Why the Ukraine global crisis is weird and will probably fizzle out

Pre-Ukraine, the economic outlook was already messy and uncertain. Above, the Australian Securities Exchange in Sydney. Picture: NCA NewsWire / Jeremy Piper

We’ve “been here before” and, this time “it really is different”.

At the macro level, that’s the overarching complication – and contradiction – you have to try to get your mind around, in trying to assess, or even just to comprehend, the jumble of uncertainties and rolling, roiling outcomes to markets, to the economy, local and global, to policy responses and initiatives that will unfold.

We’ve “been here before” – in terms of a traumatic shock left-field event that shears “normal” market and economic activity: most recently of course Covid and the almost universal, effectively co-ordinated global government and central banking reaction.

Then there was the GFC before it, 9/11 just after the turn of the century, the Asian banking crisis just before, the stockmarket crash at the end of the 1980s, the record high, double-digit, US policy rates from Paul Volcker’s (very different) Fed at the end of the 1970s.

In every case markets plunged, trillions of paper and real dollars were lost – only the suckers got stiffed with real losses; and in every case even more trillions of dollars were made in the bounce-back, thanks to the Fed and its major central bank peers.

This time “it really is different”; indeed, very as in uniquely, ­different.

Like Tolstoy’s unhappy families, every mega-implosion we’ve seen, in at least my experience going back to the 1970s, has been different in its own way. The Covid implosion of 2020 was different to the GFC in 2008 and to 9/11 and so on.

But after the implosion, markets and economies tracked similar – strong recovery – paths because of the proactive policy interventions, especially from the central banks and most especially the Fed.

I strongly recommend you keep that in mind, as you try to navigate through all the noise – the sharp falls on one day, the recoveries the next, over the (at least) next few months.

To give the most obvious example; if “things” – military, geopolitical, humanitarian, markets, financial, economic, whatever – got seriously worse, the Fed would not hike in mid-March and it would also likely restart QE.

Our own Reserve Bank had no intention of hiking at Tuesday’s meeting before Ukraine erupted; indeed, it had no intention of hiking even through May and after the March quarter inflation data.

These events will probably confirm RBA governor Philip Lowe’s belief that he is right and both the market economists and the market are wrong about rate rises in 2022. At least, through this weekend.

So yes, there will be a strong underlying momentum, to deliver a pathway away from, if not quite out of, this “event” that would be similar to all the others.

But at the same time, this one really is distinctly weird, in the interplay between geopolitics and markets and economies, with interventions in both spaces that are separate but intertwine.

Again, to take the most obvious example, the geopolitical policy response to the Russian invasion has been sanctions designed to hurt the Russian elite and indeed make it difficult for Russia and Russians to function.

Yet the really important ones are “off the table” – stopping Russian gas exports to Europe, its oil exports generally, and its access to the SWIFT global banking platform.

There’s, frankly, zero prospect of action on the first two; meaning the sanctions really add up to four-fifths of five-eighths of copulating all.

Indeed, the very fact of the invasion itself has generated a windfall for Russia with escalating oil and gas prices; and the policy actions of Western govern­ments and central banks will just make that windfall bigger.

The “Hitler comparisons” have been much in vogue this week; can you imagine in 1939 Britain declaring war on Germany, but promising to still facilitate its most important exports and access to the London financial market?

This all might suggest that for all the strong rhetoric about “standing up to Russia” the whole thing will fizzle and we could very quickly return to the positions as of Wednesday. Except for 44 million Ukrainians, of course: just “collateral damage” to oil and gas “realities”.

Underneath this overarching complication, and contradiction, you need to think about what I could best describe as discrete, separate but also interlinking, “silos”.

They start with the reality that “before Wednesday”, the world central banks were about to embark on unwinding – true, tentatively, and inadequately, indeed pathetically – all that lavish monetary stimulus.

But they were going to do it into a very complex and confused environment: vastly overvalued equity and bond markets, and ­uncertainly performing real economies.

It would have been straightforward if the state of play had been clear cut: that the global economy, the US one in particular, was in the middle of an inflationary economic boom.

There would have been only one policy horizon – significant and hopefully, but unlikely, rapid rate hikes. With the ECB dragged along behind.

But pre-Ukraine, it was already messy and uncertain. Was the US, and indeed the world, actually heading into stagflation? Was the inflation all and only supply-chain, Covid, driven and so likely to self-resolve?

Were we still at core in the secular deflation that has prevailed all this century so far, thanks to China, technology, computerisation and the internet? With the only inflation coming courtesy of central banks?

So the second “silo”, so to speak, is what central banks and governments do over the next few weeks and maybe months; both in response to “events” and the “trend-path” they were embarked on or not embarked on.

Then there’s another “silo” of likely market reactions to both the events as they unfold and the central bank/government interventions; and how those market reactions might/will spark policy counter-responses. Most extremely and specifically, the Fed “buckle”.

Unless the West gets serious about sanctioning Russian oil and gas exports and access to SWIFT – or China “tries a Ukraine” with Taiwan – the geopolitical crisis will probably fizzle out.

So we do most likely go back to the position as it was on Wednesday. Except of course we can’t and really haven’t.