Ukraine and the U.S. economy (JPMorgan analysis)

[mountaineer]

I received via email an "Eye on the Market" newsletter from JPMorgan Chase, and found the following analysis interesting:

Since the end of World War II, military conflicts and civil wars rarely had lasting impacts on US or European equity markets.  The exception, as we noted in April of last year, was the Arab-Israeli war of 1973 which led to an oil embargo, an energy crisis in the US, inflation, a severe recession and a sharp equity market decline [pre-existing US wage and price controls did make the situation worse].  But this was the exception: for example, Soviet invasions of Hungary, Czechoslovakia and Afghanistan, and the Soviet imposition of martial law in Poland, did not result in lasting damage to US or European markets.

Here’s the “but”.  In these 4 situations, Presidents Eisenhower, Johnson and Reagan did not directly intervene militarily on behalf of invaded countries.  If the US/NATO and Russia end up in military conflict, all bets on market stability are off.  As for bipartisan Congressional proposals to arm the Ukraine, ... military aid would hardly change the balance of military power in the region; military aid might be used in ways that one cannot anticipate (see US funding of Afghan Mujahedin in the 1980’s); and I have not seen an assessment from proponents of military aid of how Russia might respond, either in the Ukraine or in the Baltics where there are large sub-populations of ethnic Russians. 

Unfortunately, the opportunity for a benign Finlandization of the Ukraine appears to have passed.  The best outcome now may be a divided Ukraine, with the more prosperous East existing as an autonomous Russian-influenced region (i.e., Transnistria/Moldova and Abkhazia/Georgia), and the less prosperous West trying somehow to exist as an independent country. 

How will Europe engage with Western Ukraine, whose economy and financial system are collapsing?  Europe began this dance by trying to draw the Ukraine, which was part of Russia for centuries (and which was acknowledged by Soviet dissidents like Solzhenitsyn as an integral part of Russia), into the European orbit.  At a client conference we had last week, I spent an hour with Henry Kissinger walking through implications of events in the Ukraine.  When history is written about the events leading to where we are now, Kissinger believes it may focus as much on Western provocations and a misreading of Russian history as on Russian military aggression.  That will be for historians to decide; for now, investors should be aware that US Congressional proposals to provide military aid to the Ukraine (with US personnel possibly required to train them) may lead to both military and financial market instability if enacted.   

Whether the Ukraine receives US military aid or not, the immediate prognosis looks dim.  One thing’s for sure: President George HW Bush’s warnings in the early 1990’s on the need for a deliberate, cautious approach to the Ukraine’s status, derisively mocked by Nixon speechwriter William Safire, have turned out to be pretty accurate.

[Oceander]

Opposing Hitler wasn't exactly good for the markets either.  Does that mean that the US and the other Western nations were at fault for going to war with Hitler?  Wouldn't it have been better if they'd simply rolled over and given Hitler all the lebensraum he wanted?