TALKING ‘BOUT REVOLUTION

Chicken Kyiv, Oil Prices, and Bernie Sanders

During George Bush’s AUGUST 1991 visit to Kyiv, Ukraine, to speak before the Parliament, many in the Rada hoped that Bush would voice strong support for Ukrainian independence from the USSR. Bush did not, striking, instead, a cautious tone that was widely panned by his critics in Washington as his “Chicken Kiev” speech. In fact, the Bush Administration strongly supported the reforms – Glasnost and Perestroika – being undertaken by Gorbachev from Moscow, and who himself faced significant domestic pressures and challenges to his authority, limiting his abilities to push change quickly. In terms of US national security, gradual reform was also preferred – the Administration feared that a sudden collapse of the Soviet Union would create a void and a serious nuclear proliferation issue – many of the USSR’s nuclear weapons resided in the western, Europe-facing, Soviet Republics. If the USSR collapsed suddenly, into whose hands would those nukes fall? That was foremost in the minds of Bush and his national security team in striking a cautious tone in August, 1991. They supported freedom and democracy, but not at a pace that significantly raised the risk of chaos and nuclear proliferation.

JUNE 2015 – crude oils prices stand at $59 a barrel; February 2016 – $30 a barrel. Stock markets begin to slide starting August 2015. Cheap oil continues to drive stock markets down, why? In theory, cheap oil should be good for business and consumers (lower transportation costs, lower prices at the pump). But, the global economy is an increasingly complex system. And while Thomas Friedman may tout the “flatness” of the world (not literally, like BOB), development and the world economy remains both connected, and uneven. Thus, a lot of emerging market economies rely on revenue from oil, commodities, and debt denominated in US dollars. When oil/commodity prices tank, when the local currency loses value vis-à-vis the US dollar, the strains a multiplied. (uneveness) That strain has a way of finding its way back to the global/US economy (connectedness) – whatever the numbers are, the US does a lot of trade with emerging markets, and has the potential to also cause significant political risk in oil-dependent countries. (Not sure how economics and politics can be viewed separately, just as in war, Van Clausewitz observed that war was simply an “extension of politics”). Theoretically, lower oil prices in the long term will help the global economy, but the sudden plunge to casting chaos into the system as the effects are felt unevenly, but still reverberate.

NOVEMBER 8, 2016 – US Presidential elections. I’ve never shorted the market on the principle that that wasn’t what capital markets were designed for. Capital markets were designed as a way for companies to raise money – via the public (hence, IPO – initial public offering) – in order to grow, and create jobs, rather than being able to rely only on banks and loans and debt offerings. Capital markets were designed with *economics in mind. Shorting, in my view, is something that was created with *finance in mind – i.e., how can speculators utilize the market, not to invest in companies and growth, but to make a buck by places hedges/bets on which way stock prices went. Philosophically, shorting in some ways symptomatic of the perversion of our capital markets from something driven by economic principles to financial maneuvering. I find it quite distasteful to bet on companies struggling/failing in order to make a buck. But, I’d also bet that a Bernie Sanders election (or some of the GOP candidates) would cause a significant stock market drop. Markets don’t like uncertainty because uncertainly equals risk. Any candidate riding the crest of populism promising revolution equals risk. What some people don’t seem to grasp, is that markets are agnostic – uncertainty from any candidate equals risk, regardless of political persuasion. But more importantly, what some people don’t seem to grasp, either, is that Wall Street is tied to Main Street. So mainly employment pension funds are tied to the capital markets. Depending on the timing of people’s retirements, sustained stock market declines could hurt a lot of people. (connectedness)

As with Ukraine, “revolution” in oil prices, and populist candidacies, chaos from revolution comes with a price, and the tendency to see things in a very compartmentalized manner, or inability to see things in the larger picture, carries it’s own risk. Eventually, we will all pay for those risks, regardless of whether we acknowledge how much the world is complex, uneven, yet interconnected.

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