A good friend and client asked me the other day how I was handling all of the volatility in the stock market. Was I having difficult conversations with clients who were panicking and needing to “talk them off the ledge” so to speak? I thought about it for a few seconds and responded, “No. Not because the market isn’t volatile but because up to now the stock market volatility hasn’t changed my client’s financial future.”
When you take out your crystal ball and look into the future, can you know exactly what you’re going to encounter? Not that I’m aware of. Instead of focusing on short term movement, focus on direction. Instead of fearing the future, build challenging times into your range of outcomes. Instead of being overwhelmed by the headline of the day, take a step back and ask yourself:
- Am I heading in the right direction?
- Is there something else I can be doing to help move along my chosen path?
- Based upon where I am right now, am I on track?
I’ve hesitated to address Russia specifically because things are changing so quickly, but let’s give it a try.
Here’s the macro environment as I see it:
Russia/Ukraine
Things are changing quickly but resolutions and negotiations are moving slowly. Obviously an expansion of hostilities including other NATO countries would be a bad thing. Hopefully there will be an off-ramp for Putin to take that allows him to save face and come out looking strong to the Russian people and end the indiscriminate killing of the Ukrainian people. I really don’t think he wants to occupy Ukraine. With the G20 nations imposing extensive sanctions, including Russia’s removal from the SWIFT, the petrodollar took a hit this week. This creates a stronger currency relationship between Russia and China. While Russian GDP is small, their wealth of natural resources (greater than 10% of known global reserves for a lot of commodities) makes them a wealthy country. Chances of having a commodity backed Ruble just increased significantly. More competition for the US Dollar looks inevitable at this point.
Commodities
Most people don’t know this but certain commodities (mainly agricultural commodities) have a limit up or down circuit breaker that resets on a daily basis. Commodities do not trade 24 hours a day. If the very first trade is greater than the daily price change allowed, the entire trading of that commodity is halted for the day. If it happens again the next day, trading is halted. So you can have massive price swings and nobody is able to get in or out of a position. In the short run, prices may be more about demand and supply shocks, but in the long term, price trends will be more about systemic under investment for the past 10 years. Supply isn’t something that can physically change quickly. Structural supply issues may be with us for a long time.
Interest Rates
The fear of significant interest rate increases by the Federal Reserve has now been replaced by the increase costs of commodities leads to a tightening of liquidity. The commodities market just beat the Fed to it. The chances the Fed continue with plans to significantly raise interest rates and tighten even more while the economy is slowing due to rising costs would be a policy mistake. With the midterms coming up it would not surprise me if the White House put a lot of pressure on the Fed to actually start another round of quantitative easing or perhaps trying to pass legislation subsidizing energy and food costs to the most vulnerable.
Stagflation
Economic term that is characterized by slow economic growth and relatively high unemployment – or economic stagnation – which is at the same time accompanied by rising prices (i.e inflation). Generally, stagflation occurs when the money supply is expanding while supply is being constrained. This happened in the 1970’s. It ended in the early 80’s when Larry Summers, Fed Chair, raised interest rates to 18% to “break the back” of inflation. Could we be entering a similar economic environment of low growth and rising inflation? We don’t have enough information yet to make that conclusion. It is for sure something to be aware of.