The invasion of Ukraine by Russia has certainly reminded us of the many horrors of war, but it has done far more than that. The invasion also reminds us that the tectonic plates of geopolitics are constantly shifting and occasionally cause earth-shattering events.
While many seem to regard this as just another little flareup that will quickly be extinguished, that is a big mistake. The invasion has set off a chain of events that is leading to a massive regime shift that will shake up geopolitical alliances, disrupt old institutions, and upend financial markets. The implications are vast. It won’t be the end of the world, but it will be the end of many patterns and trends with which we have grown familiar over the last forty years.
There's something happening here
In one sense, it may seem odd to attribute such importance to a conflict involving a perennial aggressor like Russia and a former Soviet republic that is all-too familiar with conflict. Such a view, however, overlooks Russia’s long history with invasion and Putin’s motivations to regain former Soviet glory.
As Peter Zeihan points out in an excellent interview with Grant Williams, "What the Russians are after are the geographic barriers that prevent invasion." Having lost the Soviet Republics as barriers in 1991, Putin has since worked methodically to secure geographic integrity.
What has also happened since 1991 is demographics has collapsed. Zeihan makes the argument that the clock is ticking on how much longer Russia will be able to field an invading army. As he puts it, "So geography can explain the why and I think demography explains the why now." In this context, it is hard to see why Putin would back down.
Interestingly, the West is also taking a hard stand. After an initial set of sanctions that were weak and laced with loopholes, the severity quickly got dialed up. As violence increased, so too did humanitarian support for Ukraine and political support among Western countries.
In a shockingly short period of time the Biden administration migrated from fairly toothless sanctions to placing sanctions on Russia’s central bank and preventing access to its US dollar reserves. In deploying such a radical measure, the US indicated it was playing hardball, demonstrated a surprisingly high level of resolve, but it also sent a message that was hard to unsend.
As a result, two major powers are now locked in a conflict and neither appears interested in backing down. Ian Bremmer captured the scope thusly, “people [sic] keep asking me 'how do you think this ends?' as [sic] if it ends". So, it looks like this is going to last a while.
War, what is it good for?
While shooting conflict has always been in Putin's playbook, the increasing willingness of the West to engage in conflict is revealing. Part of the reason is political. Since the invasion started, there has been an outpouring of support for Ukraine and an appetite for standing up to Putin that has surprised many. Jonah Goldberg captured the change in sentiment nicely:
"So many of the arguments that take up our time—and especially my time—are little more than flashes of St. Elmo’s fire lighting up the airwaves with little relation to the reality on the ground. This is a good and decent country, and because of its prosperity Americans enjoy the luxury of using opinions like kindergarten toys. We smack each other with Lincoln Logs and shoot pieces of Lego at each other on a daily basis. But when events require us to put away childish things, most do. Because beneath our opinions rest some core commitments that run through the American character like veins of granite. We like freedom. We like fairness. And we actually like peace quite a bit, too. It’s just that when bullies and tyrants threaten any of these things, we get pissed. And we tend to do something about it."
As it turns out, there is no shortage of issues toward which that political capital can be expended. Widespread fatigue with Covid restrictions and frustration with high inflation are right at the top of the list, but high leverage, overpriced markets, and political partisanship have vastly limited the degrees of freedom to address the problems. A conflict with Russia presents a convenient way to redirect attention away from intractable problems at home to something with more popular support.
Indeed, it is not just immediate domestic problems that can be addressed. Arguably, many of the thornier global problems today derive from arrangements made after World War II that are no longer fit for purpose. The security arrangement with the US serving as global police officer and the Bretton Woods currency system are two of the more prominent features that have outlived their usefulness. It is a good time for them to be reconfigured.
As such, the conflict with Russia is emerging into a much broader phenomenon. The West now has a unique opportunity to deal with economic and financial pressures, an accumulation of bad public policy measures, and also to re-imagine all kinds of antiquated institutions and arrangements. Further, Western countries can do so in the name of righteously defending lives and liberal values against a "bad guy". In short, they get to hit the reset button on a ton of things that haven't been working and do so in the name of patriotism.
Turn, turn, turn
With Putin determined and the West newly engaged, the path of least resistance is now, unusually, one that leads to a broader war. This broader war certainly encompasses shooting in Ukraine, but it is also likely to pull in more countries and more dimensions of attack. Economic and financial sanctions will continue to escalate and cyber warfare is likely to be deployed.
As a result, the environment is about to get a lot tougher and stay that way for some period of time. This will not be business as usual.
Readers of William Strauss and Neil Howe will recognize this set of pattens as a Fourth Turning, the title of their 1997 book. They describe a Fourth Turning as "a Crisis, a decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one." Indeed, the conditions from which a Fourth Turning emerges are eerily similar to those we are experiencing today:
"Popular trust in virtually every American institution—from businesses and governments to churches and newspapers—keeps falling to new lows. Public debts soar, the middle class shrinks, welfare dependencies deepen, and cultural arguments worsen by the year."
We gotta get out of this place
One of the key implications of this process is that we are heading into a different world with different rules. Doomberg set the appropriate tone with this Substack post:
"[O]ne can’t help but wonder whether we are on the cusp of an economic singularity in which the laws and bedrock beliefs that formed the foundation of international economic order for decades break down. The consequences are similarly unknowable, but we suspect a great reset may indeed be upon us."
The bad news in all this is things will get much worse before they get better. Strauss and Howe describe, "During the Crisis, the American economy will experience the most extreme shocks to asset values, production, employment, price levels, and industrial structure in living memory."
As an example, Peter Zeihan provides a “before” and “after” comparison for commodities:
"So all of the fertilizer, all of the oil, all of the natural gas, all of the bauxite, all of the nickel, all of the iron ore all of the copper, all of these things that the Russians used internally within the Soviet empire, they were dumped on international markets and they continued to dump them for 30 years. It’s one of the reasons why inflation has been so tame around the world for so long. We were coasting on the leftovers of the Soviet industrial giant. Well, now we get to do all that in reverse in a year."
A change would do you good
While considerable pain and turmoil are par for the course in a Fourth Turning, the good news is the crisis does not last forever. Life goes on. Better yet, it is all part of a process that clears the way for better things to come. As Strauss and Howe put it, "a Fourth Turning clears out society's exhausted elements and creates an opportunity for fresh growth."
With exhausted elements pruned off, it is easy to imagine a much happier state of affairs. After asset prices decline, investors will have a better chance of earning attractive future returns. Young adults will be better able to afford a house. Wage earners will be more likely to reap the benefits of their hard work. These are all good things.
Further, it is fair to expect the role of technology will be significantly reconfigured. Rather than functioning primarily as a distraction and attention stealer, it will increasingly be deployed in ways to assist people in being better versions of themselves. This will be especially noticeably in politics where technology will ensure our voices are heard.
People with great skills and ambitions will be able to contribute to making the world a better place rather than making large firms even more profitable. This won't happen because people become more virtuous; it will happen because better incentives are in place. Scarce resources will increase the premium for people who are productive and honest and will increase the penalty on moral hazard.
It's the end of the world as we know it
So, the conflict in Ukraine is likely to morph into a much broader war that is likely to forever change much of how the world currently works. Most likely, this will be one of the most important events in your lifetime.
The most important response to such an event is to dial down risk along every dimension. That means lower exposure to risky assets like stocks and having more cash on hand. It definitely means reducing debt and other liabilities that could be hard to pay off. In general, it means simplifying things by reducing the number of connections and dependencies. The main goal here is to make it through to the other side. There is no need to be a hero.
Fortunately, if you are mostly sheltered from the storm, other details won't matter. Once it’s over, you’ll be in a good position to build afresh in a fertile environment. However, if you insist on adhering to old playbooks or just wait too long to adapt, sorry, but you’re probably ngmi.
If you want to get more frequent insights, check out my weekly investment newsletter, Observations by David Robertson, at https://abetterwaytoinvest.substack.com/.