Sunday, February 27, 2022

Cold War Equals Cold Markets

 Russia’s invasion of Ukraine is the first salvo of a New Cold War. It is Russia’s direct challenge against the global preeminence of the US and, one way or another, it is joined by China.

Western economies are based, almost 100%, on consumer spending. But the New Cold War will immediately require massively increased government spending on everything from personnel and armaments to spy satellites and foreign aid.  Meaning: sharply higher taxes and sharply lower private spending.

Do the math for corporate earnings, multiples, and share prices.

UPDATE: Germany just announced it is raising its defense budget by almost 50% from 1.40% of GDP TO 2.0%.  

Monday, February 14, 2022

Working Model

 My current working model for financial markets is this:

  1. The flood of new money since 2008 has reached unprecedented highs during the pandemic.
  2. This new money did not initially create consumer inflation because:  (a)Cheap Chinese imports kept prices down and, (b) the extra money inflated  intangible asset bubbles (stocks, bonds, cryptos, NFTs..) plus real estate and luxury items.
  3. Nevertheless, the money flood eventually caught up with reality and suddenly created spikes in basic consumer goods: energy and food.
  4. With basic goods prices soaring, wages and salaries for the working middle class are inevitably next in line.
  5. Corporations are, thus, going be caught between a rock and a hard place: higher input costs (raw materials and energy) plus higher labor costs.  They will certainly attempt to raise prices, but unless salaries and wages go up as well, they will see demand drop.
  6. Inevitably, as costs go up and demand slows or even drops, profit margins will drop too.
  7. Financing costs (interest rates) are also rising sharply.
  8. Lower or negative profit growth equals sharply lower P/Es. 
Can't see how shares and every other Risk-On asset (eg junk bonds) will do well in this environment, no matter what happens with Russia/Ukraine/China (this is a subject for another post).

Thursday, February 10, 2022