"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
This is a popular quote credited to James Carville in the early 1990s in his role as adviser to President Bill Clinton.
The Ukraine saga this week showed the power of the markets, not just the bond markets but also the foreign exchange and the equity markets.
Last Friday 28th February most equity markets closed at their record or multi year highs. In spite of the political problems on Russia's border with Ukraine the general thinking of investors was that this matter will blow over and a political solution will be found to respect Ukraine's sovereignty but re-assure the rights of Russia to its Crimea base and about the protection of Russian ethnic community in Eastern Ukraine.
Over the weekend President Putin began sabre rattling. Evidently Putin was pissed off with the West. He felt betrayed.
Firstly by denying him a spot in the sun when the world political leaders kept away and from the Sochi Olympics ( and the Italian PM who attended was forced out no sooner he got back to the office!!). But much worse he felt betrayed that the agreement signed on Friday 21st February between the then President of Ukraine Yanukovich, representatives of the Kiev protesters and three EU foreign ministers of Germany, France and Poland,(which agreement was blessed by Putin through an envoy to these negotiations) was unravelled as soon as it was signed.
The protesters kept insisting on the immediate exit of Yanukovich who had to run for his life. The result is an interim unelected government in Kiev which is not recognized in the eastern side of the country and with elections called for May rather than December as originally agreed. This will leave Putin little time to influence the election outcome which he thought he could with Yanukovich in place and the elections set for December.
The sabre rattling had dramatic effects on the financial markets but especially on Russian equity markets and on the forex value of the Russian Rouble. Both fell more than 10% on Monday 3rd March.
This sharp reduction hurts investors but it especially hurts the Russian population and Russian investors in their flagship companies. So much pain that by Monday evening Putin was forced to restore priority of the brain over the heart and was looking for an honourable exit. He accepted appeals for de-escalation and showed willingness to resolve the issues diplomatically rather than militarily.
On Tuesday the markets responded by recovering most or all of the losses suffered on Monday.
When Russia last invaded another European country (Czechoslovakia) in 1968 there were no markets. Russia was a closed economy, the Rouble was not convertible and stock markets in Russia did not exist.
In 2014 Russia and it politicians have come to understand that their power in a globalised world is highly circumscribed by the power of the markets.