Volatility and Risk Lie Under the Surface
There are serious risks to the economy that a lot of investors are underestimating.
Hello Everyone and Happy Friday!
I am writing this newsletter while sitting in the breakfast nook of my home in Santa Fe, NM. I am watching the snowflakes lightly accumulate on the ponderosa pine outside of my window as the sun slowly peaks over the Sangre De Cristo mountains. It is about as quiet and peaceful of a morning as a person could ask for, which is in stark contrast to the happenings in the world.
Yesterday afternoon, an extremely important, yet very un-reported story came out of a military twitter account that I follow. The news report was that Russia closed the Kerch Strait which connects the Black Sea to the Sea of Azov, cutting off Ukrainian ships from using the strait as a means of shipping. This is a clear provocation and escalation in the Ukraine conflict, where Putin is attempting to provoke the Ukrainians to respond to his aggressions and thus provide a narrative the Russians need to invade. Additionally, Russia released a statement stating that what Ukraine is doing in Donbass “resembles a genocide”, referring to the on-going Ukrainian war with “Russian separatists.”
It is very clear that Russia is stepping up their aggression in order to create a situation where they have a narrative to launch an invasion. This is a common tactic of any country seeking to invade another. Some countries will even go so far as to use a “false-flag” attack, meaning they will stage an attack on their own troops or citizens in order to use that attack as a pre-text to go forward with their intended actions. I will be closely watching over the next few weeks for any Ukrainian retaliation for Russia’s actions in Ukraine or an “attack” by Ukraine, whether real or staged, as a rallying cry used as a pre-text for Russia to further its military operations into Ukraine.
This extremely serious geo-political risk is occurring with the backdrop of inflation numbers that were the highest reported since 1982 ! Truly incredible. The rapid rise in prices, combined with the extremely troubling productivity numbers, spells complete disaster for the US economy. Essentially, the prices of goods and services are increasing rapidly, yet worker productivity is decreasing. This means that employees are getting less output for increased spending and salary. This can really spell a stagflationary disaster for the US economy. I really think that the FED is going to be forced to raise rates soon. It is very clear that the general populace is concerned about inflation and the Biden administration is starting to take notice. Poll after poll is showing that President Biden’s approval rating on the economy is abysmal, with the main reason cited by poll-takers was the rising cost of goods and services. The Biden administration senses this discontent with their handling of the economy and likely is putting pressure on newly re-appointed Federal Reserve Chair Jerome Powell to do something about inflation. Powell, in order to maintain any credibility and to appease his new “boss” will likely follow suit by ending the easing cycle much faster than originally planned as well as raising rates earlier than he has planned. This will cause a severe and swift correction in the equity markets.
These concerns were also echoed by my colleague, John Davies, when he appeared on the Warren Letter Podcast on Wednesday. During the podcast we discussed the potential for Russia to invade Ukraine, investment philosophy, land, gold, and the decline in investments made within the United States. We also discussed something that really struck me and changed my investment philosophy.
John made a very important point that most investors today, are really not investing they are gambling. John stated that investors have lost the long-term outlook that has proven to be effective for generations, instead they are looking to buy a stock for $1 and sell the next week for $1.10, not considering the larger picture of investing. When you invest your money into a company or a real estate project, that money provides jobs and goods/ services to the world. It is not just numbers on a screen, your investment can leave a lasting legacy on the world.
The modern day stock market is extremely manipulated via options, robo-trading and a “gamblers mentality”. These three methods of manipulation have often led to severe corrections, which John thinks is likely to occur over the next few years. He stated that he never invests in anything unless he is willing to hold it for at least five years. This point really caused me to think about trading and my own investment philosophy. Holding an asset for five years seems like an eternity in the modern market of commission free trading, yet having that mentality forces one to really think about where their money is being invested. This long-term mentality is absolutely essential to create long-term and sustained wealth. Keep that in mind as you choose your next investment.
-Russell Warren
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https://callin.com/?link=ErBPMoCkzF
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**As Always, this article was not financial advice. For financial advice, please consult with a licensed financial advisor for your particular financial situation.**