of this year. The deflationary noose is about to tighten just as most pundits are ratcheting up their expectations for sharply higher prices for food, automobiles, energy and much else that we consume. With wages lagging badly and asset valuations about to deflate across-the-board, where will the money come from to feed the inflation that virtually every economist has been warning us is coming?