Tags: Bear | Ukraine | Russia | Putin

The Bear Is Already in the House in Ukraine

Tuesday, 19 August 2014 09:52 AM Current | Bio | Archive

These are certainly stressful times for long-term investors, who face pressures for making decisions on how to invest in what and where now or if they should wait for "better" times, where sound fundamentals will once again play their historical role in all these different parameters that should be taken into account when long-term investments are done. No, this is not about trading!

Of course, everyone has to decide the level of risk they are willing to bear under a worst-case scenario, which is, unfortunately, a part of life and occurs periodically. No, good times never last forever.

Never forget that most people would be really very well off if, during their active lifetime, they would be able to do two to three durable/sustainable profitable investments. Believe me, that's easier said than done, and it surely can't be achieved when the herd mentality puts aside the parameters' complex that analyzes the investments.

Keep in mind that all that goes up must come down in some way or another . . . and I don't think this time will be different.

On Monday, the JOC Group, which is a provider of global intelligence for trade, transportation and logistics professionals that publishes the Port Import/Export Reporting Service, made the following statement that should make, at least in my opinion, any long-term investor reasonably cautious before engaging in any form of long-term investing: "Multiple container lines have planned general rate increases in numerous trade lanes in August, although any gains achieved could be fleeting as overcapacity and sluggish global demand continue."

Yes, global growth is not performing as well as what was expected a few months ago by institutions like the International Monetary Fund and others alike.

In context of the JOC Group's statement, but then literally coming from "down-under," the minutes of the Reserve Bank of Australia's Aug. 5 policy meeting says among other things: "Members noted that there was inevitably a significant degree of uncertainty about the outlook, given the number of forces working in different directions. . . . Overall, GDP growth was likely to have slowed to a more moderate pace in the June quarter and was expected to be below trend over 2014/15, before picking up thereafter."

Coming from a completely different corner, and therefore certainly not headline news at least yet, on Monday the Icelandic Meteorological Office raised the "aviation alert" level for one of the island's largest volcanoes, the Baroarbunga, to "orange" after seeing signs of intensified magma movement shallower than 10 km. This implies increased potential of a volcanic eruption after the region measured its strongest earthquake since 1996.

While there are no signs of eruption so far, it cannot be excluded and we could be at risk of an explosive subglacial eruption, leading to an outburst flood and ash emission. Air cargo shippers and millions of travelers will certainly remember the havoc and financial losses they faced when in April 2010 Iceland's Eyjafjallajokull volcano erupted. This eruption caused an estimated total loss of approximately $5 billion through May 24, 2010. Let's hope it doesn't happen again because that's certainly the last thing the European Union needs right now, as an event like that could push the eurozone back into recession. No wonder shippers and passenger carriers flying in the northern European area are closely watching this Iceland volcano.

Yes, realistically spoken, there is certainly no lack of known, as well as unknown, risks that could blow up in our face at any moment.

That said, I must admit I have difficulty understanding how the vast majority of investors still negate the risks of the Russia/Ukraine situation and remain optimistic about a "peaceful" solution of the crisis.

Last week, President Putin, speaking in Yalta, Crimea, the peninsula that Russia just annexed in March, said that Russia "will do everything that depends on us to make sure that the [Ukraine] conflict ends as soon as possible." However, he did not explain how Russia intended to help, and many investors saw his statements as a hopeful dovish sign on his part.

What many overlooked was what Putin explained in that same speech about his thoughts concerning Russia's foreign policy doctrine: "All our partners in the world should understand that Russia, like any other large, powerful sovereign state, has various ways and means of ensuring its national interests, and these include armed forces. . . . This is not a panacea and we do not intend, like some people, to dash around the world with a razor blade and wave that blade around. But everyone should understand that we also have such things in our arsenal."

In my opinion, long-term investors would do well to remember these statements about how Putin sees the Russian foreign policy doctrine because of the very simple reason that it could explain the rationale of Russia's engagement in a further escalation of the Ukraine situation. If that would occur, believe me, the result wouldn't be nice to the markets in most places on the globe.

The Russian news agency RIA Novosti reported that Russia is developing measures if the West's policies stay "destructive." Yes, the tit-for-tat sanctions game is gathering amplitude, which is certainly not a sign of de-escalation of the tensions.

We all know it's practically impossible to predict what will happen in the future, but we can at least look at previous events that were in some way or another similar to what we face today.

So, when on Christmas Eve 1979, Russia invaded Afghanistan, the dollar started a five-year rally against the then-European currencies.

For example, the German deutsche mark was 1.713 per dollar on the first trading day of 1980 and 3.173 on the first trading day of 1985, which represented a rise of 85 percent in the value of the dollar during that time span.

Also gold started a 22-year downtrend in 1980, where we saw prices (on a yearly basis) move down from $594 per ounce in 1980 to $342 per ounce in 2002, or a decline of 42 percent during that period.

The West Texas Intermediate crude oil price also moved down from $32.50 per barrel on Jan. 1, 1980, to $26.64 per barrel on Jan. 1, 1985, before finally collapsing to $13.80 per barrel in October 1988.

But not everything went down. The Dow Jones Industrial Average stood on Jan. 2, 1980, at 824.57 and was 1198.87 on Jan. 2, 1985, a gain of 45 percent during that period.

Of course, this time could be different and history doesn't necessarily repeat itself.

However, I always try to learn from history and try not to err because of wishful thinking. Therefore, it would be helpful to take notice of what were "good" safe havens in those times. Yes, in the foreseeable future, and certainly if things should go wrong in the Ukrainian/Russian situation, it will be for all investors a challenge to not loose what they have. Again, let's hope it doesn't come to that, but it's dangerous enough to be prepared just in case.

While I still hope the situation in Ukraine has a peaceful solution, I have serious doubts and I don't expect Putin to change his view of how he sees Russian expansionism, as I wrote a month ago (see "Red Alert: Putin Hasn't Changed His Colors Despite Russian Sanctions").

Finally, President Obama said about the Iraq situation on Monday, "The wolf's at the door." Regarding the Ukraine situation, he could say, "Sorry, it's too late, the bear is already in the house."

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President Obama said about the Iraq situation on Monday, "The wolf's at the door." Regarding the Ukraine situation, he could say, "Sorry, it's too late, the bear is already in the house."
Bear, Ukraine, Russia, Putin
Tuesday, 19 August 2014 09:52 AM
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