War In Ukraine & Impending Economic Fallout
The War in Ukraine has further solidified the geopolitical division of the globe into two parts. For convenience’s sake, these can be labeled North/West (NW) on the one hand and South/East (SE) on the other.
Clearly, this geographical shorthand is somewhat arbitrary. For example, if Mexico’s northern border delineates the top boundary of the South/East geopolitical division, then Russia would lie mostly in the North – and you could similarly place Russia in both the East and West.
The North/West (which of course includes the United States) has vast financial wealth – but lacks sufficient natural resources to continue to maintain that wealth. The South/East is mainly poor in financial wealth – but quite rich in all the critical natural resources and materials the North/West needs.
These disparities make it essential for the North/West to build savvy trade negotiations with the South/East, something that will require diplomacy and a clear-eyed willingness to cooperate with countries around the world.
If the United States fails to recognize this before it's too late, the North/West will likely end up with the short end of the stick. The North/West simply doesn't have the luxury of making a strong case to the rest of the world that we truly hold paramount such values such as goodness, fairness, and freedom. In today's world, Americans find themselves amidst a country that's been gradually sliding down a slippery slope for the past 50 years. This piecemeal decline only exemplifies meaningless slogans that don’t acknowledge the actual shape of today’s world.
G8 Is The New G7
Perhaps the most significant thing to realize is that Russia makes all the difference in how the North/West vs. South/East sides match up.
Consider two sets of countries:
The G7 consists of the U.S., Japan, Germany, Britain, France, Italy, and Canada.
The G8 consists of China, India, Russia, Indonesia, Brazil, Mexico, Iran, and Turkiye.
If you’re surprised that Mexico is now a part of the G8, you may have missed the recent comment by Mexican President Obrador:
“The war in Ukraine was an immoral conflict in which Ukraine’s supporters are supplying the weapons and Ukraine is supplying the dead.”Mexican President Obrador
It should be emphasized, too, that today’s G7 itself used to be the G8 in a grouping that included Russia.
Real Assets vs. Financial Assets
For investors, the disparities continue to mean that real assets – natural resources led by gold and silver – should be central to where you put your investment money.
Evidence of the divergence between the two geopolitical halves is pervasive. Take the stock market, for example. As the chart shows, real assets, as represented by an ETF that tracks future prices in all major commodities, are following an entirely different trajectory from financial assets as represented by the S&P 500.
Since the start of the year, the commodity ETF has gained about 33% while the S&P 500 has declined about 18%. Interestingly, during the recent correction in commodities, which to date is a bit more than 8%, the downward path of the S&P 500 corrected upward, so far by just 3%.
The War In Ukraine has made some things clear to both blocs. Most obvious is that U.S. sanctions have proved worse than useless. In a world of fundamental resource scarcities, money means a lot less than it used to. I have long argued that resource scarcities were accelerating and would lead to a crisis sooner or later. The war in Ukraine and the astonishing lack of perspicacity by North/West countries have meant sooner has arrived faster than I thought possible. Sanctions coupled with a European response that in some cases has been unfathomably stupid have brought Europe to a major crisis point.
European Energy Crisis Worsening
If you think this is too harsh, consider that one reason the energy crisis in Europe is so acute is that an essential pipeline for delivering natural gas needs repair. According to Reuters, the only company that can make the repairs is the German company Siemens, and for various reasons the repairs have to be done in Canada. But Canada’s finance minister (who has Ukrainian ancestry) is being a stickler about the sanctions. So Siemens is blocked from sending anything from Canada to Russia. Since Siemens, like many good European corporate citizens, is winding down its relationship with Russia, it has become a real question as to how and when repairs will take place. And this is hardly a one-off example.
As a result, Germany is rationing gas. And while Germany is the North/West country most directly affected by energy shortages, others are experiencing four-decade highs in inflation, which in turn are having major political consequences. Recent elections in France left Macron, the presumed successor to Merkel as Europe’s leader, with severe parliamentary losses that could impede any legislation he proposes. Italy, Spain, and Great Britain also face potential turnovers in their governments.
It hasn’t surprised me that the sanctions have backfired in such dramatic fashion – given the resource scarcities I’ve been writing about, I expected it right from the start. More surprising to me has been how ineffective the U.S. and other Western countries have been in their military support of Ukraine. The U.S. has poured more money into the Ukraine war effort than the entire Russian yearly defense budget. Yet barring a massive surprise, the biggest question is not whether Russia will prevail. It’s whether it will choose just to take over Ukraine’s East, leaving western Ukraine as a landlocked country without its prized and in today’s world priceless farmland – or, alternatively, to ensure that Ukraine never joins NATO, also goes after key centers in the Western part of the country…
I have been writing about America’s decline for more than a decade, including in my past two books and in many articles. But I have always assumed America’s military was still leading the pack, even as China built up great defensive capabilities. The war in Ukraine, though, raises some serious doubts about U.S. military capabilities. My source for this depressing observation is RUSI, which is short for Royal United Services Institute. Founded by the Duke of Wellington (Napoleon’s conqueror), it’s the world’s oldest and probably most trusted military think tank. In a June 17 report commenting on Ukraine’s surprisingly poor performance, Rusi noted:
The rate of ammunition and equipment consumption in Ukraine can only be sustained by a large-scale industrial base. This reality should be a concrete warning to Western countries, who have scaled down military industrial capacity and sacrificed scale and effectiveness for efficiency. This strategy relies on flawed assumptions about the future of war, and has been influenced by both the bureaucratic culture in Western governments and the legacy of low-intensity conflicts.
Currently, the West may not have the industrial capacity to fight a large-scale war. If the U.S. government is planning to once again become the arsenal of democracy, then the existing capabilities of the U.S. military-industrial base and the core assumptions that have driven its development need to be re-examined.
The report also notes that the number of shells and missiles the Russian soldiers use in days exceeds what the U.S. produces in a year, while in the past four months the Russians have used more cruise missiles that the U.S. produces in several years.
Clearly the NW, G7, or just the West, whatever name you want to use to refer to countries headed by the U.S., needs to get serious about cooperating with the rest of the world or else prepare to face a ton of pain. The reckless worship of money and short-term gains can last only so long. After half a century of it, we need to return to the recipe that worked so well in the wake of the Civil War and more recently WWII.
I’ll have more to say in the future about some of the calculations and miscalculations by the U.S. and our allies with respect to Ukraine and more generally to Russia and their implications. One thought I’ll end with is that in the recent instances where the U.S. has essentially gone to war, including in Iraq and now in supporting Ukraine, it has involved resource-rich countries. In the end, the best way to make sense of our actions may be that we went after Russia for the very reason Russia has been beating us so badly in the Ukraine – its massive endowment of natural resources – betting that Putin would fall and that we’d gain greater access.
But Putin’s alignment with the other countries in the new G8 of SE countries, countries that aren’t going along with the NW’s sanctions, has thwarted that outcome. The only viable path for the U.S. and NW is cooperation. Meanwhile, investors will continue to face massive volatility, but regardless of what path we take, commodities including precious metals will be essential to the world and to your portfolios.