Follow-ups and New Thoughts:
- My first investment thought today is that TIPs just became more interesting. TIPs started to fade as investors contemplated 5-7 rate hikes, because coupon bonds would then provide more inflation protection. If we assume that the Russian invasion means high prices on raw materials and fewer rate hike as the global economy slows, the inflation protection TIPs provide is more valuable.
- The dollar, at least in the short run, is going to be strong. Unhedged foreign bonds are just not going to do well right now. There is still going to be a great opportunity to play the falling dollar, but that time is not now.
- I’m not sure that the Russian invasion of Ukraine is positive for the energy sector in the intermediate to long term. The premise of the recent rally was underproduction and excess demand as the global economy recovers from Covid. Instead we will get a LOT of production as soon as it can be brought online, and perhaps somewhat less of a recovery due to higher global inflation.
- One of the first reaction to a chaotic global situation is often to buy gold. I think this would make a lot of sense if I were a euro or yen or EM currency investor, but as a dollar-based investor I am only mildly enthused. A currency flight-to-quality generally doesn’t do much for gold in the country with the highest quality currency. Given Ukraine’s status as a potash producer, I would rather speculate on the agricultural implications of the invasion. Consider buying fertilizer companies
Today’s market action has been buy growth and sell value in the U.S., because long term rates declined sharply overnight and the yield curve flattened. I am very skeptical that this is a good trade for all but the shortest-term investors. In fact, I believe today is a bad day to trade overall. There is a lot of knee jerk activity, and the price of anything you think you might want to buy or sell has probably already moved quite a bit. We came into today with stocks already well off their most recent highs, so there isn’t a lot of “air” underneath prices. Much of the speculative premium has been beaten out of the market (just ask Cathie Wood). Also, the nature of events like invasions where power is asymmetric is that the market impact doesn’t last long.
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