The questions that investors must now ask themselves

IT will be a cold-blooded column. I’m not going to mention the horrors of war, nor delve into the history, politics or morality of what’s happening in Ukraine.

I will only talk about money and, more specifically, how investors should react to such events.

Various financial markets have mostly reversed or reduced their initial moves. Yes, oil has soared, but futures prices point to expectations of a near-term blow before things work out with Russia or President Joe Biden removes domestic production blockages from United States and make deals with countries like Iran to produce more crude.

The Chicago Board Options Exchange Volatility Inc, better known as the VIX, has risen, but most of the rise has occurred in the past few weeks. Equity and bond markets outside of Russia showed only a mild reaction, with the S&P 500 index reversing a loss of up to 2.62% to end up 1.5%, and expectations for inflation haven’t changed much.

This is consistent with the story. Since World War II, military aggression has typically resulted in a few weeks of heightened volatility, but little lasting impact on markets. The year following the assault events was slightly better than average for investors. But investors should beware.

The great Prussian military theorist Carl von Clausewitz wrote: “War is the domain of chance. No other human activity gives it a greater scope: no other has such incessant and varied relations with this intruder. Chance makes everything uncertain and interferes with the whole course of events.

The only prediction I’m sure I make is that nothing will go as planned for anyone. In these circumstances, there is no safe bet.

Any defensive preparations must have been made by investors before the invasion, and prices and market data clearly show that investors have reduced risk this year. Investors seem to remember that the best defense is a good offense, the market’s version of that adage being to buy the rumour, sell the fact – prepare for the downside when Russian troops mass on the border , take the risk once they cross it .

Investors must now ask themselves a new set of questions. What if the Russian invasion gets bogged down, with a large number of casualties? What if Russian President Vladimir Putin loses domestic support?

What if countries like Turkey and China turn strongly against the invasion? What if Northern Europe responded with a renewed resolve to resist Russian aggression rather than increased accommodation? What if other militarily ambitious states took the opportunity to stage their own invasions?

While there are differences in detail between these scenarios, they all signify a more militarized world, something we haven’t seen since the 1970s.

War means massive, entrenched inflation, not the transitory version of the supply chain that can be easily controlled by raising interest rates.

Moreover, wartime inflation is felt mostly in raw materials rather than finished goods or real estate.

Despite the destruction of war, it’s generally good for investors – at least for those on the winning side.

The war signifies the resurgence of a nationalism which brings with it higher tariffs, immigration restrictions and taxes. In this scenario, cryptocurrencies could be particularly attractive. (I own bitcoin and other crypto assets.) That probably means putting aside environmental goals and other progressive issues.

I don’t predict these things will happen, certainly not to the degree of major war or even global violence of the 1970s. one-day titles.

But I think it’s more beneficial to look for potential opportunities that might be to win lottery tickets if the “best laid plans of mice and men” go awry – as usual – than to look for doors barn to close after the horse ran away. —Bloomberg

Aaron Brown is a former Managing Director and Head of Capital Markets Research at AQR Capital Management. He is the author of “The Poker Face of Wall Street”. The opinions expressed here are those of the author.

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