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The day was June 28, 1914.
The event: An assassination that changed the world forever …
The Archduke of Austria and his wife were shot in Sarajevo, Bosnia, setting off a chain reaction that …
Exploded into the first world war in the history of mankind …
Decimated the global economy, and …
Later ignited the greatest hyperinflation ever recorded.
But when trading began the next morning in New York, the market was quiet, and the Dow Industrials rose a meager 0.14%, the equivalent of just 48 points today.1
Investors obviously didn’t care about the assassination.
Or they didn’t have a clue as to what it really meant.
Most world leaders were equally oblivious, and before it was all over, 20 million people had paid the ultimate price.
Today, even with Eastern Europe on the brink of a devastating conflict, it’s premature to predict the outcome.
But it’s not too soon to raise the alarm for investors:
If Russia invades Ukraine, it will trigger a regional war, a global cyberwar, a trade war and a currency war.
Many investors are complacent because that’s not what happened when Russia invaded the country in 2014.
Russia seized control over three Ukrainian oblasts — Crimea, Donetsk and Luhansk.
Relative to the size of Ukraine, that was like a foreign country grabbing Texas, California and Florida.2
Nevertheless, back then, the response from the West was muted — some protests, some sanctions, but little more.
In fact, it was so subdued, President Putin was emboldened to promptly order the annexation of Crimea into the Russian Federation.
Worse, it sent a clear message of Western complacency that has continued to empower Putin to this very day.
This time, however, is vastly different.
If Russia invades again, the U.S., NATO and their allies are prepared to respond with aggressive actions that could decimate the already-sinking Russian economy.
Putin will not take that sitting down.
He controls the largest reserves of natural gas on the planet, nearly one quarter of the total supply.
If his back is against the wall, he’s likely to conclude he has nothing to lose by retaliating against the West with every economic weapon at his fingertips, starting with gas exports.
Brent crude oil, already nearing $100 per barrel, and U.S. regular gasoline, already on its way to $4 per gallon, will skyrocket uncontrollably.
Second, the world’s largest economies, now more polarized than at any time since the Cold War, will split into two opposing spheres:
THE WEST — countries aligned with the U.S., Western Europe and Japan, versus …
THE EAST — all those aligned with the Russian Federation and China.
In the wake of a Russian invasion of Ukraine and a united Western response, unaligned countries will be forced to pick sides.
Trade wars between the two spheres will run rampant.
East-West trade as we know it today — including the massive China-U.S. and China-EU trade relationships — will be shattered.
The cost of commodities, microchips and virtually every product under the sun will go through the roof.
Third, global inflation, already surging, could exceed 20%.
The International Monetary Fund (IMF) explains it this way:
“Inflation has plunged countries into long periods of instability.
“Central bankers often aspire to be known as ‘inflation hawks.’
“Politicians have won elections with promises to combat inflation, only to lose power after failing to do so.”
No kidding!
Why then, may I ask, have the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan — not to mention the IMF itself — planted inflation timebombs in nearly every corner of the world?
Why have they continued to pump inflationary fuel into their economies even after the fires of inflation were everywhere to be seen?
The greatest-ever money printing!
The largest-ever government deficits!
The tallest-ever mountains of unpayable debts!
All major drivers of high, double-digit inflation!
But never forget this:
If raging war and rampant inflation are our destiny, even those who get rich will lose.
There’s no silver lining; no pot of gold big enough to compensate for the sacrifice and pain.
Let’s pray saner minds prevail.
And just in case they don’t, let’s focus on financial self-defense, as I propose to do on Wednesday.
Be sure to join me then.
All I ask is that you let me know you’re coming with your RSVP here.
Good luck and God bless!
Martin
1 June 28, 1914, the day Archduke Franz Ferdinand was assassinated, was a Sunday. So, U.S. financial markets were closed. But even the next day, Monday, June 29, 1914, the Dow Jones Industrials (DJI) rose only 0.11 points, or a meager 0.138%, from 79.89 to 80.0. As a comparison, today, Feb. 14, 2022, an equivalent change in the DJI from Friday’s close of 34,738 would be a rise of only 47.83 points.
We believe these apparently “trivial” facts, first pointed out by UBS chief economist Paul Donovan last month, are critical to understanding the market sentiment today: As often occurs, investors could be seriously underestimating a likely world-changing event and may continue to do so until it’s too late.
2 The total area of the three Russian-occupied oblasts in the Ukraine is 30,965 square miles, or 13.2% of Ukraine’s territory. (The area of Texas, California and Florida represents 13.1% of U.S. territory.) And yet, despite the great impact this has had on Ukraine, there was relatively little movement in the West to oppose it, an error that could forever be remembered as a fatal pivot point in history.
