Good Morning Everyone,
As most are probably aware, Russia invaded Ukraine yesterday. The situation is wildly complex and there are myriad potential implications, responses and higher order effects that could transpire as a result. The situation is far too complex for one person to capture in a short letter. I want to focus on a few of the themes i’m thinking about this morning and that i believe are worth paying attention to.
First is that very few people want this. War is brutal, and likely results in a significant loss of life and unimaginable hardship for many. My thoughts go out to everyone that is effected both locally and abroad, and I hope every single citizen and their families are safe. It’s times like this that being on an island a long way away seems like a blessing, and i’m grateful my family and I are fortunate to be living in a place where the thought of another country unloading missles in the middle of the night is not something we have ever been concerned of.
However i do believe these times may very well be changing.
I will try to do my best and view the events as mechanically as possible. This situation has clearly been percolating for some time, and this looks like being the beginning of a bigger shift. The geopolitical chess pieces had been setup and were posturing, and this is the lead domino.
The themes that are top of mind for me this morning are:
China. What will they do if anything? Will they look to strategically leverage this situation and treat it as an opportunity?
How will the US & Allies respond? Will they respond?
Energy costs. Oil and gas particularly and the implications for how this impacts supply, trade and as a result, price. Also higher order societal implications of increased energy costs are major.
US rates. The US rate cycle is the most significant economic driver of much of what we’re seeing in the markets.
Money Printing, DXY and the US Dollar
Bitcoin. People treating it as a risk-on asset are lost in high-time preference thinking.
These previous two letters included below offer some relevant things to think about specific to war in relation to monetary reset, and also some potential higher order effects of the US leaning on the SWIFT system as a weapon against Russia.
What’s fascinating is that Russia appear to have realised they have an edge over the US in the global chess match. While tension has been extreme between China, they are calling the US’ bluff, and moving to invade Ukraine regardless. And not only that, but they will economically benefit. Russia are a net oil exporter, and they produce nearly 20% of the worlds oil. So while the price of oil rises, they are benefiting while the US is a net importer despite being the worlds largest producer they are negatively impacted. As the price of oil continues to rise this dichotomy grows. So Russia have found a huge asymmetry and are exploiting it. The US’ reliance on the importing of oil also means that the likelihood of them trying to cut off Russia from the SWIFT system is low, as this would send oil prices even higher and harm the US citizens disproportionately.
The US focus toward China also provides this edge. If the US did move to support Ukraine in a meaningful way (which i believe is unlikely), that would give China a major edge over the US to move on Taiwan. So the US finds itself in somewhat of a bind.
There have been reports of Chinese jets in Taiwan’s airspace this morning. What is China’s position in response to Russia’s move to invade Ukraine? Do they oppose the move (doesn’t look like it) or do they see it as a reasonable global restructuring much like them taking back control of Hong Kong in 2019 and looking to “reunite” with Taiwan as well?
It’s valuable to think back to the situation in Hong Kong, as it’s easy to get emotionally triggered by events, and to immediately think worst case scenarios - reflecting on history can help provide clarity.
China basically asserted itself on Hong Kong, a major financial hub in the world, and imposed its rule upon the people of Hong Kong. And what did the US or anyone else do? Nothing. Some three years later, and it’s clearly established as part of mainland China and the world has moved on and is distracted by something new. So it’s not hard to see the US and others providing a ton of lip service and talking big, but actually doing very little.
I would be shocked if China do not try to leverage this situation. How exactly likely depends on the US response. Do they wait for the US to deploy resources (if they even do) and be ground down a little before some kind of decisive move, or do they move on Taiwan sooner than later, while eyes are focussed on Europe? Make no mistake - all nation officials around the world will be having these conversations and enacting protocols in response. What they are, and when or how they are deployed is yet to be seen.
All of this comes while the US is talking hiking rates and a cyclical shift. Whether or not this really happens, also remains to be seen. The markets have puked major moves just on talks alone of hiking rates with no actual action, so that very well may be enough to keep the music playing for a little longer.
How does all of this impact bitcoin? On one hand it doesn’t. Bitcoin is an apolitical neutral protocol, and does not care. Block after block of transactions will continue to be mined. Short term price action relative to USD is more of a distraction than anything else in my opinion. The fundamentals of the network are getting exponentially stronger by the day, and the treatment of the worlds first and only truly inelastic global digital monetary network as a risk-on tech stock is frankly laughable. People have so obviously been conditioned to have such a high time preference that most still fail to grasp the essence of the technology and confuse it with a completely elastic good, like equities, which can create more units into infinity, and completely misses the forrest from the trees. It will seem obvious in hindsight.
As you can see I have many more questions than I do answers. In the words of Ray Dalio:
“It’s very clear me that whatever i know, is a fraction of what i need to know”.
These are certainly wild times, and as energy costs continue to increase globally, the higher order effects of this cannot be over stated. The long term time horizon and most severe outcome of which is mass starvation as the price of literally everything increases as a result of rising energy costs, most significantly food cost, and disproportionately impacts societies most vulnerable.
Hopefully we can embrace change, and move away from a system that incentives war, and toward a system that will incentivise energy abundance. We have a long way to go and a lot of work to do to get there, but i believe there is no mission that is more important and meaningful and failure is simply not an option.
This quote by Elton Trueblood captures my feeling precisely:
"A man has made at least a start on discovering the meaning of human life when he plants shade trees under which he knows full well he will never sit."
Hope you have a great weekend. My thoughts are with everyone impacted by this situation and wishing you all well.
I will chat to everyone next week.
AK
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