The geopolitical situation is spiraling into chaos, with diplomacy failing to bring a peaceful resolution to the Ukrainian crisis, which has escalated into a war.
The worst-case scenario, the unthinkable where weapons of mass destruction are not a deterrent, but a means to an apocalyptic end, is on the table.
Who will dare call the threatening player’s bluff?
“diplomacy failing to bring a peaceful resolution to the Ukrainian crisis, which has escalated into a war”
As we wrote in a piece, entitled, The Ukrainian Crisis, dated December 14,
“The Ukrainian crisis is a hot geopolitical potato, potentially flaring up into a shooting war if tensions do not deescalate and US-Russian diplomatic relations collapse,” we wrote.
Fast-forward to today, and the pampered and well-heeled diplomats on both sides, for whatever reason, have failed their people, and we are spiraling into chaos.
So the blood is flowing in the streets of Ukraine. There is talk of a ceasefire. But in the fog of war, it is difficult to know the truth. Meanwhile, the EU has approved wide-ranging sanctions on Russia, including the finance and purchase and delivery of weapons, which will only lengthen the war.
So Putin has been triggered. His red line has been crossed. Something has made him snap. Everyone has a breaking point, but not everyone has a finger on the nuclear button, a trigger capable of launching a world-ending strike.
“the Ukrainian crisis is a hot geopolitical potato”
The EU, with no independent foreign policy and now more reliant than ever on NATO, is handing spears to rural Russians so that they can slay their fellow Slavic brothers.
But Putin had warned that “whoever tries to hinder us” in Ukraine would see consequences “you have never seen in your history,” and he then puts Russian nuclear forces on special alert. A US response has yet to be made, at the time of writing.
So here we stand spiraling into chaos as the four horsemen of the apocalyptic approaches.
But let’s assume that cooler heads prevail and the best-case scenario plays out, a new cold war, which would be better than the next war Einstein warned about.
“The spiraling into chaos situation increases the demand for perceived safe-haven assets, like US treasuries” – Win Investing
If then, spiraling into chaos leads to a new cold war, what implication would that have for investors?
A new cold war could benefit US hegemony and strengthen the USD as the world’s reserve currency.
The world’s largest trading bloc, the EU accounts for 16.5% of global imports and exports and is valued at USD 15 trillion. Moreover, the EU relies on NATO for security, which becomes vital in a new cold war scenario. Put simply, a new cold war has made NATO relevant again.
NATO, referred to as the western bloc, is considered the most powerful alliance in the whole world, and in rough times club membership has value. Non-alliance means the risk of being bullied. The Warsaw Pact, referred to as the Eastern bloc, during the cold war was NATO’s opponent.
So in a new cold war, we will see countries pivot to the western bloc of the Eastern bloc in search of security.
By pivoting to NATO, the country aligns its security, foreign policy, and energy within the USD hemisphere. A new cold war bolsters US hegemony, its leadership, global dominance, and the USD as a world reserve currency.
The spiraling into chaos situation increases the demand for perceived safe-haven assets, like US treasuries. Notice that the ten-year yields have fallen below 2%. As we noted, the US dollar will strengthen in 2022, which keeps demand buoyant for US 10 years treasuries. The fact that core inflation is at 7% making real yields negative, is not an issue for global investors whose local currency is depreciating against the USD by ten to thirty percent. A strong USD makes treasuries a safe bet in troubling times.
“we are likely to see a trend reversal in military spending which was declining over the last two decades due to the end of the cold war” – Win Investing
A new cold war means that countries will be more willing to increase their share of GDP spending on NATO. Germany to increase defense spending in response to ‘Putin’s war’ – Scholz is what we expected.
So as the size of NATO spending increases, that also increases the demand for USD, thereby strengthening USD as the world’s reserve currency.
Moreover, when countries rely on NATO security, they also do energy deals in USD.
The big winners of a new cold war are the military-industrial complex (MIC).
Putin has turned out to be MIC’s useful idiot. The US department has just approved the sale of 250 Abrams M1A2 SEPv3 tanks, the deal is valued at 6 billion USD.
We are likely to see a trend reversal in military spending which was declining over the last two decades due to the end of the cold war.
Spiraling into chaos means buoyant times for the entire defense sector
As countries commit more of their GDP to NATO, watch military spending jump. Moreover, you’ll need USD, sometimes countries can pay with treasuries to finance arms purchases.
The technology sector also booms in a cold war, demand for cybersecurity increases. Scientists on both sides of the cold war are encouraged and financed to develop technologies to outdo the other side. This rivalry creates innovation.
But without wanting to sugar coat spiraling into chaos, which in the best-case scenario could imply a new cold war, there are also drawbacks with this scenario. So when capital and production in the economy shift towards military endeavors, it also means a smaller civilian economy. In other words, most people’s living standards decline.
As we spiral into chaos, there are many unknowns
If we are heading into a new cold war, the US is going into it by being heavily indebted.
The twin deficit has reached a record high with a two trillion dollar trade deficit and a 30 trillion dollar public deficit.
But spiralling into chaos will also accelerate the domestic manufacturing of strategic industries, such as chips, to prevent cold war supply chain disruptions.