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Q1 2022 Newsletter

While you and I were enjoying the holidays, financial markets and global politics forged on.  

China is hosting the 2022 Winter Olympics. Russia says they won't lay a hand on Ukraine while they lace up their steel-toed, kicking boots. Finally, the United States continues to struggle through huge inflation numbers and what employers call a "worker shortage".

As fears of American inflation and Ukrainian invasion have increased, stock markets have fallen. At the same time, the Federal Reserve is having to increase interest rates at a clip people born after 1982 haven't ever seen.  

It starting to look a lot like 1981, but what does that mean for you...?

Inflationary Pressures

Inflation is a great topic for news to press right now as we haven't seen it for a long time and most of us have forgotten what to do in an inflationary environment. The numbers are quite staggering with inflation surpassing 7% for the first time since the early 1980s. It can be unnerving!

Economically, the Federal Reserve has all the tools to head off inflation. The biggest weapon they can use is to increase interest rates and, as we all have heard for ten years, rates are currently near historic lows. The only way to go is up!

But that concerning part of this is that inflation was non-existent when we all expected it then just when we had all fallen asleep at the wheel, it showed up suddenly and intensely. The supply chain issues caused by COVID were mostly to blame at first. Next it's been the Great Resignation that has become the scapegoat. While the cause is complex and the aforementioned items are partially to blame, the real question should be how to bring it back to reasonable levels.

It's relatively simple: raise rates. The problem is that inflation happened so quickly, we're at risk of a 1981 situation where we have to raise rates so quickly that it throws the economy into recession. My take is that we'll see semblance of that play out, but it is necessary for long-term economic health and should be embraced.

Geo-Political Issues

What a messy web the Russia-Ukraine situation has become! China is Russia's biggest ally and they definitely don't want Russia stealing the show while they host the Olympics. They wouldn't mind seeing how the US would react if a conflict occurred because they have their own Hong Kong situation that may play out similarly. That said, they likely don't want to get involved very deeply to avoid any blame.

The United States has their own issues. Do you pick a fight with a school bully because they picked on some other kid? Especially when this bully is best friends with the biggest bully (China)? Maybe not, but if you don't then they'll start walking over everyone and you'll have to decide what would be egregious enough to break your silence.

While nothing will likely happen before the end of the Olympics, this definitely feels like a bit of a chest-puffing from the world's largest superpowers. It almost feels like we are about to start The Second Korean War, with the same backers on either side of a conflict. Definitely one to watch and I wouldn't be surprised if we continue to see these types of conflicts for years to come as the top 3 world powers wrestle for dominance.

Financial Markets

Human nature slowly changes. Too slowly for most of us to see or realize it is occurring and most of our dominating traits last thousands of years or more. I mention this because financial markets are simply manifestations of human nature and it is why many financial professionals feel confident that sticking out short-term fluctuations is the way to invest successfully.

We saw a double digit drop in the stock market over the last couple months, especially as the above items have been front and center in the media. We have a fight or flight response and financial markets are the perfect arena for those instincts to play out. How do we react to our fear of losing money? Do we sell or do we lean in and grit our teeth?

Ultimately, human nature will prevail when it comes to markets and optimism will eventually overcome fear. We just have to wait for that time by being patient and seeing the opportunities to take advantage of now instead of running from our immediate feat.