Distribution of Global Wealth (May 2022 Newsletter Excerpt)

Distribution of Global Wealth (May 2022 Newsletter Excerpt)

There is a funny thing about life experience. Not only is it mostly non-transferable, but also somehow, life can feel like a series of new things when it’s often a remix of our past experiences. There are many truisms that can be said of investing:

  1. Pessimists are always right … eventually, but only temporarily. By analogy, anyone could run around saying that a storm is coming, and they would eventually be right. The lightning will eventually come. However, no matter how scary the storm is, it eventually goes away.
  2. For some strange reason, a negative outlook always sounds more rational than a positive one. No matter what, there will always be voices out there saying the market is “about to crash” or the “bubble is about to burst.” People will say this of stocks or other assets such as real estate. People still talk about the Dot Com Bubble or Financial Crisis as if it’s still economically relevant, but the market is nearly 3x higher than even the top of the Dot Com peak, and 6x higher than the bottom of the Financial Crisis.
  3. General public consensus is always wrong. This can be seen in multiple environments. By the time the general public starts thinking that an investment is excellent, it no longer is. The reverse of this is also true. When everyone is has really low expectations about the future, it’s usually it’s brightest.
  4. When volatility comes, people act like that’s weird, usual, or new. The only weird thing is the lack of volatility.

Naturally, just like with anything, there are exceptions.

Is That All There Is to a Fire?

In 1969, jazz singer Peggy Lee had a hit with Is That All There Is?  She starts out the song with a story:
I remember when I was a little girl, our house caught on fire
I’ll never forget the look on my father’s face as he gathered me up
In his arms and raced through the
Burning building out on the pavement
And I stood there shivering in my pajamas
And watched the whole world go up in flames
And when it was all over I said to myself
Is that all there is to a fire?
In the first quarter of 2022, US Gross Domestic Product (GDP) contracted by 1.4% (annualized). A recession is defined as two consecutive quarters of negative growth in a country’s gross domestic product (GDP). So does this mean we’re halfway into a recession? If GDP contracts again in the second quarter (the one we’re in right now, which we’re halfway through), then yes. And if so, you’d be forgiven for asking, “Is that all there is to a recession?” When anyone says “a recession is coming”, they are 100% right. There will always, eventually, be a recession. If you keep saying this every day, you will eventually be right.

However, this negative reading seems to be more of a bounce back after the stellar 6.9% GDP growth in the fourth quarter of 2021. Right now, the economy is objectively strong, employment excellent, and we do not see significant warning signals going off. There are however, some very meaningful “wild cards” that are weighing on the minds of investors.

The Wild Cards

The big wild card right now is heightened inflation. It’s fair to say that higher inflation was inevitable as the world economies bounced back, along with the trillions of newly printed funds floating around. However, it has surprised most economist how persistent inflation has been. Part of this inflation is because of the Russian invasion of Ukraine and the oil shock with it. However, the effect is probably a lot less than it may seem – it would have been elevated regardless of the invasion.

The Federal Reserve has already started raising interest rates to fight off inflation. If they get really aggressive about this, it would put us in recession. From 1968-1982, the United States experienced high inflation. In late 1981, Fed Chairman Paul Volker spiked the Prime Rate to 21.5%, which deliberately put the US into a recession in 1982. This self-inflicted pain was roundly criticized, but in hindsight, the results are hard to argue with. Inflation peaked at 14.8% in March 1980, but fell below 3% by 1983. While our current inflation rate is half this level, and raising rates that aggressively is highly unlikely, it’s certain that this history is on current Fed Chairman Powell’s mind.

The other wild card is if the war in Ukraine escalates unexpectedly. There’s nothing predictable about war. In the modern age, most of the time the aggressors end up being the losers. This isn’t always the case but tends to be true.

It’s hard to see a positive outcome for Russia at this point. We have all heard talk of Putin feeling cornered, suggesting that he may escalate the situation and go into all-out war with NATO. This is a possibility, but by no means a rational action.

When you grow up and/or live in America, it’s easy to lose sight of just how powerful and wealthy we are as a nation. If you were to take all the money in the world, it would make a giant pile worth about $278 trillion dollars. Of this pile, Russia owns 0.85% of the pile and Ukraine owns 0.09% – or, Ukraine is 1/10th as wealthy as Russia. However, the United States owns 29.40% and another 25.06% of it is owned by other NATO countries. In the animation below we can put this in perspective with Ukraine in yellow, Russian in orange, and the NATO countries in green.