In September of 1983 Stanislav Petrov went to work as the duty officer at the command centre Serpukhov–15 for the Soviet Air Defence System. Petrov was responsible for the early warning system that was continually monitoring for an American first strike. On that day, the unthinkable happened and the system reported that the Americans had fired five nuclear missiles towards the Soviet Union. “Stan” was faced with a serious dilemma. His military training screamed at him to immediately report the missile launch to his superiors who would then surely retaliate with their own missiles. But “Stan” was not like his the other pure career military officers and he had previously been part of the civilian workforce. The non-military part of him kicked in and he decided to use his own judgement. He realized that it was illogical for the Americans to start a nuclear war with 5 missiles. The Soviet Union would respond with hundreds. If you were going to start a nuclear war, bar fight rules would most likely apply – punch first and punch hard. The Soviets had also upgraded their launch detection system and “Stan” felt that it was not yet completely trustworthy.
So “Stan” made the brave and courageous decision to not report the missile launch to his superiors. In doing so, “Stan” took a giant risk that if he was wrong, he would be responsible for failing to inform his bosses about the start of World War 3. Of course we now know that the Americans did not launch 5 missiles and that the Soviet early warning system had indeed failed. But as “Stan” recounted years later, had one of his colleagues being at the helm that day, they would have surely immediately followed protocol and informed their superiors. The greatest hero of the cold war was Stanislav Petrov – even though most of the world has no idea how close we came to nuclear destruction and how much we owe to “Stan’s” bravery.
Stanislav Petrov – one of the cold war’s great heroes</a> </div>
Why did I tell this story? We all know about the terrible tragedy of the Malaysian jet liner being shot down in Ukraine. There is not much that I can add to what is filling your media stream.
But I want to remind you that when you have heightened geo-political tensions, it does not take much for things to escalate quickly. We can’t always count on there being a Stanislav there to slow the whole process down.
I am perplexed at how much the market is ignoring the geo-political conflicts that are happening throughout the world. I don’t expect the markets to come crashing down, but they seem strangely impervious to the continuing escalations. We did finally have a 1% down day yesterday, but think about what it took to achieve that. The shooting down a civilian jet liner and the start of a ground war in Gaza, yet all we could do was dip 30 handles in the S&P 500. Have a look at the daily chart.
S&P 500 chart</a> </div>
All we did was give up the previous week’s gains. It barely looks like a dip!
I agree with Bank of England’s Taylor who said last week:
BOE’S TAYLOR: BIZARRE THAT MARKETS IGNORE GEOPOLITICS AT MOMENT..
From a geo-political point of view, the world has not been this unstable in many decades. We have a myriad of hot spots springing up – it is not just Ukraine and Israel/Gaza. China gets into military pissing matches every week with her neighbours over some stupid rocks off her coast. Iraq/Syria is falling into the hands of a bunch of extremists who were kicked out of Al-Quaida for being too crazy.
But the real point that scares me is that technology has changed the nature of geo-political conflicts. The shooting down of the Malaysian jetliner has caused me to do a little research into this Russian BUK missile system. This isn’t some huge command system that needs massive infrastructure. No, this is basically a tank with a missile on its back. Here is the alleged BUK vehicle in Ukraine:
BUK vehicle in Ukraine</a> </div>
Then as I continued digging, one of the ZeroHedge articles pointed me to the sales video for the Russian military catalogue. It was spooky, and a little scary, to watch the promotional material blowing planes out of the sky using a weapon you sling over your shoulder.
Technology has made your smart phone smaller and easier to use, but it has also done the same for military weapons. I think the chances of nuclear conflict between super powers like the one “Stan” averted in 1983 has greatly decreased over the last 3 decades. But the chances of some smaller weapons being used against a Western country have greatly increased. With all these countries being overrun by rebel forces, who knows where these weapons are ending up?
It wouldn’t take much for our economic system that relies on just in time inventory and continual global trade, to grind to a complete halt if there was a plane that was shot out of the sky in a Western country. One of my work colleagues summed it best when he said, “Imagine if it was an American plane instead of a Malaysian plane that was shot down.” I don’t think that the S&P would only be lower by 30 handles then…
Covering even more positions
Although I wish that I had kept my gold positions, yesterday’s dip did retrace a lot of my portfolio’s damage from the previous week. When the news of the Malaysian Jet liner hit the tape, I decided to cover the last of my short bond position. The position is not working, and if something truly bad happens, then I don’t want to be short the ultimate risk off sanctuary. This trade has been a complete dud and all I can say is that the traders that highlighted the fact that sentiment was extremely crowded on the short side (Bloomberg reported that 67 out of 67 economists were calling for higher 10 year rates for 2014) were indeed correct. Once again I have to learn the hard way that you don’t want to be on the same side as the herd.
After taking off the short bonds, I just let the portfolio cook. I am now good and short stocks, with basically no longs and very little risk on positions. The fact that the conflict in Ukraine was escalating even helped my long grains as that is a big wheat exporting area for Europe.
I am tempted to cover some stock market short in case this proves to be just another chance to BTFD (for those not on trading desks, that is an acronym for Buy The F’ng Dip). But when I see how confident the bulls are, it leads me to stay the course. The boat is super crowded with over enthusiastic super bulls.
Stock market bulls</a> </div>
Although I would not add to my short into the dip, I did buy some VIX. I know that I have said that buying stock market volatility is a mug’s game and that you are better off being long bond vol. But given yesterday’s developments, I think the chances of something really bad happening are much higher than the market believes. If I am wrong, I lose 3 handles on the VIX. If I am right, I make 10 at least.
VIX Index</a> </div>