Happy Fri’YAY, y’all. Busy times at the shop this week, so we will get right to it. As always, thank you for reading.
“Stock market is down on fear of Russia/Ukraine conflict.” “President Biden says Russian invasion of Ukraine is imminent.” “President Zelensky of Ukraine says invasion not imminent.” “Kremlin says talks of diplomacy are far from over.” “US Secretary Blinken says today or tomorrow.” “Biden orders diplomats home. Other NATO countries don’t.” WHAT IN THE H*%# IS GOING ON?
The diplomacy war being waged in the press by these three countries is wild and super confusing. Based on the tactics being used by all parties, you’d think someone was trying to get an extra $100 off the final price at the used car lot. Goodness. But we aren’t here to comment on global politics, we are here to discuss global finance so we will move on.
The idea of markets being down this week because of a potential conflict is very thin. Yes, there was volatility when Russia entered Crimea, but it’s hard to say that it was correlated. We could put together a list of positive market weeks occurring simultaneously to terrible things around the globe. There’s more to it.
This week, we see movement as a continuation of The Great Interest-Inflation Debate of 2022. That is what’s really driving markets, and it goes something like this… interest rates are up naturally now, so will the Fed still take rates up in March, and how many times this year? Three? Five? Lucky seven? Honestly, it doesn’t really matter as we know the trend is up. And the same questions are raised with inflation. Will it continue? One year? Two years? Will it increase or decrease? Again, it’s not important to make a prediction when we know the trend is steady.
We are still very much in a transition that could take most of the year. A move from a frothy bull market to a full-on bear market in high-flying stocks and a move from a historically low-interest-rate environment to one that is higher than that. With this changing of the guard, patience is key. There is a plan for a rising interest rate environment and the volatile stock market and it’s not double-down, all-in and hope for the best. There are small wins to be had and lots of potential when the dust settles.
We have a couple more things below for extra credit. Have a great weekend. Let us know if we can help. All the best.
High Note Quick Hits
Buy Your Happy Meals in Moscow
Foreign currency prices can be a super dry topic for many. Like bone dry. Understanding price movements can be helpful in getting a very large
picture of what’s happening around the world, and that’s important for globally diversified investment portfolios. But there is no “price” of a dollar, right? Everything is in currency pairs, so $1 gets you .65 pounds or .85 euros, but then how many euros can you get from a pound, and everything in Japanese yen has commas, and what does it all mean anyway?
Thankfully, the Economist has the much-needed “special sauce” to offset the dryness with their Big Mac Index. Yes, you read that correctly.
Their words…
Just below here, we have the most current currency readings of the Big Mac Index. You’ll notice that the USD is third on the list meaning that Uncle Sam is very strong, or to put it more appropriately, a very bad place to buy Big Macs. What’s a good place right now? Brazil. What’s the best place right now? Russia. It must taste SO good at that price.
Okay, so now that we have a grasp on the general concept there are a couple of takeaways. First, strength/weakness comes from supply/demand dynamics on the global stage. When things get uncertain like for say with a global pandemic, money flows into the USD as it’s considered safer than most other currencies. That drives the price up. When the world is on a global growth tear, safety isn’t as much of a concern and we see the USD weaken. Based on the latest Big Mac, it’s clear the world still isn’t feeling particularly safe.
The second takeaway is how this affects portfolio management. Two examples: A strong USD means traveling abroad is cheaper than normal (book those tickets!). Conversely, that means it’s more expensive for those coming to America. Similarly, for US-based companies that do a majority of their business overseas, the money coming back home is worthless which can hurt profitability. This is something that’s in consideration when selecting stocks.
The other insight provided is in regard to emerging market investments which are part of a diversified portfolio. Now, there is a dictionary-sized book worth of material that can be written on this topic alone, but let’s simplify it. When Big Macs are mega cheap in emerging economies like South America and Africa, it’s usually a headwind for growth. The reason being that these smaller countries are required to hold stable currencies in reserve. Why? Well, their currency isn’t popular enough, not stable enough to be able to trade on the global stage. Said differently, they have a bad credit score. To get a better credit score, they have to stockpile stronger currencies like the USD which hurts growth. Kind of a mindbender, yes. This current Big Mac environment has been a headwind for investments in those countries which is one of the reasons why we have kept our exposure limited.
A Wall Street Icahn(sic)
If Warren Buffett is the most famous and successful investor alive today, Carl Icahn is second. While Buffett has retained a generally sweet and humble public persona, Icahn is the man in the black hat. He’s bold, he’s brash, he’s polarizing and still feisty while working in his mid-80s. And speaking of the 80s, Icahn was the inspiration for the infamous character, Gordon Gekko, in Oliver Stone’s 1987, “Wall Street”. That should paint the picture.
This week, HBO released a new documentary on the titan titled, “Icahn: The Restless Billionaire”, which covers the entirety of Icahn’s life as told by himself, his family, and the reporters that have covered him for years. It’s a fun watch about an interesting and influential man with good stories. It can be left at that level but what the documentary is exploring is the bigger question of “corporate raider” vs. “investor” and the morals and ethics involved.
One of the things that’s supremely fascinating about this topic is the juxtaposition of Icahn’s “techniques” in accomplishing his goals versus the giant institutions that have been built doing a similar thing. In the very popular trend of Environmental, Social & Governance (ESG) investing, the same concept is at play which is, “we are investors, so you need to listen to our demands, Mrs. or Mr. CEO”. Now, Icahn may make those demands by calling the current leadership thieves and idiots on national tv which isn’t everyone’s approach, but it has worked for him. It’s not exactly the same, but the pressure from the ESG funds is similar. It’s couched in subtlety yet intended to accomplish the same goal of forced corporate behavior.
Using the Gordon Gekko quote, “greed is good”, will get you absolutely roasted on Twitter, yet Icahn will tell you that a great many positive things can be accomplished for a great many by properly placed greed. You can watch the trailer here.
