Ukraine unlikely to upset markets
EXPLOSIVE EVENTS brought about by East-West rivalries have been scarcely noticed by the world’s financial system
Is the world about to experience another Black Swan, a seemingly improbable or unpredictable turn of events with deeply negative consequences for financial markets and the economy?
Developments in Kyiv certainly have the potential to turn into such a catastrophe, for they are not just about Ukraine. Just as the Syrian civil war reflects a wider regional struggle between Iran and Saudi Arabia for political and religious supremacy, Ukraine finds itself the luckless victim of much bigger forces than its own internal divisions — centuriesold East-West rivalries and ambitions.
At this stage, wester n markets are fairly sanguine about the long-term impact of Ukraine’s civil conflict.
Ukraine is a relatively small economy that remains profoundly more integrated with Russia than Europe. If it were to vanish from the face of the Earth tomorrow, there would undoubtedly be consequences for Russia, but the direct effect on western economies would be marginal to non-existent.
Yet it is in the nature of Black Swans that they spring from the seemingly insignificant. Europe’s attempts to woo Ukraine have combined with the defensiveness of Vladimir Putin’s Russia to give the situation a potentially highly explosive dynamic. We don’t know how Putin is going to react.
Despite the warm glow of a relatively successful Winter Olympics, it’s unlikely to be kindly. First Ukraine, next Russia; Ukraine is only a mirror image of Russia’s own corrupt form of semitotalitarian, gangster capitalism. If Russia’s sphere of influence is not defended in Ukraine, it can only be a matter of time before the wolves will be at Putin’s own door.
It seems unlikely that Ukraine will turn out, as more alarmist pundits pre- dict, to be the giant powder keg that blows up the world economy anew. Most events that seem at the time to be transformational turn out to have little or no long-term impact on the wider international economy or even established political consensus.
This tends to be the case even when they hit at the heart of the world’s biggest economy, the United States. Both the Cuban missile crisis and the assassination of John F. Kennedy, forever seared on the memories of those who lived through them, were in the event mere ripples across the sands of time. Things soon got back to “normal.”
This is even more the case for events outside the U.S. For all the hoopla surrounding the Arab Spring and its eventual descent into renewed Middle Eastern chaos, it has had zero effect on western financial markets.
The tyranny of today’s 24-hour news agenda tends further to exaggerate the significance of events that, in truth, are not as important for the world as they might seem.
The big recent exception to this generalization is 9/11, which, via an exaggerated monetary and geo-political response from the world’s leading superpower, led directly to the credit crunch. Even in his wildest dreams, Osama bin Laden could not have imagined the damage his atrocities would inflict on western economies.
It’s not so surprising, therefore, that we should see in each flare-up the potential for mass conflict and economic destruction. News channels give the impression of a world pregnant with instability and disaster, awash with conflict, abuse, bloodshed and terrible happenings.
In fact, the reverse is true. Proportionate to the size of its population, the world has never been a more stable, less violent, less war-afflicted and less economically volatile place. Despite the worst banking crisis in history, somehow or other, we are still mainly standing. Progress in technology, trade and globalization has made us safer.
As for threats to financial markets, you are much more likely to find them in familiar places, such as stretched valuations, Federal Reserve tapering and the ongoing Chinese credit squeeze, than on the Ukrainian steppe.
There will be another big sell-off in western stock markets at some stage over the next year or two, but it won’t be caused by Ukraine’s attempted divorce from Russia. No, the forces that determine it will be much closer to home. Top-line growth is becoming ever harder to find at a time when corporate profits are at a near-record share of GDP but wages a near-record low.
Equities look cheap only against bonds, which have been inflated to ridiculous levels by abundant central bank money printing. The long march back to more “normal” monetary conditions poses a far bigger threat to the stability of financial markets than developments in Kyiv.
For events that truly poleaxe markets, you have to look to Black Swans in major economies — to the near collapse of the U.S. banking system, the virtual implosion of Europe’s ridiculous experiment in monetary union and so on. Such events are not sparked by conflicts in faraway places but are nearly always self-inflicted.