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Chris Temple “How Do We Factor in These Geopolitical Issues?”

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Chris Temple “How Do We Factor in These Geopolitical Issues?”

It’s bad enough when the markets have long since–as many of us view it–completely divorced themselves from the underlying economic reality. As I have mentioned a time or two, this is not exactly a new development; we can indeed go back two or three decades with the pattern developing of financial markets doing well (thanks to the Fed pumping them up) even as the lot of the average American does not improve.

 

 

To the added consternation of bears everywhere, it’s pretty obvious that the markets are likewise pretty much unmoved despite troubling developments in several places of the world.  

 

 

 

Craziest “Chickenhawk” yet?

On July 21st,  UBS’ Art Cashin quipped in a CNBC interview that even when the markets have moved into somewhat of a “risk off” mode for fleeting moments, it’s been more of a “stroll to safety” than a flight. Part of this obviously is because it clearly means more to traders that the Fed (as they see things) simply won’t allow them to lose large chunks of money. So they can chase yield, push some momentum stocks higher still, etc. with little fear of anything short of an asteroid hitting and obliterating the Earth.

 

 

To be sure, the markets have somewhat correctly discounted some of the latest flare ups as events unlikely to have much collateral impact on global growth and the like. By all appearances, the latest incursion of the Jewish army into Gaza threatens neither global growth nor even oil supplies.

 

 

Elsewhere in the world, China has been engaging in increasing saber rattling with Japan and other of its Asian neighbors. While some of these conflicts may indeed have some longer-term consequences, they do not seem to be anything for those investors among us on the other side of the world to worry about quite yet.

 

 

 

 

The evolving new “ColdWar” with Russia is already starting to have some effects, though, on both economic expectations and some asset classes. A big part of the reason is that neoconservatives and their fellow travelers (chiefly in the U.S.) seem to be spoiling for a bigger conflict to put that bad old Russian bear, Vlad Putin, back in his place. They don’t care if they trash what does exist of America’s energy advantage or anything else.

 

 

 

 

 

I wrote a few months ago about some of the dopier ideas to do battle with Russia using energy. But that insanity was outdone by CNBC’s Larry Kudlow today, when he proposed the equivalent of a monetary first strike against Russia. In short, he proposes that the U.S. take advantage of its dollar hegemony, and use the Exchange Stabilization Fund (E.S.F.) to massively sell Russian rubles against the U.S. dollar. The collapse of Russia’s currency would in turn, he insists, trash Russia’s “already weak” economy and bring Putin to his knees. A healthy corollary, Kudlow added, would be that the spike higher for the U.S. dollar would– among other things–bring crude oil prices back down to $75 or $80 per barrel and otherwise keep inflation pressures at bay.

 

 

 

 

 

First of all, this smug, ignorant “Chicken Hawk” (who actually believes his own nonsense!) seemingly doesn’t understand that MAJOR wars throughout history have been started over less than this.

 

 

Nor does he understand the current economics in the oil patch; at a $75-80 per barrel crude price, a fair amount of the latest shale boom would be rendered unprofitable on a cash basis, as it already is on a GAAP basis. Kudlow does not understand that he would be putting in grave peril the finances of any number of energy producers. Likewise, a spike in the dollar would cause traders worldwide to reverse carry trades that presently support all manner of risk-taking the world over; including all those overstretched bond markets I discussed earlier. Last but not least, it would not do American exporters a hell of a lot of good, either!

 

 

This kind of irresponsible, INSANE talk and the growing move for additional sanctions is already starting to wreak havoc in Europe. While U.S. markets and asset classes remain largely unmoved, folks across the pond are seeing firsthand the deteriorating sentiment and economic prospects for a continental economy with a lot more at stake economically with Russia than we have. Interest rates in Europe’s periphery have started to creep higher, and stock markets seem more inclined there to roll over than does ours. These worries have, even as I write this, at long last started to take some of the air out of the euro, when nothing else would.

 

 

 

 

 

Fortunately–and I am not exactly the biggest fan of Barack Obama–the president continues to resist some of these loonier ideas being thrown about by the likes of Kudlow and other neoconservatives. Nevertheless, he is no less as smug and self-righteous as they are. I am sure he–and, tragically, many Americans—does not see the hypocrisy in berating President Putin for not being able to control  people and events well inside the Ukrainian border while the president cannot (or will not) control America’s own southern border. Nor do most any of these folks care to admit that it was the U.S. and some in the European Union in the first place that destabilized Ukraine, as former Congressman and Presidential candidate Ron Paul reminds us in some new comments of his, which can be found at

http://finance.yahoo.com/news/ron-paul-defends-russia-malaysian-151731466.html?soc_src=mediacontentstory

 

 

By and large, one must craft a portfolio strategy based first on the underlying economic and market landscape. Generally speaking, as I will explain shortly in relation to gold’s price, these geopolitical influences will from time to time augment “stories” and underlying moves surrounding certain asset classes, but they do not “make” them. But having said that, the dispute with Russia over

 

 

Ukraine (and also over Russia’s role in moving the world away from the dollar standard?) increasingly appears to be having a sufficient impact on both energy prices and euro-denominated assets to compel us to take a closer look at capitalizing on some of this.

 

 

 

Posted August 15, 2014

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