Russia SWIFT Ban Thoughts
I wanted to get this note about my thoughts on the recent decision to cut off select Russian banks from the SWIFT system before the market opens on Monday. Here's an article that provides a high level overview of what the SWIFT system does and what might happen as a result. Needless to say, it's a pretty strong measure that can have significant economic consequences not only for Russia but for the entire world. The SWIFT system is a messaging system that connects banks across the world to communicate dollar money transfers. Removal from the system basically means you can't transact in dollars without a great deal of difficulty. It also means Russia can't sell oil (which is all denominated in dollars currently) and can't buy anything denominated in dollars. Before I get into my thoughts and portfolio implications, I'd like to say that this conflict in Ukraine is deeply disturbing to me, is a major humanitarian crisis and my thoughts and prayers go out to all who are affected.
My Thoughts:
Oil price likely headed higher in the near term due to inability of Russia to sell oil and resultant global supply reduction (Russia is the third largest oil producer in the world), however if they are able to sell all of their production directly to China (the second largest consumer of oil in the world) for yuan - see 4 below, the impact could be mitigated - we shall see..
Runs on and failures of Russian banks due to lack of liquidity have been all the rumor on Financial Twitter, but the Russian Central Bank will do what they must to ensure that doesn't happen - just saw that they will provide unlimited repo support to the country's banks; again, we shall see...
Conflict escalation to a wider area if the conflict drags on much longer; already NATO is posturing and many countries are supporting Ukraine with weapons / supplies, putting up "no fly" zones, etc. - this increases the level of uncertainty which would be bearish for markets, but as I write this there is news of "talks" between Russia and Ukraine, so we'll see
Rise of parallel money transfer systems:
Bitcoin (censorship resistant and totally decentralized) - many in the Bitcoin community are predicting this could be a likely option
Other cryptocurrencies (but many are centralized and can be censored)
CIDS (China's system for settling trades in their currency) - could allow Russia to trade with China using yuan - i.e., sell oil to China for yuan and buy products from China for yuan
Future sanctions could be less effective if multiple alternative global payment systems are developed and this would also usher in the beginning of the end of the dollar as the global reserve currency, which would itself have far-reaching implications
Global recession due to persistently high oil prices and the resultant inflation caused by that and the disruption of global economic activity in the wake of the war and associated sanctions
If the conflict is resolved relatively soon, the result would likely be a huge risk-on rally that would lift stocks and crush oil, bonds and precious metals - a "nothing burger" to the markets, as Ben Hunt said in a podcast I listened to today. He also thinks this won't stop the Fed from tightening financial conditions in either case (war on / war off), as some might otherwise hope.
Portfolio Implications:
Energy / commodities / gold / silver still look solid to hedge against what will likely be persistent, above trend inflation notwithstanding Fed action; may be able to buy on weakness if risk-off event early next week and if not already well positioned
Cash / US Treasuries will be short-term popular if there's a massive risk-off move, which many expect on Monday, but long term not a place I want to be due to inflation
Bitcoin behaves as a risk-on asset, so would be good to accumulate on any risk-off weakness as long-term thesis is still very much intact and it will likely do well when the current crisis ends
Low-beta stocks like utilities, consumer staples and healthcare look like good places to invest as they will be more resilient in the current market environment versus high growth / technology which continues to be challenged, particularly if Fed follows through (as many expect) with tighter monetary policy to contain inflation; see my related post on 2022 Stock Picks
Having a well-diversified portfolio allows you to sleep well despite the market chaos - check out my latest portfolio allocation update post here
Not financial advice, only for information and entertainment, do your own homework. I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2021. To see all my books on investing and leadership, click here.
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