asset management assocates
Private Portfolio Management

   


Right now we are seeing some saber rattling in the Ukraine. On two occasions we saw the market suddenly drop 200 or so points and the media attributed it to concerns in the that region.

These types of things happen frequently and certainly have to be watched but usually these flare ups do not effect our markets or our economy that much. They become somewhat of an excuse for investors to sell off some positions and cash in on the recent run up in stock prices. In other words a situation such as the Ukraine crises ends up being an excuse for a profit taking “correction” as opposed to a real catalyst for a long term market decline.

That being said the situation should not be ignored. What generally leads to a long term decline would be a compounding of other issues that start to take place at the same time. For example we continue to hear of weakness in China. Then we hear about economic financial sanctions from both the U.S. and Europe against Russia.Then at the same time we may get bad news about our own economy via unemployment or housing etc.  This compouded bad news is what takes the markets down for a protracted time.

With respect to Ukraine, there is an interesting dynamic between Russia and Europe.  Russia is a major supplier of natural gas to Europe and Europe depends upon that source of Energy. Russia needs the income from its gas exports. A conflict could mean a disruption of much need gas to the Ukraine and possible other parts of Europe.  This would hurt both Ukraine, Europe and Russia. Some say the U.S., with its current gas resources may have the ability to pick up the slack and supply natural gas to the Ukraine but this is not as easy as it sounds. Ukraine is for all practical purposes bankrupt and probably could not even pay for the gas  so the U.S. and European governments would have to subsidize these costs. Also the U.S. can not just fill up a truck with gas and driving it over to Europe. There is a lot of physical infrastructure that needs to be worked out to make this type of transaction. Bottom line is that if a solution is not worked out and they both stubbornly dig in their heals then this thing could lead to bigger problems down the road that will drag down the economies of both Europe and Russia – ultimately that would effect the U.S.. The world economies are fragile and they do not need any more stress.

Right now we have a situation where the United States is the most stable and best investment environment in the world so we continue to see money flow into the U.S markets. This is not neccessarily because the U.S. economy is doing so well, it is because there are few alternatives.  When tensions rise money flows to U.S. Treasuries. As tensions subside, that money seems to flow into U.S. stocks.

We could only hope that the situation in Ukraine comes to a resolution and remains contained. I am not all that concerned about it in terms of market risk, but it is not to be ignored.

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