Airwaves are full of commentary and news about the Ukrainian situation. The financial media drone on about how to position portfolios, how to trade markets in days such as these and incessantly ask their geopolitical guests questions they can't possibly answer. Thankfully, we are not financial media. At VIEW, first and foremost however, our thoughts are with the people of Ukraine because this is, after all, a war. Lives are lost and survivors affected forever. It is almost unseemly to think about the implications for markets. VIEW has some personal history with the risks of being a small, central European country bordering aggressive empire-builders. Regardless of the resolution from here, the longer the fighting goes on the more humanly devastating this will be for many thousands, maybe millions. To all our European friends who may be uncomfortably close to these events, we send wishes for peace and safety. For our own military that have deployed to Europe, we wish you godspeed and a safe return home.
VIEW has been in the position to have to risk manage large dollar value exposures during periods where event risk is high. Successfully risk-managing multi-billion dollar portfolios with anything remotely resembling deft and low cost is not easy but sometimes that was the mandate. Quite simply, we were responsible to insulate our clients' capital from potential significant draw-downs. The Brexit vote and the 2016 US election are two examples. What made those situations somewhat easier to manage than Ukraine was the binary nature of each situation and lack of surprise in timing. We knew months before the vote when the decision would be reached and so had time to assess probable outcomes of Brexit or Remain and Clinton vs Trump. Investors are generally pretty good at figuring out what will happen under different scenarios, especially if there are only two of them, but errors still occur assigning the correct probability to each outcome and this makes markets. VIEW believes the majority of investors were surprised by both the Brexit and 2016 election outcomes, this belief reinforced by the extreme volatility in some of the affected assets in the immediate post-even trading.
Ukraine offers a somewhat different beast. While we have known for some months about the building risks in the region, and these have increasingly been reflected in the price for Brent, the ultimate effect on commodity prices, rates and risk assets are more difficult to gauge. How long will the conflict last? What will be the extent of the sanction response and what are its details? Will NATO become involved militarily, will an individual country? What will the Chinese do, if anything, related to Taiwan given eyes are more focused on Europe? Does it matter that Russia will be paid in Euros for the 10 billion cubic meters of gas/year it will send to China starting in three years or so? Will this war impact central banks' thinking related to rates and if so, in which country? Will Russia succeed in establishing more non-dollar payment mechanisms in exchange for its main exports, oil and gas? Does this strengthen the cohesiveness of the EU, which has endured repeated blows over recent years and hardly appears unified for much of anything?
To try to incorporate all these factors and our views around them into a trading view on any given day seems a tall order. VIEW thinks leaving the short-term tactical trading to machines under current volatility conditions is the preferred tactic. The above questions and those implications we did not even list make up a patchwork of the macro environment in which their effects will play out over time. This is why our simple strategy for these events is to first, do nothing from a trading standpoint. Just consider how markets traded today with US equities staging a large reversal and NASDAQ finishing +3.36%. VIX actually finished down on the day and energy stocks closed lower. What does it all mean? We don't know nor spend too much bandwidth trying to figure out. This is because we believe the markets have become "technical", where positioning, hedging and level trading take over the direction of the market, at least for a day. Our chances of being very wrong in a short period of time are quite high under these circumstances.
The second part of our strategy for disruptive events such as this is to fall back to our current view on drivers for the market and once again avoid reactive trading in response to short term price moves. Our assessment of these drivers is not necessarily changed by daily trading or one single data point. We are constantly searching to see if something has fundamentally changed or will change in the future, but our main interpretation of leveling-off of inflationary pressure but more importantly, the continued slowing of the economy, stands. Central bank rate increases into this slowdown will most probably push the economy's growth rate even lower, how low partly determined by how aggressive the Fed is. Do we worry that inflation levels will subside to a base above the Fed's 2% threshold? Yes, but in conjunction with what economic growth? VIEW can't imagine the scenario of oil holding a strong bid due to Ukraine is positive for risk assets on a sustained basis. Or, that a war in one of the biggest countries in Europe would somehow cause a re-acceleration in US economic growth. In short, given the difficulty in finding an edge with which to trade markets around a military conflict, our preferred strategy is to simply not to.
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