It looks like the pawns (the people) of Ukraine have taken a strategic position by forcing President Viktor Yanukovych to retreat to Russia.  Is this the end of the game?  We don’t think so as long as Putin is leading Russia.  The last thing Putin, who is an ex-KGB agent, wants is for Ukraine to become part of the European Union (“EU”).  We believe this is just the beginning of the chess game.

Whichever way this is resolved, it causes problems for the EU.  We see three possible outcomes: 1) Ukraine settles down and Russia allows it to become a member of the EU; 2) Russia takes over Ukraine by force and it doesn’t become a member of the EU; or 3) civil war and a break up of the country.  The costs to the EU will be high under any of these scenarios.

Under the first, the Ukraine is broke and would need huge financial support to join.  If accepted into the EU, the EU will once again be taking in a member that does not meet its requirements.  Will the Germans want to pay even more than they already have, this time to support the Ukraine?  Will Russia make Europe suffer by cutting off its supply of natural gas to EU countries?  Under the second scenario, the fight for freedom and capitalism will take a backseat as Putin takes over and dictates how the country is to be run.  This will stop the expansion of a greater EU and be bad for capital markets.  Thinking about the third possibility, it is never good to have a neighbor that has a civil war.  Look at the impact to countries surrounding Syria.   World War I and II also started in a similar fashion.  Europe has had one of the longest peace-time eras in its history.  A civil war in the Ukraine might change that.

So what does this mean for investors?

Diversification is key at this time.  Untested Federal Reserve polices and geopolitical conflict can cause unintended consequences.  We continue to believe that a portfolio consisting of a combination of real assets, below target equity exposure and shorter-term bonds is called for in these uncertain times.

Interesting fact

According to the May 2013 issue of the Financial Post, in 2007 government spending consumed 45.6% of the GDP of countries in the EU. By 2012, that percentage had shrunk to a shockingly low 49.4%.

Sincerely,

Your THOR Team