On the Road Again

The war in Ukraine reached the one-month mark this week. There is little sign of an end in sight. If you recall, Kyiv was expected to fall within 96 hours of the invasion. It didn’t. Kyiv still stands. In fact, it’s reportedly more secure now than it was 10 days ago, to the surprise of most outside Ukraine. Russia’s might was overestimated. Ukrainian resolve was underestimated. Conviction: It’s a powerful thing.

Geopolitics are quite common around the Globe. They have been for some time. The Market keeps moving. The US Economy does too. Americans are flying again in size. The TSA screened nearly 2.4 Million people in airports across the country last weekend. It was the highest one-day total since the start of the pandemic. This week has brought five consecutive days of 2+ Million people screened, and seven in the last ten days. It’s expected to be even busier in the coming weeks as Spring Breaks across the country expand. America is definitely re-opening again.

I am one of those 2+ Million. I flew the friendly skies to back-to-back weekly conferences for the first time in 2 years. I was in Scottsdale for a Schwab event, followed by Louisville for Barron’s annual Independent Advisor Summit. It was so refreshing to see familiar faces in person again, as well as meet new ones. Sharing ideas and best practices is so much more effective in person than virtually. It helps stimulate creativity and better ways while forming strong relationships. You don’t realize how much you miss it, until it’s gone.

The airports were bustling and planes were jammed. Arizona was exploding with Spring Fever. People were heading to the ballparks, the golf course, the tennis courts and the pool. There was some business travel, but the majority seemed highly recreational, for both kids and adults. Business travel is starting to pick up too. It has a long way to go.

I had the honor of spending some time with 4-Star Admiral William McRaven again. 37 years as a Navy Seal, McRaven is probably best known for leading Operation Neptune Spear, which was the raid that got bin Laden. McRaven spoke on many issues, but of course the subject of Ukraine was of keen interest. McRaven said it has become clear that the Russians were not mentally prepared for this invasion and they certainly underestimated Ukrainian resolve. He has heard that morale is getting worse and worse in the Russian ranks. They are resorting to using brute force now. They have the numbers and the ammunition. Russia is fighting a 20th-century style war, but doesn’t have the plans or capability of winning the peace or occupation. Apparently, negotiations have evolved from Russia speaking in absolute ultimatums towards what’s being described as real dialogue. That’s significant. But peace seems so far off. The Admiral said that Vladimir Putin either miscalculated or is no longer a rational actor. The latter scenario is the greatest danger. Putin’s off-ramp is simply unclear. Asked about China trying to invade Taiwan now, McRaven said it seems highly unlikely anytime soon. Though unlikely to admit it, China recognizes the mistake of supporting Putin.

Also speaking this week was Beth Sanner, a 35-year intelligence official who worked at the CIA and the Department of National Security as well as a Presidential intelligence briefer. Her resume and commitment to service are very impressive. Like with Admiral McRaven, the subject of Ukraine was front and center. Beth Sanner called the war a stalemate for now and expects the conflict to go on for weeks. Neither side is willing to concede. She said that Ukrainian resolve has surprised everyone, particularly Russia. Sanner said the Intelligence Community is very surprised at the poor Russian execution. It’s been known that Russian command and control is disorganized and corrupt. But this showing has been beyond imagination. She said Putin only listens to a select few, and that number seems to be shrinking. Russia was completely unprepared.

Vladimir Putin has accomplished what no other leader has been able to for decades; NATO is as tightly aligned as ever. The biggest mover is perhaps Germany. The country will never be the same. Sanner said German eyes are wide open and have quickly moved to diversify dependence on Russia. Germany is finally committing the defense spending requirement of 2% of its GDP. That’s been an issue for years. America has picked up a large part of the NATO tab. Putin got Europe to finally move. Beth Sanner also said that US-Asian alliances are now stronger than ever. She called them good news stories in a bad situation. She remarked, it’s good to have friends. It is indeed.

Cybersecurity remains a major risk. Keep those shields up. Russia and China are in our systems already. That’s a sobering fact. SolarWinds and Colonial Pipeline should have been a wake-up call. Don’t click links from people you don’t know. If something doesn’t seem right, freeze and investigate. Use duel authentication for log-ins. Stay vigilant on cybersecurity. Bad actors are relentless. It’s only going to get worse.

The price of Crude remains volatile, with an upward bias. Replacing Russian Oil is not easy and certainly not quick. The price of Oil hit $114 per barrel this week. It went as low as $93 last week. It hit a decade-plus high of $130 the week before. It started the year at $75. That’s volatile. And the price of Crude impacts nearly everything we do. The International Energy Agency (IEA) is warning of an “emergency situation” for global energy security, due to insufficient oil and gas supplies. It was just last year that they urged putting an end to new oil, gas and coal projects in order to help the Environment. The Economy and the Environment have a heated relationship. We are clearly realizing you can’t have it both ways.

So what’s the solution to these spiking energy prices? The IEA released a preliminary plan recommending lowering speed limits on highways, eliminating air travel for business, taking trains instead of planes and adopting “car-free Sundays,” among others. This, with Spring Breaks upon us and the Summer driving season around the corner. Some states are taking action to lower prices at the pump. Maryland and Georgia have become the first states in the country to temporarily suspend their gas taxes. California is considering a $400 gas card, tax-free, to all registered drivers. It would cost $11 Billion. California currently carries a budget surplus of approximately $45 Billion. That’s the purse they would use to help Californians at the pump. Naturally, not everyone thinks it’s a good idea.

The gas tax relief in Maryland will be in effect for 30 days, saving drivers 36 cents per gallon. Georgia’s gas tax suspension will last through May and will cut the price of gas by 29 cents per gallon. There are also several proposals on Capitol Hill to suspend the Federal gas tax, which is 18.4 cents per gallon, though such a move is unprecedented. There has never been a Federal gas tax holiday in the history of the United States, while past breaks on state gas taxes have mostly been limited to a few days.

I observed a small sample size of stations within the week from California and Arizona to Kentucky. Admittedly, it’s a rather small sample size, but is pretty telling. Regular unleaded, 87 octane, was $6 at the Chevron by our office in Walnut Creek. 87 was $4.78 in Scottsdale and $4.19 in Louisville. Kentucky has amongst the cheapest gas in the country, but $4+ is a record high for the state. California has long been amongst the most expensive gas in the nation due to its higher taxes and more restrictive emissions standards.

Lower gas prices sound very attractive to Americans right now. But at what cost? Over in Maryland, the gas tax holiday will save the average consumer around $15 over the course of the month, but it will end up costing the state over $100 Million in revenue. The measure is overwhelmingly popular with the Maryland people. Short-term solutions provide a reprieve. However, it could eventually add to the tab of the taxpayer down the road, hurting budgets and infrastructure spending. Long-term has consequences.

The last 2 weeks have been pretty nice for investors, as the deeply oversold conditions to start the month of March gave way to a pretty explosive rally. Fed Chair Powell caught investors off guard when he said the central bank is prepared to act even more aggressively to tackle inflation. Yields spiked further. The 10-year Treasury hit 2.5% this week, the highest in 3 years. In the last week, the Market has gone from fearing higher yields to embracing them. It’s as if the Market is assigning more credibility to an aggressive Fed willing to fight inflation without hurting the Economy. But higher rates slow the Economy. It’s designed precisely to do so. Something doesn’t add up right now. Despite the pick-up in activity with the re-opening of America, inflation is sucking away more Dollars spent on food and energy that would normally flow throughout the system.

Is the Dollar losing its status as the reserve currency? That question is being raised with increasing frequency. The Russian sanctions are sending commerce in alternative currencies. Russia is believed to be selling Oil to China by accepting Yuan instead of Dollars for the first time. Reports indicate Saudi Arabia is considering it too. That would be significant. Could Bitcoin be next? With spiking inflation, US Dollars buy less and less today. This has more and more considering other stores of value, namely Gold and Crypto. This is a trend that could have legs.

When yields go up, Bond prices go down. March has been the worst month for the Bond Market since 2016. More importantly, the 2-year Treasury yield hit 2.2%. That pesky yield curve is decisively flat with areas of inversion. That’s a sign of imbalance. The 5-Year yield at 2.55% is higher than the 10-Year at 2.47% and is almost identical to the 30-Year yield which stands at 2.58%. Who wants to lend money for 30 years getting 2.58% in return every year when you can effectively get the same for tying up your money 25 fewer years before getting your money back? The answer is not many, if any. The Bond Market suggests recessionary pressures are building and the Fed needs to be careful. The Stock Market doesn’t reflect that fear anymore. The Stock Market went from panic back to jubilation in just 10 days. Keep in mind, stocks are notoriously bipolar.

I’ve heard from many people asking why is this Market rallying while things remain so dangerous with inflation and Ukraine. The short answer is, it’s acting like a Bear Market. They bring deep dives followed by large rallies that suck you back into thinking the worst is over. The Market elasticity keeps getting stretched; Both to the downside and the upside. It can be gut-wrenching. We entered 2022 with a defensive action plan outlined for the first half of the year. That was well before the tensions around Ukraine. There’s a lot that needs to be resolved and we don’t see an escape from this volatile price action before Summer. We plan to keep actively navigating the choppiness. These cycles are about staying power. It’s working.

In this day and age, it has become abundantly clear that pretty much anything can happen and events unaccounted for are everywhere. We need to be prepared with Plan A and always be ready for Plan B. Admiral McRaven showed me his March Madness bracket. In case you were wondering, he had Gonzaga winning the tournament. His bracket got busted Thursday night like so many others from coast-to-coast. The thing is, March Madness doesn’t allow for Plan B…

Have a nice weekend. We’ll be back, dark and early on Monday.


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