Risk of “Dark Great Depression” in Europe.

Clifford Bennett, Chief Economist | World’s most accurate currency forecaster at ACY Securities

25.02.2022 11:00 am

#stocks

Markets too hot to touch, as Russia targets Ukraine.

And the RISK of a "Dark Great Depression" in Europe.

When it comes purely to markets.

Seriously, for short term traders perhaps the best advice is that many markets are simply too hot to touch. You may want to take a longer term view with smaller positions and wider stops.

The only other option is micro-active trading or you could try this...

How to make the most of your personal journey in business and with your investment portfolio:

Know this. And adjust your personal path accordingly.

The world was already slowing again. Yes, we have seen a sharp drop on the pandemic and a sharp recovery through and out of it. As stated yesterday, much of the euphoria beyond the short term was largely misplaced.

The world, without a war, was and is stabilising from an overall economic perspective.

Now, this is the most important economic perspective you can gain about your future. The world is stabilising, but at a reduced level of economic activity and inter-action.

This is a semi-permanent reset that could last 3-5 years without there being a war.

Knowing your business, and of course there will be specific stories, but certainly in a general sense will experience a lower level of activity rather than that Nirvana nonsense the mainstream has been selling you, will afford you a better quality of decision making.

This is the great advantage. We have to see the world as it is, as well as how we want it to be.

Too many banks, brokers, economists, fund managers, news commentators have been selling it will be amazing. No, like always throughout history it will be hard work. There have been the good times like the roaring 20s and the past year, but such periods never last, and if not managed prudently result in significant prolonged slow-down periods or worse.

It may be the case that I am being too optimistic. The world may go into recession, but for the moment I am sticking with the very same forecast I have consistently held over the past year. Expect positive economic growth over the next 3-5 years, but at below potential/below trend levels, and for this to be accompanied by high inflation and too late aggressive rate hikes.

That is a tough environment. Adjust for this view though, and you can make the most of it, however it is, and greatly increase your relative net worth.

Markets had a continuation of the War collapse. Then snapped back.

This is why. People believe it is another Pandemic fear opportunity. In other words, no matter what happens 'buy the dip'. These people on the day may appear to be getting it right? Except that they have been buying all the way down and getting stopped out. And their 'feeling good' may not last?

Up above is my outlook on the world without War.

This is what is happening now, but only just beginning to happen due to War.

The application of tougher Sanctions against Russia being a reason for the market to rally, is one of the greatest follies I have ever seen in markets and I have seen a few. It is an emotional response. Not a logical one.

Sanctions will severely impact Russia's economy. No small thing on the world economic stage. Please note, I am not judging the impositions of sanctions, they are happening, I am merely objectively considering their economic impact.

Which will be to cripple the Russian economy to a significant degree making life extremely difficult for all Russians. Trade with the West will evaporate. This means the West suffers too.

We are all aware that Europe is hugely energy dependent on Russia. This is why Germany has only sent 5,000 helmets to Ukraine, only provided $150 million in financial assistance, and only stopped the certification of an energy pipeline that hasn't even begun to operate yet. The existing pipeline remains fully operational. For the moment.

If at any time, the situation were to escalate to a degree where Russia would begin to see turning off that pipeline as an option, it would risk Europe losing as much as 30% of energy supply. Alternative sources are not easy to come by.

If Russia turned that pipeline off, then all of Europe would immediately enter a "Dark Great Depression" phase.

Russia has said it will not use the pipeline for political strategic reasons. It also said it would not invade Ukraine. And while we persistently forecast, yes, it would and aggressively so, markets still held out hope. Not dis-similar to how people still hold out hope that there can be a war in Europe and energy supply between nations will go un-touched.

I recently heard a commentator say that sanctions would not work because Russians are tough. They know how to do tough. This is very true. As any student of Russian history would be aware.

If feeling too threatened militarily or economically by the West, Russia has the mental fortitude to deny itself huge energy income if it will mean rendering a major blow to its enemies. The more the West paints Russia as its enemy, the more likely it becomes that more significant/desperate measures will be taken against the West. Russia knows how to do it tough. Does Europe?

This is not my central forecast. If the conflict remains in the Ukraine and Russia secures the land bridge in territory to its crucial Crimea naval bases, which is why it had to avoid NATO in Ukraine at all costs, among other reasons not so easily argued, then settles in that position, there is no risk to Russia's continuing energy supply to Europe.

If however, and I am being optimistic here that nothing goes wrong in this scenario, or it is not of greater magnitude, were the following period post conflict to see ever greater sanctions and isolation applied to Russia, then the energy supply pipeline will become an increasingly, dare I say, attractive option.

Just how much do you want to push your enemy into a corner?

The US cut off Japan's oil supply and so Japan attacked and went to war. A gross over-simplification to be sure, but every nation is acutely aware of the essential nature of energy supply. Especially, in this all encompassing electricity world we live in. All business, many in their entirety cease to operate the moment the lights go out.

Again, not my central outlook, but to move forward without having the scenario of even a decrease in pipeline volume in the back of your head, could lead to an investment disaster.

Always willing to highlight opportunities. But, also, I do need to keep you aware of the risks.

In the first week of January, I said, it would not be the first time markets had a major high or low for the year in that very first week of going in the wrong direction. This looks to be the case.

Yesterday's impressive snap back, may have some momentum for a day or three, but the world economy will be slowing further due to these events.

AND THERE IS MORE.

We already had high inflation including in food. Now, expect skyrocketing flow through inflationary pressures as significant Rye, Wheat and other agricultural outputs from Russian and Ukraine become scarce.

It has been a long report, so quite simply... sky rocketing food prices around the world beginning now and lasting perhaps all year, are a given.

An already slowing global economy, to slow further on war, with already runaway inflation now going to get much worse. Do I even need to say be careful of equity markets even when they have sharp recoveries?

We have been suggesting buying Gold since June last year. No change. Releasing strategic Oil reserves will help at the margin but not impact the price of oil over the medium to long term. If people, and I do believe mistakenly continue to see the US dollar as a safe-haven, then it is going much higher. Think even Euro parity, but certainly 1.07 1.05 as I forecast last year. Australian dollar 65 cents.

A multi-currency holding approach is now the only true safe-haven currency play. US dollar, euro, Yuan.

Do not go about your business, manage your investment portfolio, or trading, as if Nirvana is around the corner. It isn't.

Clifford Bennett
ACY Securities Chief Economist.

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.