The “Wall of Worry” refers to the propensity of financial markets to rise in the face of ostensibly insurmountable problems. The negative issues being revealed for investors are a true gut check. Q1 22 began by swiftly moving into a “correction” or 10% downswing. The S&P 500 was down over 12% at the low point of the quarter. A rally in March left US markets down 5% on 3-31-22. More market data is available at Bloomberg or WSJ.
The pandemic of COVID-19 has declined dramatically and may finally be receding. The joy of engaging the world without fear of the virus has been met with the tragic aggression of the Russian dictator upon Ukraine. We will now need ponder the risks associated with a barbaric attack in Eastern Europe for the foreseeable future.
War is the most disruptive and frightening human action that we must confront as investors. Natural disasters create grave challenges, yet it seems so much more tragic as people perpetrate these horrendous actions upon one another.
The human toll is heartbreaking. As I write this commentary, my soul yearns for a ceasefire. It is all consuming to see the suffering and wish for aid, shelter, and a path forward for the people harmed in this heinous action. The hope for a better day is constant.
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I have written a presidential speech to address the catastrophe that is being perpetrated by the megalomania of Russia:
“Hear me all my American People and free citizens of the world. We seek a present and future that can rest upon all the great work of our ancestors before us. The current challenges that we are presented are not of our choosing, yet as always, we will rise and overcome those that seek conflict.
The United States has funded and developed the most powerful military on earth. This power stands ready to defend yet will not be lured into a destructive conflict when there are strategies available that will save many lives.
The demise of the USSR was sown in the very premise that life can be “planned” or that economic productivity can thrive alongside suppression of the individual. Sadly, reform and freedom have not taken the place of the Soviet bloc. All the effort of engaging post-Soviet Russia has resulted in a corrupt criminal dictatorship. A tragic snake that intimidates and deceives its’ people is headed by the blatantly corrupt former KGB operative that steals away an entire country’s life and future.
History is filled with barbaric thieves that take all they can from their citizens. Experience teaches us that kleptocrats fail every time. As these criminal regimes plunder and wreck countless lives, the seeds are sown for the downfall of evil.
The American advantage is that we seek to live by the rule of law and carry forth the vision of a democratic and free society. Western Capitalist Democracy is superior by virtue of its very principles. Each and every participant and citizen have the opportunity for success based on individual ambition and effort.
The American Model of free democracy is not easy or perfect. We argue and have much disagreement. Our legal, regulatory, and financial systems strive in the face of messy and difficult challenges that are perpetual. Let us all agree there is no alternative to individual liberty and respect for human rights. Rule of law, individual, and property rights are planks of the foundational principles that set us apart and place us all on a path of our own choosing.
We now embark on a crucial mission to defeat criminal aggression via economic means. We will sanction the criminals and disengage from trade and all forms of engagement. We will starve these beasts from any benefits of our innovations in technology, agriculture, or healthcare breakthroughs. Rising abundance and better lives emanate from free societies that do not embark on these destructive and criminal acts.
The free world will transcend this act of destruction by building up, not tearing down. We will work harder and produce more. Energy, agriculture, and innovation will be our weapons. No bombs, bullets or destruction will be chosen by us, yet we are of course ready to meet this challenge on a military battlefield. Do not make a mistake that we are not willing and able to meet this challenge with weapons, we simply are choosing a better path.
America and its partners of free and open societies will produce oceans of oil and natural gas alongside pushing forward with solar, wind and battery technologies. We do not have to argue about global warming to seek cleaner air or higher standards for protection of the earth.
Free people in the United States and globally will work to embrace productivity, education and all that puts food on grocery shelves, goods in stores, and cars on the road. This economic conflict requires all of us to perform our mission while demonstrating to oppressed people everywhere that freedom equals better life.
In the USA I see American, Japanese, Korean, and German cars among others. Where are the Russian cars? Where are the computers? Cell Phones? Merchants? Banks? Pharmaceutical innovations? Where is any of it from the kleptocrats? It does not exist as criminals only take; they never produce.
I do not stand here before the world and claim perfection. We have made our share of mistakes throughout our history. In our conflicts we have largely avoided the wholesale destruction that Russia is now trying to justify. Through our failures we have sought to refine our principles and practices. The mission now is to set the beacon ever brighter for freedom, liberty, and the merit of democratic capitalism.
We will seek to battle for a future vision where the pie of rising living standards can grow for all. All can move this mission forward via hard work and an individual contribution to rising productivity. Human beings have not come this far to work for destruction that is based on twisted historical views. The armies that serve devastating actions are ultimately drawn to our free world vision. Russian soldiers can lay down arms and succeed to their own level of success in the free world, rather than destroy for a tyrant. We welcome all of you to desert these efforts and come join us in building your lives and world, not harming others. There is a better way for all of you.
The current disruptions of supply and inflation in the price of all manner of goods is concerning. It is important to recognize that the capitalist, free market model can be volatile. All manner of transportation, shipping, and personal transport are currently being impacted by higher fuel costs. Governments can only seek fair and functioning markets that can deliver satisfactory supply. Part of our effort in this conflict is to persevere as the initial economic shock of our strategy may cause prices to move up erratically.
Open and transparent exchange should ultimately find equilibrium between supply and demand. There may be great opportunity in revisiting the long-term debate with regards to public transportation and efficient infrastructure. The American spirit has accomplished incredible things and these challenges shall be no exception. We will innovate, build, provide power, and all manner of necessity to create a rising living standard and quality of life just as we free capitalist citizens always have.
If anyone has doubt about the free world overcoming challenges, look no further than what America and the Western World has created. The best universities, hospital systems, medicines, technological innovations and so many crucial elements of modern life have not come from dictatorship or kleptocracy. The United States produces 24% of the world GDP, Russia 2% according to the IMF.
I call all free people worldwide to enlist in this effort, work hard, and care for their fellow man and woman. Citizens of legitimate societies, welcome those from these broken and demented war zones. Victims that are suffering should leave these lands of heartbreak and join us in creating a better future. We have lots of room, compassion, and resources that are ready, willing, and able to help.
Many of those in the free world are descendants of immigrants. Generations ago our ancestors sought better lives, and opportunities that we are now experiencing. The Statue of Liberty resides among the greatest monuments of this earth. Lady Liberty sees the suffering and extends the embrace of the West, of freedom, of individual rights. We welcome all who seek to migrate and emergency provisions to accept large numbers of refugees are now being formulated.
We do not seek this conflict but have no doubt that it will be decided by our hearts, our work and sacrifice. We will produce as always and tilt the world on the path it has been on for thousands of years. A journey to liberty, abundance, and higher living standards for all. We are all soldiers in this economic conflict. Let’s build a better world. Join in our freedom, liberty and justice and let us begin now.”
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In respect to the crisis, the economics and investing dynamics of 2022 present momentous challenge. Markets had been bid up to levels that proved vulnerable to profit taking. The financial support to citizens are now presenting consequences to life in “normal” or “post-pandemic” economic activity.
Pandemic aid was less significant than the actions of the Federal Reserve and central banks globally. The financial system was propelled forward by unprecedented quantities of money added to the financial system. The consequences of these actions create an effective devaluation of the dollar, and all currencies globally. Central banks sought to help buffer against scenarios of great economic slowdown that could be caused by the global pandemic. Monetary decision makers went into this process knowing one of the consequences would be price inflation.
Adding money to our financial system is a form of lending by the Federal Reserve. A loan to the economy to bridge the tough times. Initially the new supply of money shocks the system in a positive way as banks seek profits through increased loan volume as the cost of their capital is reduced. Elevated economic activity ultimately leads to an imbalance between supply and demand. Markets sometimes react via higher prices as we have seen in numerous sectors of the economy. Initially this was reflected in the rising prices stocks and real estate.
The pandemic resulted in roaring activity as people shifted their lifestyle and spent on home-based comforts. Fears of an economic slowdown were not realized as activity shifted across large parts of the population that were able to continue to work via remote and virtual mechanisms. Spending increased as people had more time on their hands. Homebuilding, remodeling, and domestic purchasing of all types raced forward.
The real economy strained as transportation, factory work and all manner of non-virtual activity was impaired. Pandemic related shortages ultimately rippled across a wide range of goods. Workers that began to see checks arrive to assist them combined with fear of the virus were disincentivized to participate and productivity has declined.
These dynamics have been compounded by the technological complexity of modern products ranging from washing machines to automobiles. From Wi-Fi connected light bulbs to voice activated climate controls for your car, a staggering array of tech-bloat has been added by semiconductor technology. These products are now delayed by shortages in sourcing all the elements required to produce the designs enabled by said technology.
Barrons Magazine articulates that the fears of a 1970’s style of inflation is unlikely. The article illustrates how the post WWII period experienced high inflation that was transitory as the conflict caused disruptions that were temporary. These historical assessments are helpful for perspective on past struggle that was overcome. The past patterns are unlikely to fit exactly or provide a template as each event is unique. The interconnected “Global” economy is now much more complex and has shown fragility as delay in one area of supply ripples across broad sectors of the economy.
The decade of the 2020s is likely to see the idea of the “supply chain” shift to “supply security”. The distant manufacturing centers of Asia have held great appeal for decades as the productivity and cost proposition was dominant. These advantages are subject to challenge as cheap labor and lax regulation are difficult to sustain. The Ukrainian tragedy of 2022 is likely to have an existential impact on the perspective global competitors exhibit as they locate in areas that are counter to core western values.
The heart of manufacturing has been in areas of the world where the hopes of engagement have been dashed as living standards have risen, but poor political systems have led to autocracy, kleptocracy and the tragic decisions of Assad, Putin, and others.
Multinational corporations have recoiled from Russia and a significant shift is depriving Russia from all manner of goods. This economic action has no modern precedent that comes to mind. A future scenario where economic activity concentrates more in areas of the world where the rule of law can be relied on is possible. This may lead to significant economic activity in the rebuilding of manufacturing and all manner of productive activity in a less globalized format.
The dynamics of de-globalization creates great uncertainty as significant markets may end up less accessible or abandoned altogether. The elephant in the room is China. As Asia witnesses the impacts on Russia, there is the hope that the authoritarian trends that have been developing in the pacific may slow or even shift direction. Domestic politics that seek to blame China for all the challenges we face does not bode well for optimism on this issue.
Energy is a great example of where generations of economists and investors held pessimistic views that were never realized. Peak Oil theory, which originally predicted that the world would see declining supply of oil between 1965 and ’71 is looked back upon as a great economic mis-calculation. Innovation and technology have obviously rendered these “predictions” ludicrous.
Dire predictions as to how the Chinese economic miracle has peaked and that the world will be a prisoner of inflation, shortage and disruption will now be increasingly broadcast. Historically scary scenarios often are not realized as the pessimism regularly fails to consider invention, innovation, and potential productivity gains. It is possible that there is a boom coming to the United States. A wave of adaptation could very well bring significant growth.
The roaring 2020s may be driven by:
1) Onshoring of myriad activities that have spent decades in far off countries
2) The economic imperative of effective immigration policy
3) The relentless success of the Western Capitalist Democratic model
During times of turmoil and change, it is difficult to remain constructive and optimistic. The very soul of freedom and liberty drives adaptation and gains the benefit investors, workers, and all inhabitants of the free world. Stay brave, remain invested and you will very likely prosper.