Mazars’ George Lagarias: A watershed moment for risk

Another area would be cryptocurrencies. The market is not very big, roughly $1.7tn, while annual profits are estimated around $1bn per annum. By comparison, the global equity market is $110tn^[1]and the global bond market is around that size. Global central banks and regulatory authorities have shown tolerance of cryptocurrencies as a precursor of nationally issued digital currencies and in the spirit of innovation. However, if cryptocurrencies are seen as a way for Russia to evade sanctions, then the regulatory tide could turn against them very quickly.

The third possible area is monetary policy and central bank independence. The Fed (and the Bank of England) have sets their sights on inflation. Can Ukraine lead the return of accommodation? On the one hand, Russia controls large stockpiles of key commodities from Oil and Gas, to Wheat, Nickel and, Copper, Aluminum and Palladium to name a few. Sanctions will by definition be inflationary. The hopes that supply-side inflation was ebbing were dashed when Russian tanks crossed the border of the Donbas region. On the other hand, inflation is not the Fed’s real mandate. It’s growth and economic stability. The Fed has acted in a very accommodative manner in the past decade, with the specific intent to repress risks. It is very hard to think that now, when geopolitical risks got very real, it will turn its back on market volatility. Especially as the effectiveness of interest rate hikes as a tool to combat supply-side inflation is questionable. The Fed is in a dilemma as it is. Will it chose to reduce market volatility or try to fight inflation? If, however, strategic interests for the US take precedence over business concerns, then this may not be Mr. Powell’s decision. In plain words, it is difficult to imagine the Fed’s independence remaining completely intact in an environment where geopolitical safety considerations become more important.

A fourth area is Brexit. Apart from the US, the only NATO allies which have been regularly meeting their defence spending targets are the UK and Greece. The UK has been a proponent of hard sanctions from the beginning. Conversely, Germany has been more reluctant, more dependent on Russian Gas, and resisted a call to eject Russia from the SWIFT global payments system. In a world where business interests are more important, it has often been said by Washington insiders that a trade deal with London was at the back of a long queue. But in a world where security concerns are more important, the gains for Britain could be significant.

At the very top level, a New Cold (or Hot) War, could significantly change the political calculus in Washington, starting with the 2022 Mid-term elections, and possibly the 2024 Presidential Election. Overall, consequences around the global will be many and far reaching. Russia has done its analysis and made its move. Now it is for America to respond. In chess, the winner is the one who sets the terms of the game. Any seasoned chess player would say that for the US President to stay ahead of the curve, he needs to come up with a response that will surprise his Russian opponent. Or else he will be playing his opponent and lose some of his strategic and size advantages. The world, and Taiwan, are watching.

Thus, from an investment point of view, a word to the wise: investment and business considerations may not be at the top of the agenda in the next few months, and this should significantly change planning. Our projections are linear, but the world is very much in flux. When the game is afoot, the status quo does not apply. Only when players have reached a new equilibrium will we be able to confidently analyse what the “new normal” may look like.

[1] Bloomberg World Exchange Market Capitalisation Index (WCAURLD Index)