The Breakdown - How Russia’s Escalation in Ukraine Is Impacting Markets

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and FDECS, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, February 22nd, yes, two, two, two, two, two, too, too, too, too, too, too, as Mitch Hedberg once famously wished his phone number could be. Today, we are talking about the latest in the Russia-Ukraine situation, which has had some pretty dramatic escalations, and of course, looking at how that might impact markets. First, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the Breakers Discord.

Starting point is 00:00:54 You can find a link in the show notes or go to bit.ly.com slash breakdown pod. Finally, before we dive in, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Now let's get this started by talking crypto markets. As you guys know, we've had a number of days of a sort of sideways down chop, and more or less we've been in this sort of $37,000 to $43,000 range for a month now. Markets are thin with little activity, and you're starting to see a lot of those classic thought leadership threads about bare markets start to come to the fore. A lot of them are good reading, right? They have a lot of consideration about what will and won't survive during a

Starting point is 00:01:34 crypto-bear market. That type of discourse is healthy. It's important. It helps us understand what's valuable in the long term, not just when we're caught up in the short term of all the numbers going up all at once. And as you might expect, in that process, there have been some comparisons to previous downturns. However, where I want to start the show today is a tweet from Kyle Davies over at Three Arrow's Capital, who points out just how dissimilar things actually are. In 2018, he writes, there was force-selling of ETH as ICOs raised tons and were liquidating. In 2022, the NASDAQ had a 3-Sigma correction with the Fed spooking rates plus quantitative tightening and Putin threatening World War III in Ukraine. These are not the same.

Starting point is 00:02:18 Now, we've discussed here a lot about the Fed spooking side of this, the quantitative tightening side of this, and of course the impact they're having on risk assets. The Fed is turning away from its easy monetary policy and so all of the things that disproportionately benefited are now disproportionately being impacted. And as we've discussed, the interest rate changes are only a small part of the concern. People are more spooked about the removal of liquidity from the system in the form of quantitative tightening and wondering what that's going to mean on a broad level. However, what I want to hone in on today is the second part of Kyle's Y-2020 isn't the same, which is Ukraine and Russia. I want to give a caveat that I am just

Starting point is 00:02:59 trying to put this in the context of global power and how that might fit with markets. This is an incomplete story, not coming from an expert but from a curator, but hopefully it's still useful as you're trying to figure out just what's going on. Let's start with what has changed. In a long speech yesterday, Putin did, well, a bunch of things, but the biggest is to recognize two self-proclaimed separatist republics in eastern Ukraine, Donetsk and Lujansk. This is part of Ukraine's Donbos region, and it's on the eastern border that borders Russia. Now, this recognition is being widely described as a sort of dramatic escalation of the situation on the border that has been escalating for weeks now. Putin followed this recognition

Starting point is 00:03:40 up by signing in order to send in peacekeeping forces, whatever that means, to those regions. And the discourse for the last 24 hours has largely been the foreign policy establishment and everyone else, frankly, reacting to Putin's speech. An Applebaum at the Atlantic says Putin's speech to which I am now listening is so full of historical nonsense, that I don't even have the energy to correct it. For example, he skipped completely the Ukrainian bid for independence at the time of the Russian Revolution. He seems to think that the Bolsheviks invented Ukraine, which is bonkers. Even Lenin didn't think that Lenin invented Ukraine. Carl Bilt, the co-chair of the European Council on Foreign Relations, said, if I compare with his speech in March 2014,

Starting point is 00:04:19 when Russia annexed Crimea, this was far more rambling, all over the place, and unhinged, and also more dangerous. Now he questions the very existence of Ukraine as a nation. It's a man with immense power who's lost contact with reality. Sam Green, who's a professor of politics at the King's College, London, said, Putin's address is unbelievably dark and aggressive. I've watched a lot of Putin's speeches, and I don't think I've ever seen one quite like this. This speech had none of the euphoria, none of the high moral notes of Putin's 2014 Crimea address. It doesn't even have the rallying cries of his February 23rd, 2012 campaign speech. In other words, this is a speech designed not to make people happy, but to make them angry. This whole speech is, as with his earlier essays, laying the groundwork

Starting point is 00:05:04 for the wholesale occupation of Ukraine. That doesn't mean where he's heading, but he's giving people a big wind-up. Evo Daldor, a former U.S. ambassador to NATO, says, listening to Putin's rant makes absolutely plain that his problem was never with NATO or possible membership of Ukraine. It was always about the collapse of the USSR and the indexes. of Ukraine. Jackson Richmond, a writer at Mediaite, says, Daily Reminder that this is about more than Ukraine. This is about Putin trying to essentially recreate the Cold War. That sentiment is one that Peter Zeyon, former breakdown guest and author of Disunited Nation, shares. He wrote a great piece called Ukraine, War After the War, and his tweet teaser said Russian President Vladimir Putin

Starting point is 00:05:44 has, in essence, declared a formal Cold War with the West, while also making clear his belief that an independent Ukraine should not exist. Olga Tokaryuk and EFen Noticest correspondent in Kiev tweets if you want to know how Ukrainians react to Putin's speech, here's a glimpse. Moms on Facebook discuss putting stickers on their children's clothes when they go to school, indicating their blood type. Make no mistake, the speech was perceived as a declaration of war on Ukraine. Now, I will note that I've seen tons of different commentary, randomly TikTok's algorithms

Starting point is 00:06:16 figured out very quickly this morning that all I wanted to see, was people in Ukraine reporting, and I don't know that it's as clear-cut as Olga argues here, but certainly it was a big enough deal that the Ukrainian president tried to reduce tensions in an overnight address, saying, dear people, we in our state do not have time for long lectures on history. I will not talk about the past. I will talk about current realities and our future. Ukraine is within its internationally recognized borders and will remain so, despite any statements and actions of the Russian Federation. We remain calm and confident. I want to thank all our citizens for this. You are proving once again that you

Starting point is 00:06:49 Ukrainians are a smart and wise nation, and in spite of everything, we keep a cool head, react calmly, carefully like an adult. We are ready for anything, but there is no reason for you to have a sleepless night. Well, after that sleepless night, we woke up today to the response. As you might expect, step one is economic in the form of sanctions. NXO is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button, and start earning up to 18% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries

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Starting point is 00:08:54 Download the FTCX app today and use referral code breakdown to support the show. The EU has proposed an initial sanctions package with Reuters saying EU-ready sanctions says Russia will feel the pain. Sanctions could include a blacklist on all those involved in the decision to recognize the breakaway regions, including the members of Russian Parliament who voted in favor, a ban on the trading of Russian state bonds, and will in general, quote, target the ability of Russian state and government to access the EU's capital and financial markets and services to limit the financing of escalatory and aggressive policies. importantly, however, a swift ban, something that we discussed on the show a few days ago, is not part of the first package being considered. The UK Prime Minister Boris Johnson also announced the country's first wave of sanctions earlier today,

Starting point is 00:09:44 saying that they're, quote, targeting Russian economic interests as hard as we can. The first targets are five Russian banks and three very high net worth individuals. Quote, any asset they hold in the UK will be frozen, the individuals concerned will be banned from traveling here, and we will prohibit all UK individuals and entities from having any dealings with them. Now, this is not necessarily as big a deal as it seems, given that already seven out of eight of these targets have been subject to U.S. sanctions for several years. So far, the biggest deal is that Germany has halted approval of the Nord Stream 2 natural gas pipeline.

Starting point is 00:10:16 Olaf Schultz, the German Chancellor, said, quote, in light of the most recent developments, we must reassess the situation, in particular regarding Nord Stream 2. Schultz said that he would ask the German Economic Ministry to take steps, quote, to make sure that this pipeline cannot be certified at this point in time, and without the certification Nord Stream 2 cannot operate. He said the appropriate departments of the economic ministry will make a new assessment of the security of our supply in light of what has changed in the last few days.

Starting point is 00:10:43 Nordstream has long been a key geopolitical question. Russian energy is essential for Europe. The EU imports around 40% of its gas from Russia, and the Nord Stream pipeline has big impacts on how that all would work. The pipeline effectively cuts out Poland and Ukraine, who have argued strenuously against it saying that it would help Russia gain more dominance over the European energy sector. In terms of the implications for Europe, here's how the Wall Street Journal puts it. The brunt of any economic pressure is likely to be borne by Europe, which depends heavily

Starting point is 00:11:14 on Russian energy, and whose banks and companies could be caught up in sanctions. Those measures, while aimed at Russian entities, could raise a host of new supply line problems for Western companies, including making it more difficult to finance purchases of commodities or send in parts to their Russia operations. Now, as I'm recording this, everyone is waiting to see what President Biden is going to say and what specific sanctions he's going to put in place, but already the battle lines are drawn in the U.S. and Republicans are using words like timid. Senator Tom Cotton said President Biden's timid sanctions tonight are wholly unequal to this

Starting point is 00:11:46 moment. Russia is invading Ukraine now. The time has come for the swift and severe sanctions that Joe Biden has long threatened but refused to impose. There is not a minute to lose. What Senator Cotton is getting at were initial comments that said that U.S. citizens and businesses couldn't do business with this region versus whatever we find out about today on Tuesday afternoon that might be coming as well. The swift and severe sanctions refers to a specific quote from the Biden administration that it seems in some ways they've been trying to hem and ha around, specifically with regard to whether this particular move by Putin constitutes the escalation that would bring those swift and severe sanctions to bear. Overall in the U.S., there's a fair bit of skepticism with these sanctions.

Starting point is 00:12:27 Tracy Schuart writes, with energy and swift off the table, why would Russia care? These people are not serious. The West has had sanctions on Russian individuals, trading firms, banks for years. It has meant nothing. So let's talk what's happening in markets. Stocks are down. Nasdaq 100 is down about 1.2% and gold is up to 1906, U.S. Stocks Index futures fall. And after an initial outperformance, Bitcoin is now down in the 37,000s as well. Some of the crypto market takes are pretty dumb. Zee from Binance wrote, things I don't understand. I'd have thought that, quote, unpredictable geopolitical situation would increase demand for crypto. Either I am off, usually, or they are. Opportunity? The level one analysis of just assuming that a sufficient

Starting point is 00:13:10 portion of the world understands crypto as a risk on asset in a geopolitical situation in the short term makes one question the value of Twitter as a medium. I liked a little bit of commentary from Suu more. He basically pointed out that people in crypto have to understand and look at the larger geopolitical context to understand what's going on. He wrote, people trying to make this out to be a crypto-specific meltdown should look at some charts. Since beginning of the month, NASDAQ is down from 15.2K to 13.7K, with BTC and ETH now unchanged. Role and correlation is now negative. You also have seen, in this I appreciate, a bit of humility. Well, Clemente says I, for one, I'm not going to larp like a geopolitical expert, just as confused, if not more, than everyone else.

Starting point is 00:13:54 Overall, what people are understanding in their markets discussion are the implications for energy. Lin Alden tweets, how are we all feeling about the possibility of triple-digit oil prices going forward? And what she's referring to, of course, is that if you look on any Bloomberg or Wall Street Journal or Financial Times, their banner headline is about oil approaching $100 a barrel. In the EU, natural gas also surged 13%. Luke Groman wrote, the inconvenient truth, though citing Russia's GDP size, failed to grasp. If we subtract Russian energy from the mix of global energy supplies, global oil and gas prices will quickly spike to levels that collapse the entire global economy, and U.S.

Starting point is 00:14:32 Decentric debt markets and financial system. The New York Times quoted Joseph Brusuelas, the chief economist at the audit and tax firm, RSM, U.S., who said, should the Russian incursion into eastern Ukraine turn into a full-fledged invasion, it is likely that the global and U.S. economies will absorb yet another. supply shock. Also from the Times, Mr. Brusuelas projected that an energy shock could shave 1% off the United States gross domestic product in the next year and push the inflation rate up to 10%. That could raise the need for policy support to help lower income workers, whether rising food, fuel, and goods prices. Oil approached $100 a barrel on Tuesday the highest in more than seven years,

Starting point is 00:15:09 and European gas futures spiked 13% after Russia ordered troops into separatist territories in Ukraine. analysis said that an escalating conflict could also lead to widening credit spreads and weigh on global stock prices. Europe agrees with this assessment. Bastien Druth, the chief thematic macro strategist at CPR asset management, said one of the very few definitive things we can see from this crisis is that energy prices are going higher. Even if there is no further escalation in Ukraine, the main consequence is still going to be higher inflation. That, of course, could have impact on broader growth. Strategists at J.P. Morgan wrote, an energy price shock amidst the central bank pivot focused on inflation, could further dampen investor's sentiment and the growth

Starting point is 00:15:48 outlook. Finally, one interesting note around the stock market, Jim Bianco kind of sees it as a barometer of how seriously the business world is taking the possibility of what happens next. For the moment, he writes, Western stock markets are a measure of how serious we are about stopping Russia. Yes, markets are down a lot the last few days, but nothing compared to the plunge they would take if they thought the West was serious. Still, I want to close with a tweet from cantering Clark, who I think really captures the market situation in the moment. Quote, trading for a long time now, and I don't think I've ever had this much near-term uncertainty. No one likes to use the words I don't know, but I don't know. I think that really captures the feel of it. We're expecting, and maybe even when I

Starting point is 00:16:32 open the browser again after I've done recorded, new sanctions from President Biden, but we also are expecting them to do little or nothing at all. The debates around what Putin does next are coming fast and furious, and ultimately we'll just have to wait and see. What is clear is that what's driving markets right now is not just native to the crypto industry, and that we are part of something larger, even if not fully correlated to the rest of the financial world. I hope that today's show and shows like it help you navigate that. So thanks for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - How Russia’s Escalation in Ukraine Is Impacting Markets

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