We’re proud of the fact that we routinely have an open rate on our newsletter of over 80%. That’s pretty much unheard of in the financial industry. And while we’re pleased that so many of our clients appear keenly interested in our perspectives, we believe that the consistently high readership comes largely down to one thing – simple unvarnished honesty. We tend to save our opinion until we’ve got something meaningful to say. When we do, we’re going to call it as we see it. We’ll let you know what we think – even though it’s not necessarily pretty at times.
These are some of those times. After 30 plus years in the industry, we’ve seen our share of challenging markets, volatility and concerns. Markets as of late have been relatively strong – especially given the situation in Ukraine. That said, overall it’s been a rough quarter. And over the time I’ve been in business, I can’t say that I’ve ever seen a financial inflection point like we’re at today. There is a lot of understandable concern over what could go wrong. That doesn’t mean it will… but it could.
Correspondingly, I also can’t think of a period where there was ever a greater need for the professional management of your money. It’s in times like this that calm, rational heads need to prevail. It’s also in times like these that immense bargains inevitably appear.
A Bear at the Door?
Historically, financial markets move in and out of corrections, bull and bear markets with regularity. Bear markets, where indexes drop a full 20% from their high or more, have occurred 11 times in the last 65 years. They are typically driven by inflationary pressures that ultimately force discretionary spending out of consumers’ hands into day-to-day living expenses. When this happens, it often results in a recession. Let’s just say that while we’ve been pleased with the economic rebound at this stage in the pandemic, our confidence level of avoiding the next recession is fading. As this history of bear markets charts shows, it may very likely be a wild ride for the next few years.
Here’s a look at some of the headwinds.
A Change in U.S. Currency Domination?
There is change afoot in payments. Over the last 100 years, U.S. dollars have always been the default method of payment for international trade. Increasingly however payments are being made in the Chinese Yuan vs the dollar. Now Russia (which continues to supply Europe gas and oil despite the war) is demanding payment for its resources in Russian Rubles. This has implications for the continued U.S. hegemony of commerce.
Russian Debt Default
Russia has decided to keep 400 of the world’s most expensive airplanes. It’s bound to have ramifications for the Western owners of these planes to the tune of several Billion dollars. That said, that’s nothing compared to the problems that will likely arise should Russia default on it’s foreign debt. They need to find $4.5B in additional funds to cover payments due in the balance of the year but they owe in excess of $600B – much of which is owed to Western countries and their banks. It’s difficult to say just what the ramifications of a complete default would be but suffice to say it won’t be good.
Rising Interest Rates
Recently we saw the first of 6 expected rate hikes in the U.S. That means less money for consumers as rate hikes mean higher mortgage and loan payments and thus less money available for discretionary spending. Governments hike rates in an effort to slow the economy and ward off excessive inflation. It’s a blunt tool though and many times this can end up pushing us into recession.
Stagflation happens when the economy stagnates, but inflation persists. In this environment, prices continue to rise while the economy sinks into recession. The dramatic increase in oil prices, combined with pandemic-related shipping disruption, could very well be the catalyst for this happening.
While the price of oil had been rising organically from increased consumption coming out of the pandemic, this latest surge in prices has been driven by the conflict in Ukraine. After a 6 weeks of fighting, there does not seem to an easy off-ramp for any of parties, so we’re likely to see continued high oil prices which may force a recession upon us.
How we see the Russian Conflict
As many of you know, I’m a big history buff. We tend to look at things historically, and historically, many wars are about resources.
This is arguably the case here. Although it’s not front-page news, when you dig a little deeper, it appears that the Russian conflict is really an energy war being fought between Russia and the West. It’s just playing out in Ukraine.
While much of the media’s continued focus remains on the humanitarian disaster, Russia sees the billions of dollars of foreign investment that have been poured into the Ukranian energy industry as an existential threat to its long-term survival. Right now, they’re the biggest supplier of energy to Western Europe, but as you can see from this Harvard International Review article, when the West starts to compete with them, Russia is effectively out of business.
Russia has been dominant in the armaments and natural resources business. Two industries that naturally complement each other. And given the level of corruption that is rife within the country, that’s unlikely to change. But without the resource revenue to fund operations, Russia could splinter and lose its position as a world power. So, Putin has piled all his chips on one square to either seize Western Ukraine’s assets or render them unusable.
To do so, they’re trying to seize the means of producing energy such as the coal in the Donbas, the Ukrainian oil and gas infrastructure and the nuclear plants. Russia is attempting to either take over the billions of dollars of resources and equipment Western oil companies have sunk into Ukraine or failing that, destabilize the whole country to ensure its ongoing dominance of the Western European energy market. As the old saying goes, “they are willing to burn the village to save it”.
Ultimately, all sides need a way out.
Don’t Over Watch
While they’re happening, mini-crises can be terrifying to watch if you’re looking at things day-to-day either from a humanitarian or financial basis – so we recommend you don’t.
Historically, mini-crises have typically turned out to be buying opportunities where your professional managers can benefit from the volatility at the time. Although we hate to see the destruction, and our hearts ache for the people of Ukraine, in the past, it’s been fundamental to stay invested and ride out the inevitable storm – particularly during times of high inflation.
Trust your portfolio managers and trust the process. And of course, call us anytime you’d like to discuss.