A Possible Inflection Point, Logistics, etc., A Painful Birth, A Race to the Center (Nov 2022)
A Possible Inflection Point, Logistics, etc., A Painful Birth, A Race to the Center
The purpose of this publication is to address those items that are likely to have the greatest impact on institutional investor risk managers. Our aim is to explain underlying causes for recent developments and where possible, predict likely outcomes.
A Possible Inflection Point
With war comes many lessons and the war in Ukraine is no different. Perhaps the largest lesson is the unpreparedness of the major powers to fight a modern war. Despite having minimal military experience, Ukraine is demonstrating Russia’s lack of preparation, logistical weakness, and befuddlement with drone-based modern warfare. Despite having no navy, Ukraine has been able to sink a significant portion of Russia’s Black Sea Fleet. Likewise with its air force, despite having few planes, Ukraine has been able to deprive Russia of access to much of Ukraine’s airspace. Lastly, Russia’s reliance on tanks and other armored vehicles appears to raise challenges in both maintenance and defense against javelin rocket attacks.
While it is easy to criticize Russian military preparedness, the reality is Ukraine is also having difficulty countering the Iran-supplied drones. As often happens in wars, technology has materially altered conditions such that relatively inexpensive drones are able to cause catastrophic damage to major military assets. Watch for a shifting in the way modern wars are fought in response to recent developments.
Nonetheless, after taking the Kherson region by cutting supply lines, Ukraine might also take Crimea and thereby force the question of any benefit Russia had hoped from the war. Hence, shortly there might be a major inflection point and an end to the war. With any ending of the war, inflation is likely to ease, and the slow rebuilding will begin.
Figure I: Consumer Index - Goods and Services
Logistics, Logistics, Logistics
Just as Russia determined that holding the Kherson region was untenable because of the difficulty in logistics, it is likely to draw the same conclusion about Crimea. Ukraine Special Forces are likely to cut the few rail and truck routes into the area and isolate Russia. Watch for a withdrawal of Russian forces from Crimea as supply lines become attenuated
A Painful Birth
While it is easy to forget, many industries undergo a painful birthing and maturation process before becoming accepted, productive members of the broader landscape. Banks endured multiple runs before the Federal Reserve, FDIC, and bank supervision systems were established. Likewise, the bucket shops of the 1920s and before were slowly replaced with a more organized and stable system with the hard work of the SEC. There is little doubt that the crypto industry suffered a major reversal with the bankruptcy of FTX, which is likely to result in civil and possibly criminal actions against Sam Bankman-Fried. Our view is that the distributed ledger system has significant benefits, but that like any investment, due diligence is required. The major problem appears to be the lack of controls for safeguarding investor funds. Hopefully, the industry will mature and realize its promise as an effective provider of financial services.
A Race to the Center
The Midterm elections provided some comfort about the tendency of the nation’s voters for some balance in our elected leaders. Rejected were extreme candidates of both parties. For those who had hoped for a Red tidal wave, concern over abortion rights and a return of the chaotic Trump years drove many women and young people to the polls. With the House in Republican control (just barely), some moderation in policies is likely.
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