Over the last week – Russia’s Foreign Ministry has said that Ukraine’s accession to NATO would lead to a “large-scale escalation” of the war in Donbas & “irreversible consequences for Ukrainian statehood.” 

The Kremlin said – “the new situation in east Ukraine raises the possibility of full-scale military intervention.”

The fundamental problem with aggressive accommodation from central banks comes down to a market foundation built on moral hazard. 

Each day, week, and month the Federal Reserve provides more juice, the leverage piles up in pockets all over the planet. 

Of course, central bankers often don’t see the toxic leverage until it’s far too late. Here lies the conundrum. While providing excessive accommodation (the Fed is making $120B of asset purchases monthly), when traditional shocks arrive – as they always have – the market is ill-prepared. 

Far far less so than under normal conditions historically. Take Covid-19 for example. Many people forget the Fed embarked on additional quantitative easing in 2019. 

By Q1 2020, relative value hedge funds were running 20-1 leverage – yes, stepping in front of the steamroller to pick up $100 bills. 

One of the primary reasons why the Fed’s March 2020 bazooka was 5x larger than the weaponry used in the post-Lehman failure era (2008) – comes down to the enormous leverage in the fixed income market. 

The Fed literally had to put out a fire, 10x the size of Long Term Capital Management. 

In March 2020, at least ten hedge funds were on the brink of failure.

*A relative value fixed income hedge fund will go long vs. short either on the run (liquid) vs. off the run (illiquid) bonds or long cash government bonds vs. futures contracts. After all, a 1% annual return levered 20x magically becomes 20%, just insert the steamroller. These funds will PRINT fabulous returns year after year and then give it all back in a week – they NEVER learn.

After President Obama was elected, there was the classic test from the bully that is Vladimir Putin, some say he disdained him. Russia’s move? He took Crimea and put Eastern Ukraine, converting the region into a permanent low-grade conflict. 

Putin realizes the best border that he can most easily exploit while giving Russia a geographic buffer against the West is a long-lasting, low-grade conflict in quasi-failed states within his sphere of influence. 

Hence Georgia. Hence Transnistria Romania. Hence Syria (love that Mediterranean port!). Today, adding insult to injury – he is militarizing the Arctic Circle. 

As our clients are pointing out in our live institutional chat on the Bloomberg terminal – before every invasion, the invader tries to first establish the moral justification for an invasion.  

Russia has already started to build a “humanitarian” justification for direct action – a strong indicator of possible action. This is exactly what is going on now.

China did not make a move during Obama’s reign, nor Trump’s, and Xi may think that represents a missed opportunity. But the Chinese military really wasn’t up to snuff back then. 

On April 21, 2016, Xi became Commander-in-Chief of China’s Joint Operations Command Center of the People’s Liberation Army. 

To quote Ni Lexiong (lecturer at Shanghai University of Political Science and Law), Xi “not only controls the military, but does so in an absolute manner, and that in wartime, he is ready to command personally.” 

At some point, you have to walk the walk, not just talk the talk. China’s military has been built up, primed, and readied. 

Numerous senior officials in Biden’s DoD (Dept of Defense) are ringing alarm bells about potential Chinese aggression i.e. —  against Taiwan. 

As Niall Ferguson reminds us all, since the Communists’ triumph in the Chinese civil war in 1949, the island of Taiwan had been the last outpost of the nationalist Kuomintang. 

And since the Korean War, the U.S. had defended its autonomy. Taiwan is still treasured land for Xi and China.

Meanwhile, our own military brass has been complaining for decades about how it would be very difficult for the U.S. to fight three wars simultaneously. Think – Ukraine, Taiwan, and some sort of the Middle East/Central Asia/Iran mix.

Trump Biden – Putin Xi

Again, neither Putin nor Xi made a move during the Trump administration. Why? Why did they treat each meeting with Trump officials respectfully? Why did Chinese diplomats dump all over Biden’s team in Alaska, in over the top, disgracefully so fashion? 

Well, Putin, Xi, and Trump are all bullies, and above all unpredictable. Think back to a playground in grade school. Bullies don’t pick on bullies. Bullies pick on snowflakes. 

In Biden – Putin and Xi see a weak old man in decline, a figurehead for an Obama third term of a country that itself is in decline, laden with debt, riven by internal strife, and sick of war. 

Realistically, what would the U.S. do if Russia made a military move on Eastern Ukraine? Nothing. And if China saw that, Taiwan would be at serious risk.

The Life of a Super-Power in Decline

During the reign of Marcus Aurelius, emperor of Rome from 161 AD to 180 AD, the omnipotent stoic philosopher spent much of his time on military expeditions along the Danube, containing German incursions. 

In 387 AD the first German hordes crossed, never to leave. In 410 AD the city of Rome was sacked. In 487 AD the Western Roman Empire fell. Europe wouldn’t achieve its earlier economic prosperity for 1000 years. 

There are literally over 200 reasons listed by scholars for Rome’s fall, but certainly among the most important is that Rome had debased its currency to pay debts, and stretched its military too long beyond its limits. 

Meanwhile, farmers were cutting off their thumbs to evade the military draft. No thumbs: no spear throwing, no sword-wielding. Sure, the Roman West scrounged up a strong emperor from time to time (Aurelian, ruled 270 AD to 275 AD), but then a string of weak ones would follow hard thereupon. 

Meanwhile, the Germans were mastering Roman military tactics, and gaining wealth from trade with Rome. And always testing Rome for any military weakness. 

Finally, when Rome was at its weakest, the Germans faced incursions into their own eastern flank and poured into Western Europe. And now, here we are.

Testing and Probing

Today, Russia and China are continually testing and probing the U.S. for weakness, just like the Germans did Rome. 

Occasionally, we vote in a bully. But half of our population finds that unbearable. So we vote in a doddering weakling in the name of normalcy and decency. And that’s fair. But Putin will push. For sure. Then Xi will push. For sure.

America will fail that double test, most likely. If America passes the two tests, there will be more tests. For sure. That’s just the nature of the game. The risk-reward is never perfect but looks pretty good right now from Putin’s and Xi’s points of view.

Some of our best relationships were in Kiev for the Orange Revolution. There was vast protesting on Independence Square in Kiev when Kiev’s Chief of Police walked on to the platform and proclaimed to the crowd that the Kiev Police Department had joined the revolution. 

He shouted, “We are with you!” The moment was electric. Everyone knew the tide had turned in favor of the Revolution. Cheers of joy waved through the crowd. An unbelievable moment of exhilaration.

The Dnieper River is Ukraine’s longest and Europe’s fourth, rising in Russia and spilling into the Black Sea. It is well known since ancient times: Herodotus describes it in his Histories. And it cuts Ukraine down the middle, effectively resulting in three Ukraine’s: the Crimean peninsula, Western Ukraine and Eastern Ukraine. 

It is well known that years before his annexation of Crimea, Putin approached Poland with the following proposal: you take Western Ukraine and I’ll take Eastern Ukraine. 

The Polish government was shocked, but this has given a lasting impression of Putin’s strategic goals in the region.

Eastern Ukraine is much more Russian. Western Ukraine is much more Ukrainian, far more European. It was Western Ukraine that drove the Orange Revolution. 

When the government wanted to strengthen its hold, our friends witnessed busloads of Eastern Ukrainian thugs, heads shaved and donning long black leather jackets everyone, dumped around the perimeter of Independence Square. 

They were scarier than the tanks that were already there. But in the event, they were bought off with vodka and weren’t much of a factor. 

The Eastern Ukrainians were skeptical and indifferent. The Western Ukrainians were enthusiastic, and Kiev, passionate. The Orange Revolution prevailed.

But then the new government became corrupt as many had predicted. And that did anger Western Ukrainians because they were left out of the action. 

So the new government fell to the old government. But that was unacceptable to the US. So the old government fell again leaving the current mess: Crimea gone, the East in low-grade conflict, and the West sullen and demoralized.

It is a pleasant coincidence for Putin and Xi that Hunter Biden has business “experience” in Ukraine and China.

In sum, Putin believes Eastern Ukraine is ripe for the plucking, but that Western Ukraine is closed to him. When should he take the East? Now or wait for the US to elect another bully, perhaps reelect Trump himself? Now is the time. Strike while the iron is hot.

Meanwhile, Xi views it as his manifest destiny to take Taiwan. Unlike Vietnam, which does have a minority Chinese population, Taiwan is really and truly Chinese. 

And it is hard to square a visionary goal of China being the single greatest dominant power on earth if it can’t even “take back” Taiwan. 

So if Xi sees Putin consolidate Eastern Ukraine, the pressure on Xi to consolidate Taiwan will prove irresistible.

Niall Ferguson and the Taiwan Relations Act

Ferguson’s depth and work on this subject is second to none. To Niall’s point, the act states that the U.S. will consider “any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States.” 

It also commits the U.S. government to “make available to Taiwan such defense articles and … services in such quantity as may be necessary to enable Taiwan to maintain a sufficient self-defense capacity,” as well as to “maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.”

And perhaps none of this would matter much to markets, a couple of 10% shakeouts, if we weren’t at highly levered all-time valuation highs, with call options being bought hand over fist as a result of forever money from the Fed.

And we notice cracks here and there in the market action even at fresh new highs: Nasdaq Biotech IBB ETF acts like death (nearly 16% off the Feb highs), ARKK Innovation ETF has $25B of new inflows now WAY underwater and the S&P 600 small-cap indices look very weak. 

These weak spots smell too high heaven, fewer and fewer stocks are holding up the market. The TRIN index remains cautious. The Archegos affair causing the margin to be reigned in. 

It’s an odd new high. Perhaps it will get better. Perhaps it will gain strength and come to look like a normal bull run. It happens.

But we have real geopolitical military risks right now that we haven’t seen since the eve of WWII. Ignore that risk at your peril. We won’t.

There is only one way to pay for war without conquest: inflation. And there is only one price to pay for running away from war: loss of power. Either scenario is bad for stock markets and good for gold.

Buy war insurance now.

We believe in the Fourth Turning. We believe our slate is about to be wiped clean. We believe in creative destruction. We believe the old order of today will fall to the new consensus of tomorrow.

But between now and then there is a crash or sequence of crashes so only one word matters: risk. And that risk is not currently being discounted by the markets.

We stayed at a military guest house, gated and armed by soldiers bearing rifles. At least two uniformed men were on guard at all times, sitting outside their watch box next to the gate. 

That changed only on the final day, when they were replaced by men in civilian clothing. 

On our first day, following an early breakfast, we were ushered into an idling mini van parked outside. 

Our liaison, along with several other staff, mainly Ministry of Defense (MoD) personnel and translators, piled in with us. 

We were then escorted around Yangon by a six-vehicle military convoy, each with 10-15 armed and uniformed soldiers. 

They even tried following us into bathrooms at times. Our military liaison told me this was for “our own safety,” to protect us against the “violators”, the term used by the military to refer to the anti-coup protesters. 

In several instances, the language employed, especially the use of the phrase “human rights violations”, seemed specifically crafted to appeal to our sensibilities as foreign reporters. 

However, despite the ambiguity and performative undertones, these conversations made the military’s agenda and platform very clear. 

To the generals in Naypyidaw, their actions were warranted by one simple calculation: four deaths, purportedly the result of the anti-coup demonstrations in Yangon, justified the over 600 murders of protestors by security forces.

Major General Zaw Min Tun avoided the question when I asked about this during my interview with him later in Naypyidaw, probing how he could justify this staggering disproportionality.

As I began walking through the market, a rumble of noise grew. Within seconds, the previously muted street was filled with the sound of banging pots and pans, an act of anti-military disobedience that had become widespread across Myanmar since the coup. 

I looked around as the noise mounted and saw that nearly everyone in sight was holding up the three-finger salute, a symbol that has become synonymous with the anti-coup Civil Disobedience Movement in Myanmar. 

A brave act of defiance given that we were accompanied by military personnel.

A man ran by me, shaking me out of my stunned silence, beckoning for more vendors to join in with the noise-making. He stopped in front of me to explain what he was doing.

“We beat the drums against the military coup, this is our symbol. All Myanmar people don’t like the military coup, they want an elected government – the government of Aung San Suu Kyi,” said the man, a 60-year-old retired seaman, referring to the ousted civilian leader. 

As he spoke, a stream of police officers began marching down the streets. The man pulled me back as they passed.

“You see what I mean?” he asked, referencing the growing security presence in front of us, deployed to quiet the protesters. 

“The police come to this market everyday. Every night at 8pm they come to quiet us. They are everywhere, they oppress all people.”

“The military is shooting everyone without reason. If we bang our pots and pans, they shoot us. Please help us, we really need it. They are covering up the truth. The military wants to show fake news to the world,” said the woman.

And yet, despite their best efforts, the regime’s ill-fated propaganda schemes did little to flip the narrative.

One woman cried out to us as we left the market in Yangon.

“Please report back our real stories.”

That summer, Sabit and her mother returned to Kuytun, to settle her father’s affairs. Friends had warned her not to go: rumors had been circulating of an escalating crackdown on the indigenous peoples of Xinjiang—of Kazakh traders being disappeared at the border. 

But Sabit had made an uneventful trip there less than a month earlier, and she wanted to be by her mother’s side. 

For two weeks, they met with family and visited ancestors’ graves. The trip, she later recalled, “was full of tears and sadness.”

On July 15th, Sabit and her mother drove to Ürümqi Diwopu International Airport, for a flight back to Kazakhstan. 

They arrived in the middle of the night, and the building was nearly empty. 

At customs, an officer inspected her mother’s passport and cleared her to go. 

But when Sabit handed over her documents he stopped, looked at her, and then took her passport into a back office.

“Don’t worry,” Sabit assured her mother, explaining that the delay was most likely another bureaucratic annoyance. 

Minutes later, the officer returned with an Uyghur official, who told Sabit to sit on a bench. 

“You cannot leave,” he said. “You can discuss between yourselves whether your mother will go or stay.”

Once she was gone, the official turned to Sabit and coldly explained that she had been assigned a “border control”—a red flag, marking her for suspicion. 

“Your mother was here, so I didn’t mention it,” he said. “You should know what Xinjiang is like now. You’d best coöperate.”

Nowhere did this seem more apt than in Xinjiang, where China’s leaders continually appeared to mistake popular discontent for a growing insurgency. 

The 2009 protests in Ürümqi—following similar ones in Tibet—caused Party theorists to call for engineering a monocultural society, a single “state-race,” to help pave the way for “a new type of superpower.” 

One influential domestic-security official noted, “Stability is about liberating man, standardizing man, developing man.”

Several months later, in Yunnan Province, a small group of assailants dressed in black stormed a train station and, wielding knives, brutally killed twenty-nine bystanders and injured more than a hundred and forty others. 

Although no organization claimed responsibility for the incident, an insurgent group based overseas celebrated the attack. 

The authorities declared that the assailants were Uyghur separatists, and in Beijing the incident was called “China’s 9/11.” 

Xi was enraged. “We should unite the people to build a copper and iron wall against terrorism,” he told the Politburo. “Make terrorists like rats scurrying across the street, with everybody shouting, ‘Beat them!’ ”

Soon afterward, the Party leadership in Xinjiang announced a “People’s War.” The focus was on separatism, terrorism, and extremism—the “Three Evil Forces.” 

The region’s top official took up the campaign, but Xi grew dissatisfied with him, and two years later appointed a replacement: Chen Quanguo, then the Party secretary of the Tibet Autonomous Region—a tough-minded apparatchik whose loyalty was beyond question.

The P.1 variant shares mutations such as E484K, K417T, and N501Y and a deletion in the orf1b protein (del11288-11296 (3675-3677 SGF)) with other VOCs previously detected in the United Kingdom and South Africa (B.1.1.7 and the B.1.351, respectively).

Prevalence of P.1 increased sharply from 0% in November 2020 to 73% in January 2021 and in less than 2 months replaced previous lineages (4).

The estimated relative transmissibility of P.1 is 2.5 (95% CI: 2.3-2.8) times higher than the infection rate of the wild variant, while the reinfection probability due to the new variant is 6.4% (95