The Russia-Ukraine Conflict Heats up as Macro Headwinds Strengthen

GB Market Commentary 17/02/2022

by Marcus Sotiriou

Bitcoin has failed to reclaim the $44,000 level, as it dropped this morning to around $43,000, partly due to increased fear of war between Russia and Ukraine. Even though no casualties have been reported, according to the Organisation for Security and Cooperation in Europe, there have been multiple shelling incidents along the line of contact between Ukrainian forces and Russian-backed rebels this morning. Russians have accused Ukrainian forces of conducting the mortar attacks, while Kyiv then accused the Russians of using artillery, as a kindergarten has been shelled.

Yesterday’s release of the FOMC minutes from the January 25th-26th meeting was, as expected, no surprise to the market. The minutes showed a continuation of a hawkish stance from the Federal Reserve though, as inflation and supply chain issues "would likely warrant a faster a pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019." This confirmation of aggressive tightening in the near future, in addition to fears surrounding Russia and Ukraine, creates significant headwinds for global markets over the upcoming weeks/months.

The Vice Chairman of Berkshire Hathaway, Charlie Munger, criticised the cryptocurrencies yesterday in an interview. He claimed, “it is an ideal currency if you want to commit extortion or kidnapping” and said “why would a country want untraceable technology to come into the payment system, run by a bunch of people who just want to get rich quick?”

Even though Munger is one of the greatest investors of all time, he has not been an expert in the field of technology, and research suggests he may be wrong about the crypto industry. According to Elliptic, illicit activity accounts for less than 1 percent of transactions. Furthermore, scams make up most of the cryptocurrency related crime — not money laundering or other unlawful activities. In addition, cryptocurrencies are actually easier to trace than traditional payment methods because transparent public databases exist for most transactions.

Munger’s company, Berkshire Hathaway (owned by Warren Buffet) has bought $1 billion worth of stock in a digital bank called Nubank that focuses on crypto, as it allows users to put money in a Bitcoin exchange-traded fund (ETF). At the same time, the company sold $1.8 billion and $1.3 billion in Visa and Mastercard stocks respectively. This is a clear sign that although Munger has negative views on crypto, his company still wants exposure to the fastest growing asset class in history. I expect many traditional investment firms with similar views to follow suit, as the industry is now far too big to fail. At this point, you could argue it is riskier for a wealth manager to have no exposure at all rather than having a small allocation.