As the tragedies in Ukraine and other Russian surprises have unfolded, I was most amazed by how unprepared the Russian army seems and that a ragtag team of civilians defending their homeland could put up such a fight. I always love an underdog. Along with showing the scrappiness of the Ukrainians, this serves to expose Russia’s weaknesses, which I now surmise would succumb easily to offensive aggression. I had considered Russia a military superpower, but I now see them as a blustering bully who is disorganized and under-supplied.

Clearly, the world has turned on the bully, and it appears the cold war is back on. I pity the average Russian citizen, who was just getting used to capitalism and its luxuries, like good coffee and bad burgers. Unfortunately, those days are seemingly over for them, and that taste of the good life might spell trouble for Mr. Putin at home. Russia’s exile from the world’s payment systems should doom the Russian economy in short order and return them to third-world status.

Russian Oil

Amid these Russian surprises, the world is also adjusting to the absence of Russia’s oil. I have no idea how this plays out in detail, but higher energy prices seem a near certainty. According to global strategist Peter Zeihan, Russia’s fields were already in decline. Their economy was banking on the billions in infrastructure spent by BP, Exxon, and Shell to juice their exports. While Russia talks a big game about confiscating and using those assets, Argentina tried that and failed miserably. So those Russian projects are abandoned now, and Peter says it will take decades for western companies to forget, likely keeping Russia out of normalized trade until the middle of the century. He also predicts oil at $170, which I find plausible.

At first glance, oil-heavy investors like me relish the thought of $7 at the pump. But high gas prices will crimp budgets of average Americans, along with the pinch they’re already feeling from crazy prices on meat and other daily items. The spike in inflation we are experiencing at home had already provided commodity products (like oil) with a steady tailwind. That breeze has gone to gale status.

I initially thought this inflationary bump was COVID-related and temporary, but now it seems to have legs. It bothers me that long-term bonds have yields far lower than current inflation; the 30-year Treasury pays 2.43% while inflation is running near double digits. What are those bond buyers thinking? They must expect that inflation is just a phase, and maybe so. Bonds always compensate for inflation and not much else. Large gaps in yields vs. inflation must close over time. Either rates must rise significantly, or inflation must abate. The recession that normally takes hold in times like these might have them meet in the middle.

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