The Perils of the 'Great Man'

One man can make all the difference... Putin's influence on the global economy... What's next in Russia?... Beware of autocrats... The perils of the 'great man'... Our biggest event of the year...

Editor's note: With Digest editor Corey McLaughlin taking some time off this week, we're bringing you a series of special guest essays (while keeping a close eye on the markets), beginning with today's contribution from our international editor Kim Iskyan.

As Kim explains, despite a global population that is nearing 8 billion, one person can still have an outsized influence on the rest of us... as Vladimir Putin has demonstrated with the war in Eastern Europe.

Sometimes, one man makes all the difference...

"Great man theory," a 19th-century approach to understanding the past, holds that a handful of powerful individuals have shaped most of history.

This theory represents the flip side of the notion that history is shaped by grassroots actions by everyday people.

Among these "great men" are Jesus, Shakespeare, and Thomas Jefferson (Nos. 1, 4, and 10, respectively, in Time magazine's 2013 list of history's 100 "most significant figures") – whose ideas, leadership, and visions markedly changed the trajectory of history.

But these great men can be downright evil, like autocrats Adolf Hitler (No. 7) and Joseph Stalin (No. 18), who had an outsized negative impact on history – and humanity.

Today, another "great man" is altering the course of history for the worse...

As I (Kim Iskyan) will explain in this Digest, by invading Ukraine, Russian President Vladimir Putin is throwing a monkey hammer into the global economy, upending the global geopolitical infrastructure, reversing Russia's post-Soviet progress... and changing the trajectory of modern history.

And more to the point for us... Putin's actions also demonstrate the outsized impact a single man with authoritarian power can have on markets – and on your portfolio.

There are more people on Earth than ever before... but all it takes is one...

There are 7.9 billion people on the planet today. That's nearly five times more than the global population in 1900... and twice as many as recently as 1975. Around 117 billion people have ever lived on Earth... and 7% of all humans who've ever been born are still alive today.

What that means is that, statistically, it has never been more difficult to stand out from the crowd – and yank the mule of history in a different direction. And though it's probably not his primary objective, Putin is at least succeeding at garnering attention like a bear in a honey store, with Russia's "war of choice" invasion of Ukraine.

'The month that changed a century'...

This was the headline in Foreign Policy magazine in April.

"The world-changing meaning of Putin," cried the Financial Times.

"The long weekend that changed the world," wrote the Atlantic, referring to the immediate and massive global reaction to the launch of the invasion.

As Vladimir Lenin, who led the Soviet Union in its earliest years, once said...

There are decades where nothing happens; and there are weeks where decades happen.

It has been more of the latter this year.

Consider everything that happened within weeks of Russia's February 24 invasion of Ukraine...

Almost in an instant, Putin sparked greater sense of unity among Western powers and their allies than at any time since the end of World War II... engineered a food crisis that will leave another 250 million people facing food insecurity... prompted a surge in energy prices, and inflation, to multidecade highs... and – as Europe faces the challenge of replacing Russian fossil fuels – extended a lifeline to oil and gas companies around the world.

As I wrote in April, the decline of the dollar could be one of the most enduring unexpected outcomes of the conflict. (It wasn't his objective, but Putin would surely love to dethrone the greenback.)

The Organization for Economic Cooperation and Development, a group of the largest economies in the world, cut its outlook for global economic growth from 4.5% to 3% – pointing to the repercussions of the war in Ukraine... The MSCI World Index is down 22% in 2022 so far, while the U.S. benchmark S&P 500 Index has fallen 21% – with the war being an important factor.

And the relative geopolitical lull of the past 30 years is over...

"Ukraine and the start of a second cold war," proclaimed the Financial Times.

The threat of nuclear holocaust, never far away, is back on center stage...

A recent cover story of the Economist discussed "why the war in Ukraine makes nuclear conflict more likely."

And then there's what's happening to Russia...

The Western world's sanctions on Russia are the geopolitical equivalent of solitary confinement – on steroids. And as the Atlantic explained, in many ways, they're working...

[Russia is] the world's largest country by geography, an oil-and-gas powerhouse with the globe's largest nuclear arsenal. Nevertheless, a curtain is descending around it, disconnecting Russians from globalization's benefits, such as trade, travel, finance, and technology. The result will be a poorer, more isolated, and weaker Russia. Governments are no longer trying to alter Russian behavior but are instead trying to diminish its ability to project power.

I lived in Russia for nine years... where I highlighted the country's prospects to foreign investors, helping resurrect the country from the economic trauma of 70 years of Soviet-style socialism. It got to the point where Russia's status as an emerging market was in the same neighborhood as China and India.

All that is gone – or at least it's going to become something very different. "Thirty years of progress gone, and there's no future for Russia now," an old British friend who has been an entrepreneur and analyst in Russia since the mid-1990s said to me recently. "I'm in shock."

The stakes of the war in Eastern Europe are dramatic...

The loss of life and violence of the war are terrible, of course. There are no bigger stakes than life and death.

But the idea I'm exploring today is the geopolitical fallout... and consequences on markets from the conflict.

Looking beyond the impact on Russia, or how Putin is fueling global inflation and unifying the West... Putin's war is about a lot more than trying to right what he views as a historical wrong, as he contends.

It's bigger than a reaction to his misguided perceptions of threats from the West – or a desire to make Russia relevant again.

No... rather, the invasion of Ukraine is an attempt to wreck an entire geopolitical infrastructure – and, even more darkly, a civilization. As Foreign Policy explains...

Putin is trying to complete work on a vast project of destruction implicitly supported by several other world leaders... these leaders want to break what they see as U.S. hegemony over the international system and undermine the notion that the world is bound by a common set of values embodied in international law...

The new world order they are aiming to install is dominated by competing – and increasingly autocratic – civilizations, each controlling its own geopolitical space. Putin plainly intends that a greater Russia encompassing at least part of Ukraine will be one of these...

That's not playing musical chairs at the geopolitical table... That's chopping the table into firewood, burning it, and creating a new table from scratch.

But Putin's grand plan isn't working...

Russia's president evidently believed that when Russian troops crossed the border into Ukraine in late February, they'd face little resistance.

Putin developed a revisionist historical fairytale to justify invading Ukraine in a 5,000-word essay called "On the historical unity of Russians and Ukrainians," which he published on the Kremlin's website last July. Part of that fiction was that Ukrainians wanted nothing more than to be enveloped in a Russian bear hug.

But that was a spectacular misreading of the room – and a Siberia-sized Russian-intelligence failure – because Ukraine didn't follow the playbook. Instead, Ukrainians have fought back with determination and bravery, repeatedly thwarting Russia's military objectives.

Putin has been forced to move the goalposts of victory... from a full takeover of Ukraine – a country nearly the size of Texas, with a pre-war population as big as California's – and the complete eradication of its aim to join NATO... to far more modest aims of controlling parts of the southern and eastern parts of the country.

Russia's leader had good reason to think he'd get away with invading Ukraine...

Putin anticipated that the global indignation at Russia's incursion would dissipate like a toddler's tears. After all, Russia's 2008 invasion of the former Soviet republic of Georgia, and its 2014 annexation of Crimea, elicited tut-tuts of outrage and strongly worded statements from Western capitals... but not much more.

And until Ukraine became a global cause célèbre – did you know the colors of the Ukrainian flag before March of this year? – it was a geopolitical afterthought. To much of the developed world, Ukraine was another poor cesspool of corruption... with bland food and few prospects.

Ukraine's gross domestic product ("GDP") per capita in 2020 (about $3,700) was at the level of El Salvador and Libya, according to the World Bank.

It's a reflection of the recognition of the stakes that Western countries have – so far, at least – come together to support Ukraine. That support has spanned the political spectrum...

In an era when bipartisanship in the U.S. government has lost any meaning, last month a $40 billion aid package for Ukraine sailed through Congress (just 11 senators dissented).

But most Russians still like Putin...

According to one study, 5 million Russians have left the country during the Putin era – that's like 12 million Americans leaving the land of Uncle Sam – and hundreds of thousands have left since the start of the war.

These departures are the exception, though. According to the one somewhat trustworthy polling organization in Russia, Putin's approval rating has increased by 18 percentage points since late last year – to an incredible 83%. For comparison, President Joe Biden's highwater approval rating is 56%... and Donald Trump averaged 41%.

Even accounting for poll respondents who feel pressure to say something nice about Putin, he's still enormously popular... in part thanks to a boost from the "rally around the flag" effect, whereby citizens come together against an external enemy.

Beyond that, though, Putin has a huge reservoir of goodwill because of the post-Soviet economic recovery – driven by a boom in commodities prices – that coincided with him becoming president at the turn of the century.

From 2000 to 2013, GDP per capita in Russia grew ninefold. At the beginning of his power, regular Russians were barely getting by. It wasn't long before they were vacationing in Turkey and buying locally made Ford Explorers. Russia's economic boom ended years ago, but Putin is still getting by on its fumes.

And now that's all in the past.

The World Bank forecasts that the Russian economy will shrink by 9% this year...

That's a lot... but it's nowhere near as bad as it could be.

Thanks to higher energy prices – triggered in large part by Putin's invasion – Russia is actually likely to generate more revenues from oil and gas exports in 2022 than it did last year. And though Europe is weaning itself off of Russian energy, there are still plenty of willing buyers in Asia. So economic sanctions on Russia aren't hitting as hard as they might.

More than anything, the elimination of Russian oil from much of the global economy is driving energy prices and inflation higher and higher... hurting everyone outside of Russia.

And the continued conflict in Ukraine raises the risk of food shortages around the world with each day it goes on. Various commodities are skyrocketing in price and becoming harder to find.

Meanwhile, I recently checked in with a friend and former colleague in Moscow who told me that – contrary to his expectations and the circling-the-drain coverage of Russia in the Western media – things are more or less normal.

As he told me...

The ruble is stronger, people are working, the banking sector is strong... it's actually not so bad.

So, the war is going poorly... the economy is hurting but surviving... and Putin is still popular. What's next?

Don't wait for a coup in Russia...

"Could Vladimir Putin be overthrown?" wondered Newsweek in March.

The Western media eagerly reported in May that Ukrainian intelligence claimed that a coup against Putin was underway and was "impossible to stop."

"How long can Vladimir Putin hold on to power?" asked theConversation, an online news outlet, in April.

But even if Putin wasn't overwhelmingly popular in Russia, there's no room for dissent there. The only potential opposition leader, Alexei Navalny, was nearly poisoned to death by the Russian Federal Security Service and is now in prison. Protests of any kind are met with a steel boot and jail time.

Few Russians – nowhere near enough to bring about change – are prepared to risk life and limb in the name of politics.

Will someone inside the Russian government confront Putin? Perhaps, but don't count on it. (If you doubt it... watch this video of a meeting of the country's Security Council.)

Meanwhile, the country's oligarchs – big businessmen worth billions of dollars – know that their assets are one Putin signature away from seizure, so they'll stay quiet.

And even as more and more of the country's oligarchs are hit with sanctions – and with the possibility of the expropriation of their wealth by Western governments – they're in no position to pressure, or protest, the president.

Those who have thus far have hastily resigned from their positions of power and beaten a hasty retreat.

The one factor that could change everything is Putin's health...

Speculation has intensified in recent months that Russia's president has cancer, or maybe Parkinson's disease. Various reports suggest that Putin's eyesight has deteriorated, his cheeks are bloated, he grips the table in a strange way... and at the Victory Day parade on Red Square in May, he was coughing and had his legs covered by a heavy blanket.

Former Secretary of State Condoleezza Rice said he seemed "erratic." After meeting with him, French President Emmanuel Macron called him "stiffer" than in the past.

Of course, it's all circumstantial evidence at best... and may add up to nothing. And reports of Putin's poor health, to paraphrase an aphorism attributed to Mark Twain, have been greatly exaggerated. "The Many Deaths of Vladimir Putin" headlined an article by the Center for European Policy Analysis, tracing the many rumors about Putin's poor health over the past two-plus decades – none of which has been shown to be true.

But at some point, Putin – who's 69 years old – could be seriously ill...

And then, all bets will be off because his supporters will abandon him.

"Impending death induces political death," contend Bruce Bueno de Mesquita and Alastair Smith in 2011's The Dictator's Handbook: Why Bad Behavior Is Almost Always Good Politics. As they explain...

Dead leaders cannot deliver rewards to their coalition... if essential backers [that is, the most critical supporters] know their leader is dying, then they also know that they need someone new to assure the flow of revenue into their pockets... a terminal ailment is bound to provoke an uprising, either within the ranks of the essential coalition or among outsiders who see an opportunity to step in and take control of the palace.

Would a new leader of Russia change anything?

Russia has only the barebones skeleton of a democracy. The abrupt departure of Putin – due to poor health or any other reason – would trigger a scramble for power, rather than an orderly transfer of authority followed by elections.

The question of what would come next, and who would win the struggle, puzzles even the most experienced Kremlin watchers. But the list of more moderate, less war-hungry potential heads of Russia is short.

An old friend from Moscow who now works at a think tank in the U.S. told me...

In the best-case scenario, the next guy won't be more inclined to start a nuclear war.

In other words... Putin, a bad "great man," will likely be followed by someone at least as bad. And all the problems triggered by the Ukraine war, from inflation to higher commodities prices to the danger of massive escalation, aren't going to go away.

The global economy won't suddenly fit back into place. And there will be no the-war's-over relief rally in stock markets anytime soon.

The big lesson: Beware of autocrats...

In autocratic countries, the rule of law doesn't really exist... It can be overridden by the will of one guy – a dictator. That's an obvious reason to be wary of investing in such countries' markets.

And more broadly, leaders with absolute power – or, at a minimum, far too much power for their own good – aren't subject to the checks and balances of more democratic structures. As The Dictator's Handbook explains, they're answerable only to their essential backers – and no one else.

That means that they have enormous leeway to do what they please... like start a war. (Very occasionally – one of the very few examples is Singapore, where I lived for five years – an autocratic form of government will act in the best interest of the people... but don't count on it.)

And what's more, investing in the stock markets of autocratic countries has the potential for catastrophe. Russia's stock market is indefinitely off-limits to foreigners – and hundreds of billions of dollars in stock and bond investments (and far more in direct investments) have been written off.

"Autocracy is a bad investment," concluded the Morningstar financial-research firm.

Bear that in mind before you invest in the likes of Saudi Arabia (where the crown prince was likely behind the murder by Saudi agents of a journalist who wrote for the Washington Post)... Kazakhstan... Turkmenistan (where the authoritarian president cultivates a personality cult and ordered a gold-leaf statue of himself riding his favorite horse, holding a dove)... and many other countries where a single ruler calls the shots.

Turkey is nominally a democracy, but it's run like the personal fiefdom of its president, Recep Tayyip Erdogan... His single-minded approach toward fighting inflation, in defiance of his economic advisers, flies in the face of centuries of macroeconomics and has resulted in prices rising 74% over the past year.

In China, the Chinese Communist Party claims to be a "socialist democracy" – but it doesn't act much like one. And though Americans don't have the option of putting money into North Korea, Iran, and Venezuela, it wouldn't be a good idea anyway.

Here's what you can do...

Despite a global population that has grown fivefold in just a few generations, a few people with a stranglehold on power can still have outsized influence on millions of people in their own countries... and on billions of people around the world.

We're seeing this play out in real time. Putin has been accused of "blackmailing" large swaths of the globe... In some respects, it's working. We're seeing a cost-of-living crisis unfolding in Europe right now...

Inflation, ignited by the pandemic and ensuing government responses, and accelerated by quagmires related to Russia's invasion of Ukraine, is skyrocketing all over the world.

It's hard to say with certainty how much stock you should put in "great man risk," in your portfolio. But you should know that it's there. In places where one individual can make unilateral decisions on behalf of everyone, it's impossible to know when they might happen or what they will be.

There are precautions you can take to protect your portfolio from these kinds of risks.

First, this is another reminder to always know what you own... If you own an international stock fund or emerging-market index, for example, make sure you look "under the hood" and see what's really in these funds. You might be surprised by what you see.

A lot of funds won't touch Russian stocks now, but before the war began, for example, the Vanguard FTSE Emerging Markets Index Fund (VWO) had a roughly 3% exposure to Russia at the end of January. That's not a lot, but it's something.

Instead of allocating money to just any old emerging-market fund, consider one that is more selective in its allocations...

For instance, several "ex-state owned" exchange-traded funds ("ETFs") exclude state-owned enterprises, businesses that are often linked to autocratic regimes.

These funds would have avoided owning stakes in a Russian-owned energy company, for example. One such ETF is the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE). We don't make official recommendations in the Digest, so this is just an example for your information.

We might not ever be able to totally eliminate or even heavily limit "great man risk." The war in Ukraine proves that once again. But you can be mindful of avoiding getting caught up in the dictator's playbook... and putting as much power in your own hands as you can.

Our Biggest Event of the Year, NEW LOCATION

To hear more from Kim and our entire team of editors and analysts, including exclusive, actionable recommendations to add to your portfolio, we want to mention a special opportunity today...

Tickets are now available to our 20th annual Stansberry Research conference...

We're switching things up this year with a new location... the conference will take place on October 24 to 25 at the luxurious Encore Harbor resort in Boston, Massachusetts... but the spirit of this annual gathering remains the same.

As longtime subscribers know, the Stansberry Conference is a gathering of some of the brightest minds in financial research and beyond...

During this year's event, you'll hear from your favorite Stansberry Research editors – in addition to Kim, they include Steve Sjuggerud, Dan Ferris, Eric Wade, Dr. David "Doc" Eifrig, and more.

We also feature special guests from outside our business as well. This year, our all-star lineup also includes Scott Galloway, professor of marketing at New York University's Stern School of Business and a serial entrepreneur... and William Cohan, a former Wall Street investment banker and bestselling author.

Tickets are already selling fast, so make sure to reserve your spot today... If you act now, early tickets also come with a $1,000-value free gift – for a limited time only.

New 52-week highs (as of 6/17/22): None.

In today's mailbag, feedback on Dan Ferris' latest Friday Digest and Altimetry director of research Rob Spivey's Sunday Masters Series essay about an overlooked opportunity in the oil industry... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, While I was reading the Digest and your remarks about institutional investments in residential homes, I started reflecting back to the [great financial crisis] and what made it so disastrous. In essence, it was the collateralized debt markets. The financialization of the tiered mortgage bonds being bought and sold with mispriced amounts of risk. When institutions buy homes, they buy in large lots. This is not dissimilar to the [mortgage-backed securities] structures where you have a tiered ladder of mortgages within the bond.

"The housing market is not a commodity. Housing quality varies greatly, even within communities. I think institutions are mispricing this reality and are mispricing these variables. After they pay cash, they quickly refinance.

"The banks are repeating the same mistakes. No bid bubbles popping." – Paid-up subscriber Bret R.

"Yes, more wells will be drilled, but the number of wells completed will not go up significantly for a while. Supply chain and personnel restraints in the U.S. oil industry are very real. Not sure how service companies will benefit significantly other than frac sand and casing. Seems like most of the price increases are being offset by real operating cost increases (personnel, diesel, materials)." – Paid-up subscriber Tim M.

Regards,

Kim Iskyan
Olney, Maryland
June 21, 2022