It’s hard to take two steps without running into a story or article on Ukraine. Just check out the Google search trends for Ukraine:

ukraine google search trends

It’s pretty easy to understand why Ukraine is so important in the geopolitical space. It’s an old Soviet state with shifting allegiances between Russia and the European Union. As events have unfolded stock and commodity markets around the world have been on a wild ride up and down. Articles like this and this make it clear people are trading on the news. But why can a country most Americans couldn’t find on a map have such an affect on the markets?

The answer is two-fold. First let’s look at how instability in Ukraine can affect the global economy. The European Union relies fairly heavily on energy from Russia. Pissing off Russia in any way will have repercussions for energy prices and demand. But even more critically, many of the pipelines out of Russia run through Ukraine, so the country is a vital conduit for energy in western Europe. Ukraine is also a major shipping hub. Its now well-known Crimean Peninsula is a major import/export hub being on the Black Sea. Goods will flow in and out into the Mediterranean and the Suez Canal. This is a critical port not just for Ukraine, but Russia too. Collect all that together and then tie a gigantic debt-laden bow on top and you have a gigantic turd of a problem.

All of these factors can impact the economy. This of course has downstream effects on company profits, which of course drive stock prices. But it’s hard to imagine that so far any significant damage has been done to profits or the economy. And you’d be right.

The second part of the answer is not about instability in the Ukraine, but how markets react to news. Stocks jump up and down every day not because of what the company’s profits look like. They move because expectations of those profits are changing. But even more so, when news comes out that could impact profits in the future, everyone knows people will be selling. So you don’t want to be the last person to sell. This contributes to the paranoia of markets. You’re not buying oil futures because you expect the price to go up. You’re buying them because everyone expects the price to go up. It’s trading on the psychology of an event’s impact, not the impact itself.

And that’s OK so long as everyone understand what that means. It results in rapid reactions to news because no one wants to be the last person to sell a stock that could have bad profits in the future. If you’re not among the first, you missed the boat.

When it comes to Ukraine though, I believe the situation has been over-hyped. Putin has a history of testing the west’s patience and Russia has far more to lose economically than they did 20 years ago by have strained economic relations. It’s clear the media is still controlled by people who were adults during the Cold War as well. It makes for a great plot to bring back the memories of Communism and red phones in the White House.

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categories: economics, government, investing