Wealth, War & Rates

Readers, I was a guest on the Market Huddle podcast this week. Here is a recording if that’s of interest. I will also release a new podcast this weekend, a conversation with writer David McCloskey, once a spy, now a spy writer. Finally, while I wish I could give away the material for free, I can’t. The paywall compensates me and my team for the effort.

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THIS IS NOT INVESTING ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.

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The world has become more confusing in the last two weeks, which is one reason why the NASDAQ has fallen 6% from its recent peak. Some of this is hyper-ventilation over “sticky” inflation but some of it is a genuine recognition that we may be on the cusp of a much, much more dangerous world. Here are the moving pieces.

Geopolitical - Step back from the pitter-patter of unsettling headlines, what’s quite clear is that the post-1991, Cold War-is-over, peace dividend has evaporated, poof, gone. Thanks, Vlad. Last Saturday, I watched with horror as Iran sent waves of missiles and drones at Israel. On X, you could also see the crowds in Iran (perhaps coerced) cheering. When I was in Ukraine last summer, I saw what these drones do--they slice a person into cylindrical pieces, like salami at the deli. As I was writing this, air raid sirens were going off over Ukraine. (The Air Alert app on an iPhone delivers this to you).

The root cause of this conflict is simple—-hierarchical power (the Kremlin, the Ayatollah, the Supreme Leader) finds the West at the same time both a) threatening and b) weak. The West’s wealth is disorganized, disruptive, and chaotic. There is no doubt AI will lead some to get very rich and others to get fired and enter into financial difficulties. This dynamism endlessly threatens established elites, which is why rigid, agrarian social structures find it so threatening. Check, religious fundamentalists of any creed. Hierarchical power covets this wealth but looks at the package—transgender rights, economic volatility, drugs—as an indication of softness. Think Putin bemoaning the West’s moral corruption while wearing $100,000 Swiss luxury watches paid for with bribes.

What is the market implication? Strongmen (they are all men) try to pick off what they deem as weak links and disrupt Western power. The very existence of the West’s wealth is a threat to them. That is Russia attacking Ukraine, Iran first using proxies (Hamas) and now its bases to attack Israel, Xi defenestrating Hong Kong and placing his sites on Taiwan. Saturday night’s vote in the US Congress over Ukraine aid is a big deal. Will the US slouch toward doing the right thing or simply back away and leave Ukraine hanging?  My hunch (hope) is that the aid passes in Congress and, if it does, it is an important indication that the West not only can produce wealth but, in meandering fits and starts, coherent policy to go along with it.

Market Action - Markets are interconnected. Ten-year yields rose from 3.9% to 4.6%. As they did, risky assets began to get crushed. The S&P 500 and oil each tumbled 5%, the NASDAQ a bit more. Tech stocks are now up just 1.7% this year.