Shall We Play A Game?

Shall We Play A Game?

So, there was a mutiny, or something, over the weekend in Russia. What happened?

Yevgeny Prigozhin, head of the private military contractor Wagner Group, moved his military towards Moscow. He stopped 200km short, discussions were had, and he stood down. Prigozhin will be exiled to Belarus, charges against him will be dropped, and his fighters will be invited to join the Russian military. There are a lot of different opinions of motivations, and just what exactly happened, but that seems like the basics.

Was the coup real? It seems so. Failed coups can be quite short. Military experts had hoped that at this point, the Ukrainian counteroffensive would be forcing the Russian army’s back to the wall. That would be the time to strike, and the basic idea could have been planned months in advance. It can be hard to back out of something like that, even if it wasn’t quite working out as planned. Prigozhin seemed to get no support, including many of his own troops. If nothing else, it creates questions about Russia. How stable is it, really? It also looks like the Wagner PMC will be dissolved. That could hurt their strong relationships in Africa, as they may no longer be trusted.

The point here is not to pose as a Russian or geopolitical expert, though. The idea is that unexpected events, black or grey swans, come up all the time. Imagine this had happened on Monday at noon, not Friday after the market was closed. What do you do? I’m not sure there are right answers. Here are some general thoughts, though.

What you think will happen should take a backseat to what the market thinks could happen. You’re likely not setting the price on assets, so what will the market do with this? Will there be concerns about a nuclear superpower being destabilized? Will any dip get bought? Does it really change anything at all, in the market’s mind? In addition, there’s the question of liquidity. What happens in the pre- and post-market can be different from when the market is open and real buyers or sellers show up.

Longer-term, you can watch the market’s reaction and see where you think they may be wrong. Let’s say the market worries that a nuclear power is in trouble and buys Treasuries. You think nothing at all has changed, and in fact, sticky inflation and a likely rate hike in July will hit Treasuries. Great! You can sell your Treasuries into the panic bid.

My blogs get written on Sunday. On Monday they go through compliance, then get published, usually about 20 hours after they’re written. By the time you read this, we’ll know much more about what the market thinks of all this, if anything. That’s kind of the point, though. Multi-sigma surprises happen in markets all the time, because the real world isn’t actually a normalized bell curve of events. We need to be aware of that.

Human nature is to assume the future will resemble the recent past. We can drive forward by watching the rearview mirror. Obviously, sometimes that fails spectacularly, and sometimes it takes only a small bump to shake things up. Right now, for instance, the broad stock market has been consistent in predicting a steady path ahead. If investors start repositioning to hedge against a new outlier, that can shift other investors to change as the environment moves.

I have no idea if a butterfly flapping its wings will cause a real shift, here. I do know, however, that the market is a system that shifts from stable to unstable. A forest fire is most damaging when there hasn’t been one for a while. Chances are nothing too dramatic can happen here, as the economy still looks too stable to cause a real mess, but could this be an event to shake confidence a little? All we can do is try to position ourselves towards favorable odds, and watch.

As I send this off for review, stock futures are up a bit, as investors seem to be looking at Japanese verbal intervention in markets, rather than Russia. Oil is up a bit, though. Will this end up being viewed as unimportant? Will some investors react after the market opens? We’ll see. Fundamentally, though, what I think should happen doesn’t really matter. The market will make a move, and we can decide what we want to do with it.