ARB - The Red Bear Rises
024 - Russia's territorial ambitions escalate dramatically, Omicron eases
MARKETS INTELLIGENCE
Hey guys apologies for delay - this is a combo of Thursday morning and Friday morning writing so excuse some of the lag. Global markets continue to see exasperated volatility due to easing Omicron concerns and an updated CPI number due tomorrow. The Biden admin has already warned us that this number won’t include recently lowered energy prices. UPDATE - Inflation at 6.8%, highest in 40 years.
The annual inflation rate for the United States is 6.8% for the 12 months ended November 2021 — the highest since June 1982 and after rising 6.2% previously, according to U.S. Labor Department data published December 10.
Evergrande, the Chinese real estate giant who has been teetering on the edge of severe bankruptcy for months, defaulted on debts today.
The firm has over $300B in obligations.Sam Bankman-Fried, CEO and founder of FTX exchange testified this week in front of the House Financial Services Committee.
The headline CPI reading is expected to rise even further on Friday with traders, bankers, and economists expecting a nearly 6.8% y/y rise in headline CPI (0.7% m/m). Could be crippling.
The Senate has approved a resolution to nullify the Biden administration’s requirement that businesses mandate the Covid 19 Vaccine
Twitter suspended @NancytTracker, a popular account that tracked Speaker of the House Nancy Pelosi's stock trades and the @TrackerTrial, an account that was posting updates on the Ghislaine Maxwell trial yesterday. *apparently one account has been reinstated.
GLOBAL INTELLIGENCE
Fear and PTSD from the 1980’s has been reborn throughout Western Europe and Central Asia as Russia has continued to bolster a substantial buildup of troops and armor along the border of Ukraine in the past several months. It appears Russian President Vladimir Putin is contemplating similar action that we saw in 2014, when Russian forces boldly and swiftly annexed the Crimean peninsula. In the last two years Russia has provided support, special forces consulting, and arms to the separatist, pro-Russian insurgency around the Donbas region of eastern Ukraine. This situation appears to be the real deal, with Biden’s objectively weak approach to China and Russia adding fuel to the fire, creating a very dangerous situation.
Some quick background - while my professional experience is primarily in Sales, Trading, and Fin-Tech functions, my separate interests have always been centered around history and geopolitical conflict, I consider myself an avid war history buff, studying these topics extensively in undergrad, majoring in Global Affairs and reading about war history/conflict voraciously in the free time I have in my day to day life. I also come from a military family, which I think lends itself to learning at a young age who we currently compete with on the world stage for power, dominance, and influence. This is a summary of readily available info on the conflict which I have aimed to package into a concise update. With that, let’s hop into a concise overview of the situation.
Notably in the last decade, we have seen a joint spurt of regional aggression by not only China: in the Pacific, Africa, and South America, but also from our friends the good ole Reds from Russia: in formerly USSR territories and in key ports and central Asian choke points. The threat of having to soon deal with Russian territorial aggression in Europe AND a China Taiwan conflict at the same time is growing and our enemies know this duo would be very difficult to counter effectively. It is becoming alarmingly apparent that Putin in particular, smells blood in this current administration.
This week as tensions seem to be edging towards a crescendo, President Biden and Vladimir Putin engaged in a high stakes video conference together. Biden warned Putin that the U.S. is prepared to impose "severe consequences," including stifling economic sanctions, if Russia were to violate Ukraine’s sovereignty and territorial integrity. Do you think that’s enough to stop Putin’s territorial ambitions? I don’t. Biden also met with local NATO forces to urge participating countries that unity is essential in the face of continued Russian aggression.
While it receives little to no coverage in Western media, this conflict has been far from cold with clashes happening almost daily between Ukraine defense forces and Pro Russian Separatist forces within Ukraine itself.
Updates in Eastern Ukraine as of yesterday December 9th:
1) Russian hybrid forces launched 6 attacks in the war zone in eastern Ukraine during the day of December 9, 2021. The enemy used of the following weaponry:
forbidden 120-mm mortar launchers – near Svitlodarsk
easel anti-tank grenade launchers – near Svitlodarsk (2 times), Luhanske,
automatic easel grenade launchers – near Svitlodarsk (2 times), Luhanske,
high caliber machine guns – near New York, Novooleksandrivka (2 times),
grenade launchers of different systems – near New York, Novooleksandrivka (2 times),
small arms – near New York, Novooleksandrivka (2 times), Svitlodarsk (2 times),
(2) No lethal casualties as well as no wounded in actions reported among Ukrainian servicemen for the last 24 hours (EMPR Media.com)
This excerpt from Military.com gives a valuable lense to the unique nature of strategy employed by the Russian Federation since the end of the Cold War:
Since the problems that Russia creates for the West are much more significant than those that the West creates for Russia, we do not have to accuse Moscow of lack of logic and excessively risky behavior. The risks of negative undesirable consequences for Russia are extremely low and are well calculated by its leadership. A clear example of this approach is the beginning of U.S. cooperation with Russia to combat cyber threats, although it is clear that cyberattacks against the U.S. from Russia were not only known in advance to Russian intelligence, but also conducted by hacker groups directly subordinate to them.
A similar model applies to possible military escalation. The logic of this behavior is fully consistent with the methodology of the Chief of the General Staff of the Armed Forces of the Russian Federation General Valery Gerasimov with his use of the military threat to achieve non-military goals, and previous Russian and Soviet practices of strategic influence on the enemy, also based on military, especially nuclear threats. Such a universal approach to creating threats to further eliminate them in exchange for concessions from the object of influence is called “escalation for de-escalation” and the resumption of its active use after the Cold War is personally associated with Vladimir Putin (Military.com).
In short - Putin knows there is little the West and Europe will and can do, if he chooses to become aggressive and begin a full scale attack on the Ukraine. That poses a major issue for us and our allies.
US Intelligence has indicated that there may be signs of a full scale invasion of Ukraine in the next several months, if not right at the beginning the of 2022. Satellite images show massive buildups of heavy military equipment, troops, and artillery along the East border. Vladimir Putin’s recent moves are rattling Kyiv and the Ukrainian defense forces who have been begging the U.S. for greater military assistance and support. If I had to take an educated guess US Special Forces are likely present in the Ukraine right now, helping to arm and prepare Ukrainian Defense Forces. Brig. Gen. Kyrylo Budanov, head of Ukraine’s defense intelligence, previously told Military Times that Russia is preparing for an invasion by late January or early February (Military.com).
Run ins with Russian Military Forces have escalated outside the Ukraine in regional hotspots as well, including the Mediterranean and Baltic regions. On Thursday two French warplanes as well as a refueling’ aircraft were tracked down by two Russian fighter jets in international air space over the Black Sea, the French army said. This is literally a scene straight out of Top Gun, same fighters too. This is the second time this has happened in recent weeks and as developments unravel in the coming months, it’s likely to not be the last. Antony Blinken, the US secretary of state, had made it clear that America is concerned about the possibility of war (Financial Times).
UKRAINE CONFLICT FINANCIAL PLAYS
While it is difficult to say when a full blown conflict could break out out in the Ukraine with Russia, here are some broad plays that could be easy calls in the event the conflict becomes more serious:
LDOS (Leidos Holdings) - is an American defense, aviation, information technology, and biomedical research company headquartered in Reston, Virginia, that provides scientific, engineering, systems integration, and technical services.
CACI (CACI International) - CACI provides services to many branches of the US federal government including defense, homeland security, intelligence, and healthcare.
iShares U.S. Aerospace & Defense ETF (ITA) - This ETF gives exposure to a number of high profile defense names. he fund's top two holdings in a basket of 35 stocks – The Boeing Company (BA) and United Technologies Corporation (UTX) – carry a cumulative weighting of nearly 40% (Investopedia).
Worth mentioning that initially Biden is considering financial and economic sanctions against Russia should they show blatant aggression. Chief among these options is limiting U investor access to Russian Debt Secondary markets. I’m no expert on this area, if someone is feel free to share some thoughts in the comment.
Have a good weekend.
-Andy