End of an Era – All Things Are Changing

Here in the UK we are mourning the death of the seeming constant in our lives, that of Queen Elizabeth II who has been our monarch for 70 years. While the position is largely symbolic these days in terms of executive power, her wise and non-confrontational counsel has frequently served to defuse countless international tensions and she earned the respect and admiration of politicians of all hues all around the world.  Her state funeral on September 19th will truly recognize the place she has in the hearts of world leaders everywhere in terms of their attendance.  Warm tributes have been flowing in from all around the world including from President Biden and former Presidents Trump, Obama, Bush and Clinton.  She was the UK head of state through 14 US Presidencies.

But as this Elizabethan era has drawn to a close, the world has been seeing many changes too, not least in terms of the rise of China as a third superpower, and Russia flexing its muscles again with its Ukraine invasion and the international destabilization, both economic and political this has caused. President Putin may not be doing as well militarily as he had initially believed he would but economically he may well be winning some aspects of the war. The US-precipitated sanctions on Russia are backfiring horribly on the U.S.’s allies in Europe which had become far too reliant on Russian energy supplies for their domestic and industrial economies. Putin has been able to use the control of this supply to his huge political and economic advantage while the massive rise in global energy prices as a result has meant that Russia has been able to largely maintain its revenues even on diminished sales.

The U.S. itself is largely self sufficient in the two most affected sectors from sanctions and the Ukraine war - energy and agriculture – but is not immune from global price trends, hence the inflation it is currently suffering.  But its European allies are being affected to a far greater extent.  Their politicians may mostly be remaining onside, but can this last through the winter with the general population throughout Europe, much of which suffers harsh winter weather, facing massive energy bills it cannot afford without descending into abject poverty and economic collapse. Even in the UK, which sees milder winters than most and is not reliant on Russia for energy, we are facing enormous fuel cost increases which could bring the whole economy to its knees.  Putin may not be winning the military war, but he does seem to be making huge comparative economic victories!

True, the Russian people are suffering economically too, but the state-controlled media there paints a totally different picture which is generally believed by the Russian people.  Dissenters are ruthlessly suppressed and the populace is far more attuned to deprivation than that of the West anyway.  This tends to be a win-win for Putin, who seems to be as strongly in control and as popular with the Russian people as ever.  If Donald Trump made inroads in the US with his Make America Great Again (MAGA) slogan, how much more so has Vladimir Putin been with whatever the Russian equivalent may have been.

Let’s also take a look at media coverage of the Ukraine war. Truth is always one of the first casualties of a war and certainly most of the media commentary coming out of Russia has been decidedly suspect in its believability.  But how about that coming out of Ukraine which is usually given far more credence in the West.  Certainly some of this could well be just as biased as that from Russia, notably reports of Russian low morale, desertions and atrocities, although the stronger presence of Western media on the ground in Ukraine probably keeps some of the latter a little more credible.  Even so this coverage may well present a more optimistic picture of the progress of events, from the Western point of view, than may actually be justified in fact.  After all Russia does appear to have gained a fair bit of Ukrainian territory and although Ukraine may be making some inroads in regaining some lost ground Russia is still in control of around 20% of the country.

But what does all this mean for the markets?  The Ukraine conflict does not show any signs of diminishing. President Putin seems to be forthright in his desire to continue, and possibly expand, the conflict while President Zelenskyy has avowed to recapture all the lost and annexed Ukrainian territory including Crimea. If these promises are followed through this could be a very long drawn out conflict indeed. 

The threat of prolongation and further escalation is likely to continue to destabilize the global economy and high inflation is likely to persist as a result with Russia continuing to exert a stranglehold on European energy supplies.  Europe may gradually be able to reduce its dependence on Russian oil and gas, but in the meantime, economies will suffer, recession will reign and industry, and associated equities, will continue to contract.  

Continuing political nervousness and uncertainty should be positive for assets like gold, which have stood the test of time in this respect. Silver will probably benefit too, even if only by its continuing relationship with its yellow sibling.  

So in my opinion the next few years will see a continuing weakness in risk-on assets like equities and bitcoin which could be severe over time and some strength in gold and silver. The dollar could continue to strengthen against most European currencies, but may fall against others not so affected by the economic downturn brought on by energy issues. A difficult few years for most of us may thus lie ahead but in the end we could come out battered, but perhaps stronger for it, although in a somewhat different world politically.  Maybe wishful thinking but that is what history tells us.