Ignore Distractions: Focus on the Real Action!

Dear Reader,

Given enough time, the markets can and will adapt to any extrinsic shock. Take COVID-19 in March 2020 as an example. The financial markets went from deep despair to the fastest rally on record, all within a matter of months.

Exactly two years later, in March of 2022, the markets were given another excuse to sell off, at least in the short-term. Russia’s invasion of Ukraine was accompanied by Joe Biden’s existential, end-of-the-world alarm bells. Biden’s narrative was, and still is, that Americans must all willingly sacrifice their own qualify of life in order to defeat Putin.

More than 100 days into the invasion, Putin is far from defeated. As Russia continues to relentlessly bombard key Ukraine cities, Biden ups the ante with sanction after sanction – perhaps forgetting that Russia isn’t Afghanistan or Libya. In a globalized supply chain, Russia remains one of the world’s top exporters of oil, natural gas, nickel, wheat, coal, and other essential commodities.

And now, hardworking Americans are paying the price in a big way. As the summer heats up and a busy travel season gets under way, electricity bills are expected to double or triple year-over-year and the pain at the gas pump will only accelerate in 2022’s second half.

As always happens sooner or later, what’s happening on Main Street is spilling over to Wall Street. A shift in sentiment and focus in the financial markets is moving away from Russia. Putin’s invasion, as it persists week after week and month after month, is starting to become background noise for the markets. Unless the war expands to the West, it will stay in the background as other issues are top-of-mind for America’s businesses and workers.

We’re already seeing these macro-level issues in the financial media headlines: asset inflation, supply chain disruptions, and shortages of both essential goods and workers. Much of the asset inflation we’ve witnessed is tied to high petroleum and natural gas prices, a problem that didn’t start with the invasion of Ukraine.

Biden’s been using anti-drilling regulatory policy to dis-incentivize oil and natural gas production since he took office. Now, as America faces sky-high gas prices and electric bills, Biden’s suddenly chastising oil companies for not producing – while at the same time, he’s promoting severe “windfall” taxes on oil producers which would further dis-incentivize drilling activity.

Even beyond Biden’s manufactured energy crisis, policy errors are taking their toll on America’s economy with or without Russia’s provocation. As the old saying goes, America can’t print and spend its way to prosperity. The government tried this failed experiment once again in the 2020’s, and today we’re all forced to pay the piper for Paycheck Protection Program (PPP) loans and “free” money that’s manifesting itself today in higher prices.

Couple that with production and human services being put on hold – not just when Russia invaded Ukraine, but at least a full year prior to that – there are backlogs in the economy today and essential goods are hard to obtain, and super-expensive if you can even get them.

One particularly disturbing example of this is the baby formula shortage. Yes, issues happened with sanitation and related problems, but the underlying root causes come down to worker shortages, collapsing quality controls, inflation in materials, and supply issues – and again, the policy failures that allowed all of this to happen.

So now, under threat of major regime changes in a midterm election year, the government is engaged in finger pointing instead of finding viable solutions. Reportedly, Treasury Secretary and former Fed chief Janet Yellen effectively threw Biden under the bus regarding the runaway inflation issue, saying she had “wanted” the $1.9 trillion COVID-19 stimulus cut by a third.

As career politicians engage in recriminations, investors are left with tough choices. In the current scenario, there just aren’t many places to hide. Real estate, once considered an all-weather safe haven for investors, could be the next shoe to drop. Where can we seek shelter while also seeking growth, then?

Even as many commodity prices have doubled, tripled or more, the only thing that hasn’t gone up the way the rest of the market has moved has been gold and silver. Given the threat of stagflation over the next year if not longer, it’s important to be strapped in and prepared. Remember that when print-and-spend policy destroys government money, tangible assets will have their time to shine – and it could happen sooner, and more dramatically, than anyone expected.