Russia/Ukraine: the Biggest 0/1 Volatile Moment of Your Life

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It could be the equivalent of being told you have a terrible cancer with only 1 month to live. And then being told a month later, the cancer is completely gone. It’s that extreme.

The war in Ukraine continues with loss of life likely to soar as Russia attempts to pacify large cities. Our prayers and support go out to its citizens.

The war is also roiling the commodity and financial markets as energy and grains soar while equities slump. The potential for a US Russian oil embargo is sending WTI near $120 and natural gas in EU to a record high. Actually “record” doesn’t quite represent what’s happening and this is why we have charts (see below).

Source: WSJ

I sent a Tweet/LinkedIn post out earlier today covering an article from the Economist and stating I completely agreed with their insights. “And I think right now, we’re all underestimating the risk of Putin using nuclear weapons. Putin is all-in, willing to destroy cities, using whatever means necessary to subdue the country. Sanctions destroying Russian economy will take longer but will create heightened nuclear risk. China will be pushed to act or have a dependent Russia to clean up.”

Clearly, the markets are exhibiting a violent reaction to the news and to the potential outcome of a complete shutdown of Russian energy and Ukrainian grain. EU is the major loser when it comes to loss of Russian energy. Turkey, Egypt, Iran, Iraq and Lebanon stand to lose the most when it comes to grain shipments out of the Ukraine. There are no swing producers standing on the sidelines ready to act to ease the loss of production. The silence out of OPEC/Saudi Arabia should surprise no one especially the US State Department. President Biden may be traveling to SA shortly to discuss more oil production.

Yet, the longer the war takes the more time is afforded to have sanctions destroy the economy of Russia. This should mean more public protests and more internal political instability for Putin. We will now get a stronger understanding of just how strong a grip he has on the nation and his political allies. As conditions deteriorate within Russia, the internal political pressure will build to end the war or end Putin’s reign.

This reminds me of what happens in options when you get near a strike price on the day of expiration. Either the price goes to zero or it goes to 1 (full value). Every time the price moves above or below the strike price, you get wild swings in value.

This is what could happen with the war in Ukraine. For now, the markets are pricing in a lot of bad news and driving commodity prices to levels we’ve never seen. This is the 1 scenario.

Yet, the zero scenario has a probability attached to it. If Putin loses power, then the world would welcome back Russia into the economic mix and the EU would begin quickly stop preparing to block their natural gas imports. With luck, the Ukraine would be able to export their grain and maybe miss one harvest. Yes, this is an optimistic scenario.

But this scenario presents the case for extreme volatility as we would go from 1 (Russian/Ukrainian exports lost) to zero (Russian/Ukrainian exports restarted). This scenario is predicated upon Putin being removed from power. (Question: why the long desk?) Would any of these men turn on Putin? How likely is this? 10-15% today, but every day from now it will creep higher. The price movements would be EXTREME depending on how high commodity prices go up and how low equity prices go down.

As we watch the events unfold in real time, try to keep focused on potential outcomes outside of what the media and leaders are discussing today. It’s the only way to prepare for what can happen next.

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I'm Andy Busch

If things feel crazy in the world today, that's because they are. We are seeing huge shifts in risk and reward, leading to a lot of economic uncertainty and confusion about where we go from here.

As an economic futurist, I do things a bit differently than your typical economist — going beyond analyzing how today's financial policies impact economic growth, to focus on the super-charged trends driving much of today's global chaos and change.

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