Quarterly Report: The War to End All Wars

by Team of Northern Trust, 4/5/22

Such was the assessment originally applied to “The Great War” that ran from 1914 to 1918 – a war so violent and so bloody the world was convinced nothing so horrific could or would ever happen again. The world was wrong. Two decades later the world was thrust into a second “great war” from 1939 to 1945. Today – this time seven decades later – the international community is, again, confronting a geopolitical crisis with possibly long-ranging ramifications. What will history have to say about this barbaric invasion? First and foremost, it will mourn for the Ukrainian people; they deserved none of this. But history should also identify several enduring geoeconomic trends that were either born out of, or accelerated by, this unnecessary conflict.

Private power. This is the first war wherein the private sector played a pivotal role in its outcome. Social media – a peace-time source of conflict – has been a war-time force for good, providing a direct window into the horrors of war thanks to the recording devices now in people’s pockets. Tech companies – from Microsoft to Starlink (a division of SpaceX) – have served in the war effort, either preventing or providing internet access depending on the circumstance. Other major companies – Coca-Cola, Disney, McDonald’s, Nike, etc. – showcased their unique source of economic power, pulling their influential brands out of Russia (in many cases, ahead of official sanctions).

Deglobalization. Populism – which can be sourced back to the financial crisis – represented the first sustained hit to globalism. The pandemic – and resulting supply chain impairment – took the next whack. The war in Ukraine may be strike three. The current world order – installed at the end of World War II and fortified by the West’s Cold War victory – is under attack. The West-East wedge has never been bigger, and many countries are recognizing that global dependence (think energy) equals untenable vulnerability. This is not the first “peak global” episode. Global trade (as a % of activity) also rose and fell ahead of World War I – and took 60 years to regain pre-WWI levels.

Decentralization. While deglobalization hits the economy, the financial world braces for decentralization. And nothing is more central to global finance than the U.S. dollar – the world’s “reserve currency” since World War II. U.S. dollars represent ~90% of global financial transactions and ~60% of global central bank holdings. That incumbency can make it hard for the dollar to be displaced anytime soon, but risks do exist. Central banks eye cryptocurrency, while geopolitics may also be a disruptor. Example: The U.S. cut Russia’s access to $0.6 trillion it holds at the Federal Reserve1 – a tactical win but strategic misstep? Russia’s heinous actions justified the response – but other central banks must now wonder if this could happen to them.

Opportunity amid chaos? This war is unlikely to be the last – and its impact will echo for years. Uncertainty often causes fixation on the negative, but opportunities also arise. Much investment may be needed in coming years (supply chain reorientation as one example). As we wait, a well-diversified portfolio can protect against incoming fire.