Putin’s Ukraine Gambit Looks Like World War I Beginnings
Nobody thirsted for World War I’s ignition, but it was touched off by the assassination of Archduke Ferdinand and his wife who foolishly made an Austrian state visit to Serbia. They were shot in their carriage by a Serbian nationalist. This act implemented systemic interlocking treaties throughout Europe and England.
In World War I, millions of young men from France, Germany and England were dispatched to their death by stupid generals still living in the age of cavalry charges and swordsmanship in the 19th century.
Early 1950s, I experienced the Korean War as an infantry second lieutenant fresh out of ROTC. I nearly froze to death in the Arctic climate of North Korea. Harry Truman, then our president, termed all this a “police action.” There was no money then for thermal boots, arctic parkas, mittens and pile caps. We lived off the quartermaster stores left over from World War II.
Deep basic, my country had failed me, but nobody back home knew much about it. There was no television coverage of the Korean War. A bunch of alcoholic correspondents congregated in Tokyo’s watering holes, not our front lines. I never saw General MacArthur tramping our line of final protective fire.
Short of committing a million troops and combined air power, NATO won’t stop the Russians from overrunning Ukraine. Nobody officially as yet is talking about a full response to what could be a Russian walkover.
What’s the serious investor supposed to do now? Defer banging out your portfolio until the takeover is broadcasted, everywhere? Aren’t you then too late to avoid all the bloodshed to gush in securities markets, everywhere? Or, do you dare bet on a last-minute rapprochement between the 2 major blocks of opposing power?
I’d assume that the New York Stock Exchange would shut down trading on the outbreak of broad-based hostilities. The issue then becomes when do you reopen the Exchange? Big players, both individual and institutional alike will press for an early reopening. Everyone wants his liquidity restored, including me. This is a precious commodity.
I remember in the Cuban missile crisis of 1962, the market shut down after running 5 hours late. There was no electronic trading then. The broad tape was a chattering electromechanical contraption. But, Wall Street then was like a small village of undercapitalized partnerships. There were no trillion-dollar market capitalizations like Apple and Microsoft. Anyone managing over $100 million was considered a whale.
What would happen today if investors wanted out of all the trillion-dollar plus index funds and ETFs? Today, the amount of forced selling would easily run into trillions. Where would you find the buyers of last resort? Wily investors don’t step into a market selling at 2 times book value. They are disposed to wait until stocks sell at approximate book value. Ask Buffett what he’ll do.
There are several market precedents that aren’t exactly ancient history. Most recent is the financial world’s meltdown of 2008 – ‘09. The U.S. Treasury had to intervene with massive blocks of liquidity to save our major banks from insolvency. Merrill Lynch got merged into Bank of America around $4 a share.
A short history of General Motors is instructive. It needed bail out money, too, under Paul Volcker’s reign of tight money in 1982 – ‘83. Later, in 2008 – ‘09 it coulda fallen off the screen and went private, then public, again, in 2010. General Motors’ management today should commission a life-sized bronze of Ben Bernanke and display it in their board room as a reminder that Uncle Sam waxed benevolent in their recurrent hours of deshabille.
I may not be the right operator to ask how much markets do swing if Russia invades Ukraine. Even absent a full Russian offensive, I hold that our market is still 20% overvalued. I base this on my read that price-earnings ratios in troubled times are pared by inflationary forces like labor, materials and the added costs of doing business.
In the investment world you are what you do, not what you say or intend to do later on. I’ve raised cash reserves, over 25% of assets. So far, I’ve banged out high multiple stocks, selling down positions in Amazon, Home Depot, even banks, but not energy plays like Exxon Mobil, Enterprise Products Partners and Energy Transfer Partners. I crave high-yield paper in a troubled world setting.
My deep basic is the market rested pricey before Ukraine surfaced as a major issue for the Western world to digest. Financial markets historically misconstrue such events by overreacting initially, but not this time around.
The best advice was given by Bernard Baruch when a distraught player shoved his list of stocks at him. Baruch brushed the paper aside and said: “Sell down to your sleeping level.”
Long ago, when I sifted through my demented mother’s effects in her steamer trunk, under the knotted chokers of glass beads I found mildewed stock certificates of Texaco, Ford Motor Company and U.S. Steel - all odd lots. I can still hear my father cursing the market: “The sonofabitch motors and steel. The damn oils. They never go up.”