The Russia/Ukraine conflict is the first major aggression that we have seen in the developed world since the 1930s/40s. There has been local conflict around ethnic differences – most notably in the Balkans – but this is different. There is no precedent for how this might play out as the global economy is far more intertwined today than it was 80 years ago. Countries are very dependent on other countries for critical consumer staples and critical durable goods. By critical durable goods, we do not mean more toasters or iPhones, we mean air conditioners, auto parts, generator parts, and other electrical equipment – also solar panels. Specifically, note the weakness in Caterpillar’s stock, not because the demand for its goods is weak, but because it is too reliant on Russia for equipment. Escalation in the tensions in Europe, especially any move that brings China into the mix – proactively from China or as a consequence of its alignment with Russia - and then disrupts trade, will expose critical supply chain holes, much worse than we have seen for semiconductors this year.
