Click to enlargeThis is not a political call. We don't really care to comment on politics. This is a call to say we were very surprised by a sequence of events that we don't think has recently occurred. Russia attacked the US. Not only did the US not fight back, they joined Russia to join the Syrian leader who they had been fighting. We think this is to avoid any conflict into the elections. Putting national strategy and risk aside for the sake of elections tells us there is a TON of risk that will seep out at some point soon.
We think these type of events are a reminder how much market (NYSEARCA:SPY) coil risk is building with the potential to spring at any time.
Before we go into this we want to ask a question. Any US administration that was attacked by Russia anywhere in the world would do what:
A) Increase pressure on Russia
B) Cut off relations with Russia
C) Side with Russia and work with them according to Russia's strategy and completely abandon whatever strategy the US had previously.
I would have guessed A or B but the correct answer last week was C.
We think the US for some strange reason wants to avoid conflict going into the elections because it will make the Democratic Party look weak.
We like to be altruistic and say actions of government are done for the good of the nation. We prefer not to think that government moves would be postponed for the good of a political party.
These moves that we are about to show are so strange. The reason we bring them up is that it is just one more building risk ahead of elections that is getting swept under the rug.
Among other risks so far getting swept under the rug are:
1) Rate hikes (It will hit markets)
2) Cutting Fed reserves balances in their plan of normalization (they will hit markets).
3) Living will resolution failures (Enforcement will break banks and we think will tighten credit.)
4) And now... war with Russia
We think there is incredible risk building for the market and we think that at some point either it's going to burst forth after the elections or by accident before the elections.
We are referring to a recent exchange and outcome with Russia that shocked us.
Let's start here with this quote from an amazing Wall Street Journal Article ("WSJ"),
"U.S. military and intelligence officials say the previously unreported close call for Western forces on June 16, and a subsequent Russian strike on a site linked to the Central Intelligence Agency, were part of a campaign by Moscow to pressure the Obama administration to agree to closer cooperation in the skies over Syria....But White House and State Department officials, wary of an escalation in U.S. military involvement in Syria, decided to pursue a compromise."
The US not only backed down they joined Russia.
"In exchange for the U.S. easing Moscow's international isolation, Russia would halt airstrikes on the U.S.-backed rebels and restrain the Syrian air force."
Whatever was the US strategy of the war in Syria, it completely changed because Russia put pressure on the US. The US game-plan is out the window and they agreed to work with Russia based on Russia's plans.
So after a little pressure from Russia, the US made a total about face.
"Since its armed intervention on behalf of Syrian President Bashar al-Assad last September, the Russian air force has conducted hundreds of sorties against CIA-backed rebels fighting his government, fueling U.S. anger."
The US will be now turning around backing Assad through Russia someone who the US was previously against (CIA-backed rebels).
Maybe the Russian attack was by mistake? Nope.
"After that first Russian strike, officers with the U.S. military's Central Command air operations center in Qatar called their counterparts in Russia's air campaign headquarters in Latakia, Syria, U.S. officials said. The American officers told the Russians that the garrison was part of the U.S. campaign against Islamic State and shouldn't be attacked. Roughly 90 minutes after the U.S. warning was delivered, U.S. aircraft circling nearby watched as the Russians launched a second wave of strikes against the garrison."
The point of our report is not to question war strategies. The point is that such a glaring about face, we think, is to avoid conflict ahead of elections November 8th. We think this is such an ironic sequence events that in "normal times" this would likely never occur.
But don't think the US was so so weak. They held their ground to some extent. Read this,
"Officials close to Mr. Kerry said he shares the skepticism of military and intelligence officials about Russian intentions, which was why he inserted a clause during the negotiations to allow the U.S. to unilaterally suspend cooperation with the Russians if they started bombing U.S. allies again."
Very tough move but the US threatened to not cooperate if Russia bombs the US again. Very harsh, wouldn't you say? Not really.
China and Japan
We mentioned in another recent report (Risk To Our Bear Case In Oil) (NYSEARCA:USO) (NYSEARCA:OIL) (NYSEARCA:UWTI) that Japan is taking steps to change their constitution to allow acts of war. Such acts are currently unconstitutional.
China had serious military acts in a disputed area in the South Sea Of China and warned others recently from trespassing.
China and Japan are a risk to each other and the world.
These steps like the recent US escalation in Syria by US bombers seems to have a rising tenor of military action globally.
The building of war tones can't be ignored and has potential serious investing consequences. We think it's another excuse to be in cash or more look for points to short.
We were surprised by yet another sequence of events, this time in a new venue, war. Keeping markets calm at any expense ahead of elections appears to have taken center stage.
QE, interest rates and now military strategy seem to all adjust to the call for calm ahead of elections. Russia is smart. The world is smart. If there is a window of weakness, we as investors should be aware of such risks that are ever-present. We don't want or call for anything but anything can happen at any time and we see a murmur building.
Please be safe. We are bearish.
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Disclosure: I am/we are short S&P 500 / UPRO BUT THAT CAN CHANGE AT ANY TIME.
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