Geopolitics & Trading

I’ll start by saying that a big part of the reason I can’t stand legacy news, like that on typical television, is that I can’t stand hollow emotional narratives. To me it just feels manipulative and divisive. The reality is we aren’t individually in control of anything except our own interactions with others, and whether those are civil or not. That being said, the nuggets I have gleaned from the situation so far are as follows:

  1. As of yesterday, the Russians have moved in from 3 fronts, but they mainly focused on regions near their borders which have little resistance.
  2. The Russians seem to be targeting airbases and air defenses to ensure air superiority on their side.
  3. The goal seems to be regime change, hence the focus on Kiev. This is why Putin says that far-right neo-nazis have taken control of Ukraine, in order to justify that move. The current leadership is too pro-Western, and he will not allow certain border countries he deems critical to join NATO.
  4. Russian dominance of its key border regions – Kazakhstan, Georgia, Ukraine & Belarus – is not new and unprecedented, it has been the case for hundreds of years from the Russian Empire, to the Soviet Union, and continuing through the period following Soviet dissolution. I’m not saying this is right, I’m just saying that this is the case and it does not mean we’re on the eve of world war 3.

It’s been an insane week in the markets, with lots of chop. Before the invasion, I actually thought that things would settle down. Russia is a critical supplier of fuel and food to the rest of the world, and consequences of abruptly ending that trade would be devastating. At the same time, the West made it clear that they would not interfere militarily, so I thought it would force a private agreement between Purin and Zelenskyy to give the Russians the assurances that NATO couldn’t give.

I was not alone in this view, and two nights before the invasion I decided to look at some Russian stocks as a gamble for peace. I came up with the ETF’s LETRX & RSX as well as OGZPY. Ultimately I decided to go with the higher dividend play on Gazprom, so the next day I bought some OGZPY. Before the end of the trading day, I also bought 2 well out-of-the-money calls in SPY, betting that the deeply oversold stock market would shoot higher.

The next day I was certainly surprised by the invasion. Partly due to stubbornness, I added a bit more OGZPY at super-cheap prices that morning figuring that the US and Europe could not afford to cut off Russian oil and natural gas anyway. That turned out to be a decent bet so far, though I’m still down in the position overall, but I’m not adding more because it is currently a high risk/high reward play. If we prevent US ownership of Russian stocks, I could lose most of what I put in there. If things settle down geopolitically, then its current price of $5.30 sports a P/E of 2.8 when our S&P 500 has a P/E ratio of 24, and a dividend yield of 6.4%. In other words, Gazprom is crazy cheap because of the risk that you could lose nearly everything you put in, but you could earn multiples if geopolitical events settle, so I plan on holding my small position to see how things play out.

On Friday, we surprisingly got that oversold bounce I was looking for on the S&P 500 and I managed to sell off my SPY calls for a near double. The choppiness here is insane. I still refuse to speculate on puts until mid March, as I see the risk of a low-volume melt higher as bigger than the risk of a market crash before the Federal Reserve really turns from easing to tightening.

Back to Russia … when looking at the potential geopolitical consequences of cutting Russia off from Swift and banning their oil & gas exports, consider the following:

This chart below shows what really led to this crisis. Russia has been planning to re-assert its influence on the Ukranian government since 2014, and hoping to do it with minimal international repercussions, but this is the opening that caused them to make a big move now.

This spike in European energy prices has led to unprecedented CPI spikes which make CPI in the US look tame. Either way, they are enormously unpopular as they force reduction in power by pricing the lower end out of access to home heating and destroying their industrial jobs such as manufacturing which require a lot of power usage. Could you imagine blackouts & brownouts throughout Europe throughout the entire winter? The humanitarian consequences could be devastating, and it piles on top of the critical worldwide shortages of fertilizer which will create a major food crisis starting this coming fall.

As you can see, the problems here became clear back in September. Has the west taken any of this seriously? Not really. Germany went ahead and shut down 3 of its last 6 nuclear power plants last year, with the last three due to shut down this year. They built plenty of wind and solar, but aside from the intermittent nature of this production requiring a large natural gas and coal power backup, it only produces about 1/4 of it’s rated capacity on average. The solution, more of the same peppered with asset bubbles driven by QE – as if raising the cost of housing would somehow help their situation.

How about the US? We don’t take it seriously either. Just 2 days ago we delayed any leases of US land for oil drilling, after the auctions we had last year were cancelled in court. We produce much less oil and natural gas than we did in 2019, and we won’t allow the expansion of LNG facilities to export more of it. Meanwhile, we still have environmental groups targeting key critical infrastructure and pipelines to force shutdowns with no replacement available. I often wonder what their real goal is here. Do they really think it helps the environment to import high-energy manufactured goods and fuel from countries overseas which don’t have our environmental and labor restrictions? Do they really think that they can starve the bottom of our society of basic needs such as food, shelter, heating and transportation for the good of the environment without serious geopolitical ramifications both domestically and internationally? I don’t know.

My favorite read on these subjects here: likes to say “energy is life.” He’s right.

Anyway, I’ll sum up by saying that cutting off energy supplies from Russia would cause a humanitarian crisis in the West with limited gain as they would just accelerate their pivot to exporting primarily to China.

Anyway, here’s where my portfolio wound up:

  • HEDGES (7.7%)
    • 7.7% TLT Calls
    • 2.6% AG (Silver), shares
    • 5.7% AG (Silver), calls
    • 4.4% SAND (Gold, Silver & others), calls
    • 5.0% EQX (Gold), calls & shares
    • 3.9% LGDTF (Gold)
    • 4.4% SILV (Silver)
    • 3.6% SILVRF (Silver)
    • 3.3% MTA (Gold & Silver)
    • 3.2% MGMLF (Gold)
    • 1.9% RSNVF (Silver)
    • 2.2% SSVFF (Silver)
    • 2.2% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (29.4%)
    • 14.0% CCJ, mainly shares & some calls
    • 7.3% UUUU
    • 3.3% UEC
    • 1.8% BQSSF
    • 1.6% DNN
    • 1.3% ENCUF
  • US CANNABIS (15.6%)
    • 1.8% AYRWF
    • 2.0% CCHWF
    • 2.1% CRLBF
    • 1.8% CURLF
    • 1.9% GTBIF
    • 2.0% TCNNF
    • 2.0% TRSSF
    • 1.9% VRNOF
  • CRYPTO (1.1%)
    • 1.1% XRP
  • OTHER (2.6%)
    • 2.5% OGZPY
    • 0.1% ATCO calls
  • CASH (0.3%)

My overall portfolio value didn’t change much and I didn’t trade much this week either. My Uranium miners went up while gold & silver miners consolidated, US Cannabis retreated a bit along with my TLT calls. Be ready for more choppy behavior and fierce rotations under the surface these coming weeks. I still think it’s too early to be bearish.

Good luck, and please don’t get carried away with emotional narratives. Be especially wary of any stance which lacks the ability to tolerate dissenting views.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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