Mazars’ George Lagarias: A watershed moment for risk

George Lagarias
George Lagarias, Chief Economist at Mazars.

George Lagarias, chief economist at Mazars, comments on modern warfare and its impact on economy, tech regulation and cryptocurrencies.

Modern wars can be so devastating, that from an economic standpoint they don’t make sense. Which is why, as far as markets are concerned, they remain unpredictable.

But, an outlier risk as it was, the invasion of Ukraine has happened. At the time of writing, there were but two certainties: The loss of life, and the disbelief that the European continent is seeing another aggressive war.

Over the short term, sanctions on Russia, a key global producer, are already pushing input prices up. Before mid-February, supply chains were staging a fragile recovery. This war, no matter how long, may very well exacerbate supply pressures and erase the progress made in the past three months. SWIFT-related sanctions may result in the defaulting of some payments, an event which may require more market liquidity. This will put pressure on the Fed, which will have to decide whether these price rises are temporary, whether it should accelerate its rate hike schedule, or whether it should turn its attention to rising market volatility.

Russia has shocked the world. But shocks don’t last forever. Shocks are met with reflection, and soon followed by inflection. Humans are nothing if not adaptation machines. This war will, in all probability, become one of those watershed moments of how markets process risks.

Possible points of inflection

As an investment manager, when the unpredictable happens you go back and ask yourself: could I have foreseen this? An affirmative answer is slightly reassuring. It was an error in judgement. Your brain was at fault and that means personal reflection on how to think better. But if the answer is no, if the risk realised was only a fringe one, then this means that the world has changed. It means that deliberation will not be individual but collective. Society will see the world anew. And this spells long-term changes. Much like the pandemic turbo-charged changes already happening, such as agile working, the Ukraine invasion might do the same for different areas of business.

The single greatest point of inflection, could be the priorities of the United States. Currently, the world’s foremost economic and military superpower prioritises business over strategic interests. Ukraine changing this calculus could have immense economic, financial and political consequences.

The first area that could change would be tech regulation. In a heavily polarised Washington environment, an antipathy for Big Tech is probably the only issue on which Democrats and Republicans agree. In times of peace, freedom of speech is always respected in democratic nations, even in the face of devastating consequences for democracy itself. But in times when strategic geopolitical interests take precedence, the tech platforms’ ability to regulate information will come under close scrutiny. To put it bluntly, when war is concerned, the state has always legitimately claimed a monopoly on propaganda. This directly threatens the business models and profitability of big tech companies, like Google and Meta. Recently, a Facebook whistle-blower filed evidence and testimony which suggest that the platform subsidises high-frequency posts, irrespective of content. Efforts to curtail that led to losses in profitability and the effort was abandoned. Whether true or not, in an environment where fear of propaganda by other nations will become a priority, we should expect much higher levels of scrutiny on content platforms, which could ultimately threaten their current business models. Together, tech stocks account for around 25% of the S&P 500 capitalisation.

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