Russia Invades Ukraine

SPECIAL REPORT

Today another chapter in the world history book begins.

If you woke up today and had your choice of reading the following headline, which one would you choose:

1) New Omicron variant found in Costa Rica proved to be more contagious and dangerous than the previous variant and cases are already seen in two states in the U.S.A.

2) Russia invades Ukraine

If you chose #2, you need to know more about history. And believe me, I am not an expert, I prefer to focus on making beauty products. But I am writing this special report because Vladimir Putin’s decision to invade Ukraine affects everything and everyone.

The World Is Connected Like Never Before

Why are there imports and exports? Why do we travel? Because every country in the world is unique and possesses its own natural resources. I go to Mexico in the winter because it is 80 and sunny while it is 20 and gray in Detroit. Speaking of Mexico, they grow avocados and most countries cannot. Same with poppies and why drugs are so prevalent. Every country has a specialty. Italy: Parmesan cheese, wine, olive oil; France: Bordeaux region; Africa: Diamonds; Middle East: Oil and so on. What does Russia have? Natural gas (and yes, plenty of vodka).

What doesn’t Europe have? Natural gas. Where does Europe buy its natural gas? Russia. Unlike crude oil that is shipped on freighters, natural gas must be sent via  tunnel. In fact, they were building a tunnel for this reason between Germany and Russia (Nord Stream 2) and now that is on hold. And it is winter. Which means more crude oil will be needed but supply has been constrained for many reasons (#1, #2 and #3 are all Biden related and why frackers in the U.S. will not expand production). Today crude oil exceeded $100 for the first time since 2014. What happened in 2014 you ask? Russia invaded Ukraine.

Inflation

Inflation is running at a 7.5% rate, highest since the Carter administration and already the FED is pondering how much to raise interest rates in March. Virtually every company has not only raised prices, but are raising them again. Mondelez which makes hundreds of brands like Oreos and Cadbury has already raised prices 6% and are doing another 6% shortly. Why? Commodities keep going up. Commodities are staples like wheat, flour, coffee, cocoa beans, soy beans, oil, metals (aluminum is approaching a record $3400 per ton). Putin’s decision today has sent nearly all commodities up 5% in one day.

What does that mean for inflation? You got that right.

Stock Markets

Most American’s are invested in stocks whether they own stocks, IRA, 401(k), pension, mutual fund, etc. The wealth effect since March 2020 has been incredible for the economy through 2021. However Biden’s spending has caused ripple effects that all American’s are feeling and one reason why there will be a massacre in the November elections. U-M does monthly consumer sentiment reports and January was among the worst.

Yesterday, stock markets entered correction phase (down more than 10% and the NASDAQ is down more than 20%). Today will be down another 3-4%. More importantly, the stock market prices stocks based on 6 months future economic activity so when the stock market goes down for an extended period of time, the future does not look good.

Trillions have been lost since the beginning of 2022. The wealth effect has evaporated. Now the FED has to deal with this and inflation. I would not want to be Jerome Powell. He has to make the most difficult decision next month: Raise interest rates to curb inflation OR keep them at zero to help stabilize the stock markets. He knows that his decision will decide whether our economy keeps on humming or sinks into a recession. With all the pain and suffering businesses have endured since March 2020, a recession would be a total disaster.

Vladimir Putin

I love reading about history. I prefer not be living it. Putin is not only a communist leader, he is a strategist. If you know anything about Russia’s history, then you can understand Putin’s decision to invade Ukraine. The Soviet Union used to be on the same level as the United States when it came to military power, space exploration, nuclear weapons and so much more. The Soviet Union collapsed in 1991. Putin took power in 2000. Since then, he has been waiting patiently for his opportunity to redeem Russia and make it a superpower like it used to be.

The question I ask myself is that if Trump was president, would Putin have invaded Ukraine? Biden is in the top percentile of weak presidents and virtually nothing he says gets done. That is another reason why China’s leader, Premier Xi Jinping, has not condemned Putin’s decision. In fact, they might be best buds. We saw Putin and Xi together at the Olympics’ opening ceremony.  Xi has his own ambitions too like taking over Taiwan and the South China Sea and has already constrained Hong Kong.

One thing Putin does not care about is retaliatory action by Biden and its allies. At least not today. Because all those sanctions are about economics. The ruble has collapsed in value. So what. Imports to Russia will be curtailed or stopped. So what. Bank accounts will be frozen. So what. Putin expects hardships for his people during war and his supporters will endure hardships for as long as it takes. Until there is a breaking point.

Putin claims he launched the invasion because of Russian federalists in Ukraine. Why he really went to war, only he knows. But one thing is for certain, he wants Eastern Ukraine because that is where the sea is and that is where the true power play comes in.

President Biden

I don’t have much to say about him except for this: What are you going to do Joe? Inflation will hit 10%, a gallon of gas will hit $4 and an apple will cost $2. What are you going to do Joe if sanctions don’t work? How long will the U.S. military stay on the sidelines? What are your allies going to do? Truth is, who would want to be in Joe’s position? Then again, he is the one that campaigned to be president and won. He must make the right choices.

Bottom Line

The entire world will feel the ramifications of this war. The Ukrainian people have endured so much. Since 2014 they have been on edge. Volodymyr Zelensky, Ukraine’s President and only 44 years old has done his best. He has tried to get Ukraine into NATO and included in the European Union, two more reasons why Putin made his decision. Zelensky is dependent on his allies which include the most powerful democratic nations in the world: The U.S., the U.K. and Europe. What are his allies going to do?

The next few weeks are critical. One thing is for certain, Xi is watching how this unfolds very carefully because he too, is a communist leader and a strategist. If he sees Biden being weak, he may take the opportunity to invoke war. This is why it is so important that this war is short. Putin wants respect and he will need to get it if the war will end quickly. Let’s not forget the Soviet Union was instrumental in ending World War II and one more reason why the world really is connected.