Tensions around the globe are on high alert about a potential Russia invasion of Ukraine. The Pentagon ordered 8,500 troops on higher alert Monday to potentially deploy to Europe as part of a NATO “response force” amid growing concern that Russia could soon make a military move on Ukraine.
The uncertainty is causing winter wheat prices to climb and financial markets to fall, along with many other impacts. AgriTalk’s Davis Michaelson hosted Vince Malanga, president of LaSalle Economics, on Tuesday, Jan. 25, to dive into the current events and potential market impacts.
Q: Should there be conflict between the U.S. or at least between NATO and Russia, what sorts of economic impacts might we expect?
Malanga: The immediate response to that would be a spike up in the energy markets. I think you’d see a sharp rise in both the price of crude oil and the price of natural gas.
Given the fact that Ukraine is such a large wheat producer, that would cause a spike up in agricultural commodity prices. You could expect a pretty sharp negative reaction in equity markets around the world. How long that might last is a function of how long the conflict might last.
Q: Will it takes shots fired to really have a full market impact?
Malanga: Yes, I think that’s probably right, and I think I would put the odds of that as pretty slim. Sure, the risk is there, but it is hard to decipher what the goals of the Russians are right now. Do they want to attempt to embarrass the West, or do they have a strategy to take over the country? That is anyone’s guess. But certainly, the sooner we get over this mess, the better it will be for everyone, and maybe that’s why they want to drag it out for a long time.
Q: Do you subscribe to the theory that Vladimir Putin would like to reassemble the former Soviet Union?
Malanga: I think he’s made that pretty clear. He is getting older and there’s a lot of unrest inside Russia. So maybe he feels some sense of urgency to do that. I think there’s clearly a perception on the part of the Russians that the West is in some sense of disarray. Therefore, this may provide an opportune time.
Let me remind you when the Russians walked into Crimea back in 2012, Mr. Obama and his team made the blunt statement, this will not stand well. If I’m not mistaken, nine years later it’s standing. So, I think they perceive some weakness, some weakness in the administration and may feel a sense of opportunity here.
Q: The financial markets are trending fairly negative. Is this corrective in nature? What is behind the downward pressure?
Malanga: You’ve got two things going on simultaneously. Not only do you have the unrest in Eastern Europe, but you also have a perceived change in monetary policy coming from the Federal Reserve.
As a result of that, it’s pretty hard to measure which is having the greater impact on the equity and financial markets. Although I would say that it’s the perceived change in monetary policy that is probably having the greater effect on prices in equities, not only in the U. S. But worldwide.
Q: What are your expectations for the Federal Reserve’s moves?
Malanga: In the last five weeks, we’ve gone from a general consensus that the first rate hike from the Fed would come probably sometime in the early part of 2023. In a matter of four weeks’ time, and during a period where the economic data has shown softness rather than strength, we’ve gone from no rate increases in 2022 to a simultaneous asset purchase program and raise rates five times.
It seems extreme. I think expectations have gotten way ahead of the reality. If I’m right and three months from now or four months from now, we’re going to be looking at a softer economy. I think the threat of that kind of monetary adjustment will dissipate. I think that would turn out to be a positive for asset values.
I think we’re going through an adjustment. The market hasn’t had a meaningful correction for a couple of years. Typically, a 10% correction is not unusual at all. So, I expect this to last a little bit longer in time, but I don’t think it’s going to last very long.
Q: So, the fear remains though that the Fed will become too aggressive?
Malanga: Yes, and I think that’s a legitimate fear given the concern they’re expressing about inflation. The big risk in my in my opinion is that the Fed over does it and tighten too much. Then we wind up in a recession in the early part of 2023.
The other risk, given the fundamental fiscal tightening that’s going on, is that we wind up in a period where the Feds sort of backs away, inflation continues to fester and we wind up with some sense of stagflation, which is something on the order of 1% growth and 5% inflation.
Of the three of the three alternatives, two of them are negative. The Fed has to walk a real high wire act in here whereas they whereby they don’t tighten too much but they don’t tighten too little either.
