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0 Views· 29 June 2022

The Alarming Economic Aftermath Of Russia's Invasion



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Over the past few weeks, investors have been concerned about a potential war breaking out between Ukraine and Russia. Now, with tensions running high between the East and the West, the global economy is in a tight situation. This video will go over where the current US economy is positioned in this landscape, what has and will continue to change, and how us investors can position our portfolios for outperformance.
Russia’s Ukraine invasion has frightened people all over the world and will have devastating consequences. The war is not just affecting Ukraine and Russia, but the entire world. The European Union will be delivering $500 million worth of weapons to Ukraine. That is the first time in history that the EU has sent arms to a country that is being invaded. A vast array of other countries are also being involved in the war. Germany will be supplying Ukraine with 1,000 anti-tank weapons and 500 anti-aircraft missiles. President Biden has also decided to supply up to $350 million of weapons for Ukraine. This type of involvement is unprecedented and hasn’t occurred since the Cold War. Most people believe that Russia will win the war because Russia is simply too well equipped to lose. If Russia wins, then the Ukraine invasion will likely force Ukraine’s regime to be pro-Russia. The question is how long the resistance will continue once the current government in power falls. The expectations are for a new Cold War and militarized borders. However, the risk for a military escalation will remain for some time. Economic sanctions are being levied against the Central Bank of Russia. All of this is going to have a substantial impact on the global economy. First, we’ll start with how the US economy will drastically change, but before we get into that, we have to contextualize the current US position of the economy.

Recent economic indicators show that the US economy is running at full steam. Unemployment declined to a near-52 week low and wages have been on the uptrend. Salaries in January were up 10% year over year, and consumer spending is up 12% year over year due to excessive money printing.

In the past two years, M2 money, which is the measure of the amount of money circulating in the economy has grown 42%. An increase in M2 typically pushes the US GDP higher along with it. M2 is up 15% month over month and the US GDP is up 15% quarter over quarter. All of this will be extremely important soon when we discuss how Ukraine and Russia’s tensions affect these measures.

The increase in M2 is also pushing inflation higher as well, which is exacerbated by supply chain disruptions. In particular, the US is struggling with supply chain issues because of the country’s inefficient shipping ports. Despite all of this, the US has not experienced much of a change in foreign currency rates for the dollar. This is in part because other countries have also flooded their economies with money printing.

M2 data is not collected in Europe so in this chart, we will compare the US M3 and Europe’s M3 money. M3 is like M2 but it also includes deposits over $100,000. This chart compares the change in M3 as a percentage. You can see that the increases in M3 are about the same for Europe and the US.

With the amount of money printing happening, commodity prices have been pushed higher as well. And again, consumers have been paying for these higher prices. This will be incredibly important soon when we analyze the impact that Russia's war has on the global economy.
The federal banks of the world have become hawkish, which puts the global economy at an awful time to be at war. When a bank is hawkish that means that they see high inflation and want to combat inflation before it becomes a long-term issue. The stock market is expecting between 4 to 6 interest rate hikes from the U.S. Federal Reserve. The effective federal funds rate, or interest rate, is the rate that the Federal Reserve lends money to banks at. Increasing this rate has the result of elevating rates across the economy, and therefore reducing the supply of money. That rate for the US is currently at 0.08%. However, four 25 basis point rate hikes would put it around 1.08%. Each basis point is 0.01% so four 25 basis points would be 1%.
Originally, the markets contemplated that the Fed would raise rates 50 basis points, or ½ of a percent, in March. Now with the war underway, that option has been taken off the table. The
Fed could, however, raise rates 50 basis points later this year. The war is essentially delaying rate hikes because the central banks are scared of a recession during war time.

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