This war is shameful and crazy. All wars are.
And there’s no telling what President Putin is going to do next.
What I do know is that the globalized world economy is not going back to what it was. The Coronavirus Crisis and the Supply Chain Crisis it helped cause were clear reminders of how delicate global supply chains could be. Now, a superpower’s invasion of another country and the ripple effects on supply chains and financial systems around the world are going to make every country move toward domesticating all supply chains.
We’ve seen the U.S. government making moves to help Intel Corp.
make chips for other companies, and that will probably be the playbook for many industries. Do you want to source your supply of plastic or textiles or finished goods from China when the fragility of such a dependence is now again on full display?
For years it has amazed me how we can buy a weird fruit from China at the local Albertson’s as cheaply and easily as we can an apple from El Paso. The cost of shipping and moving goods around the world has been subsidized with the protection and investments our government have channeled toward the Middle East to help keep the price of oil down.
This paradigm — this entire globalized economy — is changing. That will probably lead to more inflationary pressure for the next few years. Longer-term, it will probably be amazing for the U.S. economy as we unleash new robotics, software and other technological revolutions that will make our domestic supply chains and distribution chains and retail business models ever more efficient and profitable. But that new secular trend will take at least a year or two to kick in. And it will take another two or five years to start affecting the economy in good ways.
The market setup
Which brings me to the market setup analysis. Obviously the Russian/Ukraine war and the vacuum that it seems to be as it sucks in ever more of the world’s attention and resources, is the single biggest near-term factor for the markets.
But even looking past that, I am worried that the U.S. economy has some recessionary tendencies as we work through the unwinding of the 12-year Bubble-Blowing Bull Market that culminated with the SPAC and Speculative Crappy Stock Bubble popping in February 2021 before so many of these stocks crashed 80%-99%.
There was a lot of excess out there, some of which is still being worked through. The trickle-down effect of that crash is starting to be felt in tech-centric cities, such as San Francisco and Miami. Crypto geniuses who bought cars, boats, computers and/or the best smartphones on credit in the last two years while their crypto and speculative stock accounts went through the roof are now trying to figure out how to unwind all of this mess. People who bought extra houses to put on Airbnb
and giant funds that bought real estate around the country en masse could be next.
I’ve talked a lot over the last year about how crowded it has felt to be a Revolution Investor, as everybody was suddenly saying they were focused on finding the best technological revolutions and holding on for the long term. It’s less crowded out here now as so many people and money managers are dealing with huge losses and moving into cash or defensive stocks or value investing or just paying off debt.
But it’s still crowded in crypto and it’s not exactly lonely out here being a tech-centric investor right now. Maybe we’re halfway or two-thirds of the way of churning through those weak-handed investors and the crappy stocks that still have to go lower and/or go all the way to zero before the cycle turns. There will be better times to buy most tech stocks (other than Intel and maybe a handful of others, such as Meta Platforms Inc.
Uber Technologies Inc.
and Rocket Lab USA Inc.
) than right now.
Need for caution
Let’s get back to the Russian/Ukraine war — we need to be cautious. Unless China somehow decides to join the rest of the developed world in isolating and shaming Putin and/or unless Putin’s generals and the public of Russia somehow rise up to overthrow him and end this war, I’m not sure how this war ends quickly. Regardless, I am struggling to get my head around how the new less-globalized economy is going to work.
For my entire career, my baseline economic thesis has been that the internet, combined with a globalized economy, was going to make trillion-dollar economies abound as it brought billions of people out of poverty and into the consumer class. The openness of the system would allow companies based in the U.S., which obviously can out-innovate anyone, to become trillion-dollar businesses. That’s what happened. That’s not the setup anymore.
This doesn’t mean what’s coming next won’t be even better at creating trillion-dollar valuations and improving the lives of billions around the world. In fact, I expect that whatever paradigm comes next will be better. But there are new risks to earnings power over the next five years for most of the companies in our portfolio that weren’t there two weeks ago before the outbreak of this war in Europe.
I have erred on the side of caution, raising a little cash into the rally on March 2, off the recent lows. In both my personal account and in the hedge fund, I have done some trimming across the board (about 10%-20% of most of my positions) and in the hedge fund, I’m adding to my short hedges and will continue to do so if the markets continue to rally near-term.
I’m not outright short or bearish, but I want to step back from things here a little bit while the fog of war is heavy but stocks have bounced. I’ll obviously be open to buying or adding to great companies’ stocks on weakness, but for now I’m getting more defensive than I have been for the last year.
Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.