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The Alarming Economic Aftermath Of Russia's Invasion - YouTube
Channel: Casgains Academy
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over the past few weeks investors have
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been concerned about a potential war
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breaking out between ukraine and russia
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now with tensions running high between
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the east and the west the global economy
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is in a tight situation this video will
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go over where the current u.s economy is
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positioned in this landscape what has
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and will continue to change and how us
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investors can position our portfolios
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for our performance
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[Music]
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russia's ukraine invasion has frightens
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people all over the world and will have
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devastating consequences the war is not
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just affecting ukraine and russia but
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the entire world the european union will
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be delivering 500 million dollars worth
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of weapons to ukraine that is the first
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time in history that the eu has sent
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arms to a country that is being invaded
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a vast array of other countries are also
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being involved in the war germany will
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be supplying ukraine with 1000 anti-tank
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weapons and 500 anti-aircraft missiles
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president biden has also decided to
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supply up to 350 million dollars of
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weapons for ukraine this type of
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involvement is unprecedented and hasn't
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occurred since the cold war most people
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believe that russia will win the war
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because russia is simply too well
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equipped to lose if russia wins then the
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ukraine invasion will likely force
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ukraine's regime to be pro-russia the
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question is how long the resistance will
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continue once the current government in
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power falls the expectations are for a
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new cold war and militarized borders
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however the risk for a military
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escalation will remain for some time
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economic sanctions are being levied
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against the central bank of russia all
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of this is going to have a substantial
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impact on the global economy first we'll
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start with how the u.s economy will
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drastically change but before we get
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into that we have to contextualize the
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current us position of the economy
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recent economic indicators show that the
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us economy is running at full steam
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unemployment declined to a near 52-week
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low and wages have been on the uptrend
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salaries in january were up 10
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year-over-year and consumer spending is
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up 12 year-over-year due to excessive
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money printing in the past two years m2
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money which is the measure of the amount
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of money circulating in the economy has
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grown 42 percent
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an increase in m2 typically pushes the
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us gdp higher along with it m2 is up 15
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month over month and the us gdp is up 15
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quarter over quarter all of this will be
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extremely important soon when we discuss
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how ukraine and russia's tensions affect
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these measures the increase in m2 is
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also pushing inflation higher as well
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which is exacerbated by supply chain
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disruptions in particular the u.s is
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struggling with supply chain issues
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because of the country's inefficient
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shipping ports despite all of this the
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us has not experienced much of a change
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in foreign currency rates for the dollar
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this is in part because other countries
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have also flooded their economies with
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money printing m2 data is not collected
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in europe so in this chart we will
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compare the usm3 and europe's m3 money
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m3 is like m2 but it also includes
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deposits over 100 000
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this chart compares the change in m3 as
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a percentage you can see that the
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increases in m3 are about the same for
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europe and the us with the amount of
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money printing happening commodity
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prices have been pushed higher as well
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and again consumers have been paying for
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these higher prices this will be
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incredibly important soon when we
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analyze the impact that russia's war has
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on the global economy the federal banks
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of the world have become hawkish which
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puts the global economy at an awful time
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to be at war when a bank is hawkish that
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means that they see high inflation and
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want to combat inflation before it
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becomes a long-term issue the stock
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market is expecting between four to six
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interest rate hikes from the u.s federal
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reserve the effective federal funds rate
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or interest rate is the rate that the
[221]
federal reserve lends money to banks at
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increasing this rate has a result of
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elevating rates across the economy and
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therefore reducing the supply of money
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that rate for the u.s is currently at
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0.08 percent however four 25 basis point
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rate hikes would put it around 1.08
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percent each basis point is 0.01 percent
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so 425 basis points would be 1
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originally the markets contemplated that
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the fed would raise rates 50 basis
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points or half a percent in march now
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with the war underway that option has
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been taken off the table the fed could
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however raise rates 50 basis points
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later this year the war is essentially
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delaying rate hikes because the central
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banks are scared of a recession during
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wartime goldman sachs recently predicted
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that the fed will raise rates 11 times
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in 2023 such a massive delay could mean
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that a recession could occur in 2023 the
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federal reserve also has to start
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quantitative tightening quantitative
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tightening is when the fed sells bonds
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that is the opposite of quantitative
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easing which is when the fed purchases
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bonds we have been experiencing
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quantitative easing since early 2020
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with quantitative tightening the supply
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of money in the economy would be reduced
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thus lowering m2 and therefore reducing
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demand as well in other words if
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quantitative easing is a money printer
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quantitative tightening is a money
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vacuum
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this chart shows a level of m2 starting
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at the end of the 2008 recession at 100
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billion dollars if this trend continued
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without the pandemic happening m2 would
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be between 200 to 220 billion dollars
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however because of the pandemic m2 money
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is now at 259 billion dollars the fed's
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debt is also at six trillion dollars
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instead of the expected three trillion
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dollars quantitative tightening and
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rising rates will slowly economy
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significantly delaying such a move means
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that inflation could get out of control
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the conflict and imposed sanctions on
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russia are pushing up commodity prices
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especially in oil and natural gas such
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increases have the effect of slowing the
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economy in the short run because the
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money to fill up or heat a home is taken
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out of the consumer's pockets at a
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certain point this can also be dangerous
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and raise inflation further russia's
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invasion of ukraine drove up oil prices
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from the usual 70 to 80 dollars per
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barrel to over 100 before dropping to
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the 90s the reason why this is happening
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is because of the impact that the war
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has on the production of commodities
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first of all russia provides nearly 25
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percent of oil and 40 of natural gas to
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europe sanctions or damage to the
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pipelines would reduce supply as three
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pipelines run through ukraine not only
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that but ukraine produces 14 of the
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global wheat supply and a large portion
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of that gets exported to europe thus the
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invasion will have a significant impact
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to the volatile food and energy prices
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in europe if the oil and wheat supply
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decreases in europe this would push
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prices higher as a result some supply in
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the u.s will likely be moved into europe
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and increased prices in the us
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that type of relationship means that
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prices across the globe are linked the
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russian sanctions will also have a
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substantial global impact the sanctions
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have mostly targeted the financial and
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technology segments of the economy
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however they have stopped short of
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cutting russia entirely from the swift
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payment system the swift payment system
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is essentially where all the
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international banks go to settle
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accounts and transfer money if russia
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were to be immediately cut from the
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swift system european banks would not be
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able to deal with the debt owed by
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russian banks as a result europe would
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have a problem paying for the gas and
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oil purchased by russia additional
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sanctions are targeting swift but
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economists are expecting at least one
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bank will remain on swift to allow
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europe to purchase oil from russia so
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with energy and food prices likely to
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remain high this creates a problem for
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federal banks across the globe even
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though these may seem like short-term
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problems there is the risk that this
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further aggravates long-term inflation
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problems what the us and other countries
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could try to do to keep prices down
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would be releasing some other strategic
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petroleum reserves this could
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temporarily push oil prices back down to
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the 70 to 80 dollar point however oil
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production will likely not increase
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significantly because of short-term
[467]
political tensions this is because oil
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manufacturers do not want to borrow
[471]
money to drill for oil at 90 per barrel
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if prices might drop to 70 to 80 dollars
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near term there are a vast array of
[479]
problems going on right now the
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inflation rate is at over seven percent
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we have a war that is driving up energy
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and food prices exorbitant money
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printing and artificially low interest
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rates the federal reserve needs to
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reduce the money supply and raised rates
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while trying to keep unemployment low
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that's extremely difficult to do without
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crashing the economy the stock market
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does not lack uncertainty and our
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current situation definitely fits into
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that category the question is no longer
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if the economy will slow but rather how
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much it'll slow a way to look at the
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uncertainty in the market is through
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volatility i typically use the market's
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fix or vol to determine volatility
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earlier this year the vol was in the mid
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30s to near 40s that placed roughly a 40
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chance of the s p 500 crashing to 3 800
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or increasing the 5100 while we could
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see further downside recent market
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events point towards some level of
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market support the fact that nato and
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the us are not stepping in to actively
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defend ukraine and support at the
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current market levels the economy is
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currently continuing to accelerate
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although the higher energy prices will
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temporarily slow the economy this could
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actually be beneficial because it does
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some of the fed's work of slowing
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inflation the long-term rates of the
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treasury bonds are roughly in line with
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where they were before the pandemic this
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is a great sign because it indicates
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that the market believes that race and
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inflation will return to normal in the
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long run however the short-term bond
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yields tell a totally different story
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the short term portion of the rate curve
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shows that the fed is behind on raising
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rates the difference between the fed and
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the one month treasury bond yield is
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nearly 150 basis points or 1.5 percent
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so where are rates expected to go
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these are the rate expectations the
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market has priced in by december of 2022
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the expectation is for rates to be 1.5
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higher than they are today which is a
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substantial amount
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inflation would also be back down to the
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3 range by the market forecast central
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bank's worldwide raising rates places
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less risk on the s p than across the
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globe europe is likely to feel more pain
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with higher prices than the us the
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expectation would be for the u.s to
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outperform the european market the
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dollar will also increase in price in
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relation to european currencies as the
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fed raises interest rates faster than
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europe the asian markets are likely to
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hold up well for the most part however
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the tax-centric focus of japan and south
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korea could see a slowdown because
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russia is prohibited from purchasing
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technology for military purposes i
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suspect that russia will go through
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china to make such purchases latin
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america and emerging markets will likely
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survive without too much of a problem
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that being said with the u.s dollar
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likely to increase in value compared to
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other currencies the benefit of any
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potential outperformance from latin
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america could be lost from the
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conversion of foreign currency to u.s
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dollars when investing abroad remember
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that you are investing in the foreign
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currency of another nation the value of
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that currency fluctuates in relation to
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the u.s dollar domestically with
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inflation high but consumers paying for
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the goods at higher costs companies that
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are in the non-durable space are likely
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to do well
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these are products we would use every
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day such as toothpaste razors shampoo
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and more companies in this industry tend
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to perform well during recessions this
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would also include beverages such as
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water and beer all of which can hold
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value during a recession the other side
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of the coin include luxury brands such
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as louis vuitton and ralph lauren which
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would likely struggle in a recession as
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the escalation and new cold war continue
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cyber security stocks are likely to do
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well like palantir and many others other
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plays some of which have played out well
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are banks and energy
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that trade is lightly crowded and more
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fought with risk especially the energy
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trade the bank trade could also begin to
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flatten and unwind if the economy slows
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enough today the situation is very fluid
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a lot can change on a daily basis but
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with so many items in flux the vix
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should be closely watched let me know
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how you see the tensions in ukraine
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playing out down below
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if you enjoyed this video please hit the
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like button and subscribe and i'll see
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you in the next one
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