Swamponomics: This Means War – And a Stock Market Rally?

After weeks of taunting, threatening, and trolling, Russian President Vladimir Putin gave the go-ahead to invade Ukraine, causing the global financial markets to drown in a sea of red ink – at least temporarily. The leading benchmark indexes sank, commodities soared, and currencies plummeted. But investors, from the institutions to the armchair traders, took advantage of the hemorrhaging and bought the dip in equities. Is this further proof that the market is irrational, or is this how the New York Stock Exchange generally functions?

Despite the crash at the Feb. 24 opening bell, stocks finished the session higher. They continued this momentum heading into the weekend, posting triple-digit gains and the best day of 2022. The Dow Jones Industrial Average soared about 800 points, the S&P 500 Index added 100 points, and the Nasdaq Composite Index surged nearly 200 points. Bonds climbed higher, with the benchmark ten-year Treasury yield up 0.028% to 2.00%. Investors were so confident, they dumped the U.S. dollar, gold, silver, and energy commodities. Even Russian stocks were up as the VanEck Russia ETF and the Direxion Daily Russia Bull 2X Shares soared 17% and 32%, respectively.

So, what happened? There are a couple of possible reasons to justify this head-spinning turnaround.

The first is that the final shoe dropped in the Ukraine-Russia saga when Moscow pulled the trigger on an invasion. The financial repercussions have been clearly outlined, and the worst is over. The war has now manufactured a calm ocean of certainty. Unless there is a nuclear conflict or the United States puts boots on the ground in Kyiv, investors’ worries have faded. Put simply, like the Mar. 23, 2020 bottom, markets are forward-looking.

The second is that participants in the equities arena are speculating that everything will be fine at home. President Joe Biden reiterated that Western sanctions are targeting the Russian economy. In other words, the Ukraine-Russia conflict will not dramatically impact the U.S. economy, except potentially on the energy front. Plus, the situation that could intensify inflation might give the Federal Reserve some pause to accelerate rate hikes, meaning the Eccles Building might move ahead with a 25-basis-point increase rather than a hefty 50-basis-point jump.

The U.S. stock market is predictably irrational. This is why 90% of day traders lose money, and the meme stock enthusiasts are presiding over portfolios deep in the red. As legendary comedian Milton Berle once said, “Pick your spots, baby.” Peace, what is it good for? Selling. War, what is it good for? Buying.

Russia Testing China’s Patience – And Wallet?

In recent years, Russia and China have advanced their working relationship for the good of dismantling the United States. From currency swaps to lucrative multi-year energy agreements, Beijing and Moscow are attempting to undermine world order and skirting U.S. hegemony. But does China's friendship with Russia include its decision to invade Ukraine? While the Chinese Communist Party (CCP) has showcased its support for President Vladimir Putin's invasion of its western neighbor, a couple of state-owned entities are potentially cracking under pressure.

Bloomberg recently published a report that confirmed two of China's largest government-owned financial institutions are limiting financing for purchases of Russian commodities, mainly oil and gas. Industrial & Commercial Bank of China ceased issuing dollar-denominated letters of credit to acquire physical commodities from Russia that are ready for export. The Bank of China has reduced its financing for Russian goods, citing internal risk assessment.

It is not only the banks that are restricting imports of Russian commodities. Chinese refiners and traders are delaying their purchases of Russian crude until the situation has subsided. Plus, freight costs for cargoes loading from the Black Sea have dramatically increased in price amid security concerns, resulting in fewer transactions.

Global markets are ebullient that U.S. sanctions are not homing in on Russia's energy industry – for now. But this has not stopped several sectors in markets worldwide from imposing restrictions on financing Russian purchases. Moreover, experts note that Chinese banks monitor sanctions closely and take more significant action when U.S. dollar transactions are at stake.

Perhaps China will intervene in the situation and urge Russia to cease its military conflict when the costs become too enormous to bear. Be it sky-high energy prices to a disruption in the global marketplace, every yuan has a price.

GAO: Be Ready for Student Loan Delinquencies

Since the early days of the coronavirus pandemic, federal student loan payments have been suspended. President Joe Biden recently extended the suspension, essentially rejecting a proposal to cancel thousands of dollars in government-backed student loans for millions of Americans.

With the United States economy possibly moving on from the public health crisis, the federal government is set to resume payments this spring. But be prepared for millions of borrowers to struggle with paying back $1.7 trillion, the Government Accountability Office (GAO) warned in a new report.

The GAO found that as many as half of the individuals chained with federal student debt could be on the brink of delinquency. In addition to fiscal problems, the GAO noted that the Department of Education could possess outdated contact information, making it harder for officials to get in touch with borrowers to inform them of the amounts due.

Before the COVID calamity, approximately one-quarter of borrowers were estimated to be in delinquency or default. Indeed, this is an issue that has crippled millions of young people nationwide, particularly for those unable to locate employment that mirrors their credentials. So, is it any wonder why millennials have been pushing the administration to cancel student loan debt?

~ Read more from Andrew Moran.