Putin Plays The Madman Card

During the Vietnam War, President Richard Nixon let the North Vietnamese know that he would be willing to start World War III to bring them to heel. Nixon called it the “madman strategy” of diplomatic pressure. Thankfully, Secretary of State Henry Kissinger restrained Nixon from fully testing that theory.

The financial markets were handling Russia’s invasion of Ukraine with surprising resiliency, until Russian President Vladimir Putin played the madman card. Putin last week put his country’s nuclear forces on high alert, prompting many analysts, including a few of his former Kremlin aides, to question his sanity.

MAD also serves as an acronym for mutually assured destruction. Even if you’re bluffing, threatening MAD is a form of madness in and of itself. Below, I examine a portfolio hedge against the escalating military mayhem in Eastern Europe.

Putin’s increasing isolation not just from the international community but from his own advisers is unnerving investors. A former KGB spymaster, Putin is making emotional decisions based on his grievances about the collapse of the Soviet Union, as well as his resentment of NATO expansion. Putin’s brinkmanship weighed on stocks last week (see table).

Russian forces have been pressing deeper into Ukraine, creating a refugee crisis. Russia’s bombing and seizure of the Chernobyl nuclear power plant hasn’t helped investor moods.

As of this writing on Monday, U.S. stocks were extending their losses and crude oil was hovering at $120 per barrel. The price of oil is currently up 70% since December. Mounting casualties in Ukraine and Putin’s veiled nuclear threats are keeping investors on edge.

The Western response has been severely punitive. Billions of dollars of foreign investments, notably by energy companies, have been wiped out.

Germany killed Nord Stream 2, an $11 billion undersea pipeline that is designed to transport natural gas from Russia. BP (NYSE: BP), Shell (NYSE: SHEL), ExxonMobil (NYSE: XOM), and Equinor (NYSE: EQNR) have jettisoned huge oil and gas operations in Russia.

These energy behemoths aren’t leaving Russia because their managers have suddenly become humanitarian bleeding-hearts. Instead, it’s because Putin’s sanction-riddled fiefdom has become a lousy place to make a buck. Better to cut losses now, rather than face angry shareholders later.

Read This Story: “Big Oil” Says Nyet to Russia

The list of corporate icons walking away from Russia gets longer every day. Apple (NSDQ: AAPL) halted sales in Russia. The Belgian cooperative SWIFT banned Russian banks from its global platform for financial transactions. Alphabet (NSDQ: GOOGL) suspended YouTube advertising on channels affiliated with state-funded Russian media. Alphabet also removed from YouTube the Russian “news” outlets RT and Sputnik, both of which do little more than spew pro-Putin propaganda.

Mastercard (NYSE: MA) and VISA (NYSE: V) also suspended operations in Russia. Life is about to get ugly not just for Kremlin-linked oligarchs, but also for ordinary Russian citizens. Russians are supposed to be good at chess, but so far, Putin has played the game badly in Ukraine.

The bull market: not dead yet…

Typically, the combination of sharply rising commodities prices, tightening monetary policy, and the outbreak of war overseas would sound the death knell for a bull market. However, economic expansion, falling joblessness, and corporate earnings growth are providing a floor under stocks.

These fundamentals are poised to again come to the fore when the Russia-Ukraine war fades. It’s also worth noting that Putin’s ferocity in Ukraine has energized the Western alliance. Whenever the global post-WWII rules-based order shows stability, it’s favorable for investors.

Positive news came last week from the U.S. Bureau of Labor Statistics, which reported that the U.S. added 678,000 jobs in February, pushing the unemployment rate to 3.8%, the lowest level since the outbreak of the pandemic.

In a reversal of roles, energy stocks are generally overpriced, and technology stocks are becoming a value. Investors are concerned that tech companies are vulnerable to falling consumer demand in strife-torn Europe and rising interest rates in the U.S.

Investors should expect continued choppy trading over the short term, but later this year, I expect underlying positive factors to exhibit continued strength and keep stocks aloft.

I remain bullish over the stock market’s prospects in 2022, but I don’t underestimate the danger of inflation, which in turn is exacerbated by overseas war and soaring oil prices. Higher oil prices feed inflation and as such pose a risk to the economic expansion. But let’s look at the lessons of recent history.

Crude oil prices exceeded $100/bbl in March 2011 and didn’t fall below $100/bbl for a prolonged period until July 2014. During this time frame, the S&P 500 gained 62% and economic growth stayed strong. This suggests that the economy and equity markets are not at severe risk in the context of $100+ oil.

Volatility lately has been nerve-wracking, punctuated by huge intraday swings. But some of the most horrendous days in the market have been followed by impressive rebounds.

Case in point: the Dow Jones Industrial Average plummeted 597 points last Tuesday, then staged a remarkable comeback the following day to close 596 points higher.

Which brings me back to “madman” tactics. The perpetrators usually come to a bad end. Richard Nixon’s paranoia-driven excesses eventually destroyed his presidency and brought him lasting historical disgrace. Vladimir Putin perhaps faces a similar destiny.

Editor’s Note: In these fraught times, where can you turn, for both capital appreciation and wealth preservation? It’s not too late to increase your exposure to gold.

Gold prices have been surging in recent days and they’re positioned for further upside. The time to increase your stake in gold is now, before investors bid the yellow metal sky high. For details on our investment team’s favorite gold play, click here.

John Persinos is the editorial director of Investing Daily.

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