“History had no lessons or rules to offer the student, it could only broaden his understanding and strengthen his critical judgments.” – Carl von Clausewitz, On War.
After our last report on the market’s response to the Russian attack on the Ukraine, I had a number of clients reach out regarding my thoughts on the current military and geopolitical issues surrounding the invasion in the Ukraine. I certainly appreciate clients asking for more detailed analysis. The following thoughts are informed by my thirty-year Army service and my graduate education at the University of Virginia and the United States Army War College. Any errors in my analysis are mine alone, and not a reflection on those institutions.
Mr. Putin’s invasion of Ukraine is another nail in the coffin for globalization. Brexit in 2016 was the first shot across the bow of the populist anti-globalization anger and rage that would soon consume much of the industrial world. The election of Mr. Johnson in Great Britain and Mr. Trump in the United States were also manifestations of anti-globalization rage. Mr. Johnson removed Great Britain from the European Union, while Mr. Trump attacked the NATO Alliance and the rules-based order (arguing the United States bore too much of the burden) and imposed stiff tariffs on several Chinese imports. His successor, Mr. Biden, has kept the Trump tariffs on Chinese goods just as Covid hastened, and reinforced Mr. Xi’s view, that as supreme leader, he needed to focus China inward. The Ukraine invasion is another act in this drama.
The rules-based order was set up at the conclusion of the Second World War at the Bretton Woods Conference in New Hampshire. This generally unknown conference addressed many of the economic policies that fueled the rise of protectionism, populism, and Fascism. Two of the major accomplishments were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). The Second World War convinced leaders that economic cooperation was the only way to achieve both peace and prosperity at home and abroad. But clearly, the Brexiteers, MAGA Crowd and Mr. Putin are set on killing globalization, and all the post war economic reforms to include the World Trade Organization (WTO) and the IMF.
United States’ stock markets have rebounded quickly despite the tragic news in the Ukraine. At NSG we never tire of pointing out, no one can predict markets, and we don’t try. This quick rebound is one reminder of why we don’t. Markets quickly assimilate all available knowledge and incorporate it into prices. The markets do it very efficiently, as Professor Fama of the University of Chicago demonstrates repeatedly in his economic research. The market’s rebound is further undergirded by these facts, that the United States enjoys the best economy in 38 years, the lowest unemployment in 30 years, and 87 percent of the companies that comprise the S&P 500 Index report their best earnings ever. It should not be too surprising that the market it is doing well.
Globalization began in earnest in the 1970s under the Nixon Administration and really took off in 1991 after the fall of the Soviet Union, which Mr. Putin called the greatest tragedy of the 20th Century. From 1991 until the invasion of the Ukraine, the United States reigned as the unchallenged hegemon of the global order. Despite our own internal squabbles, no power seriously challenged the United States’ global primacy.
The United States was so powerful that it could and did engage in small wars of empire. During this period the United States was often described by leaders as the hyper-power. As the country attempted to mold events in the Middle East, it simultaneously pushed the NATO Alliance eastward. This included adding countries on Russia’s border. This NATO expansion is at the heart of Mr. Putin’s grievance toward the West. Part and parcel of Mr. Putin’s anger is he believes the West does not treat him and Russia with the respect they are due.
No more: Mr. Putin, and Mr. Xi clearly intend to challenge America’s hegemony. They are balance of power men, and they are firmly rooted in the 19th Century in terms of realism and spheres of influence. And China unlike Russia, has the economic power, if unchecked, to be a peer competitor and the hegemon of Asia. Nevertheless, China, even more than the United States, is in a very difficult position vis-à-vis Mr. Putin’s attack on the Ukraine. No country, besides the United States, has benefited more from the demise of the Soviet Union and the rules based economic order than China. The admission of China to the WTO has fueled the growth of a vast middle class and China’s GDP in 2020 was nearly 15 trillion dollars, second only to the United States’ GDP. For Mr. Xi to support the upending of this global order is, at best, problematic. Will he abandon a rules-based order that has benefited China?
This invasion and its aftermath will continue to play out in the days ahead, and NSG will keep you updated on the second and third order effects. As strategic leaders know all too well when the Dogs of War are unleashed the consequences, even for a militarily powerful state like Russia are unknown. As I type this, it’s clear that Mr. Putin is experiencing outcomes that he didn’t anticipate: the resolve of the NATO Alliance, led by the United States and Mr. Biden; the economic consequences; and the steely resolve of the Ukrainian people.