So Mother Russia has a big problem. How’s that going to affect you in the portfolio? Hello, my name’s Paul Carroll, the CEO and Founder of Avion Wealth, an elite wealth management firm here in Texas.
President Putin has recognized two Eastern provinces as break away states, something I might add that the Ukraine doesn’t agree with. He’s painted himself into a corner domestically, and anybody who saw yesterday’s monologue is right to be very deeply disturbed. For the first time since he took over as the President of the nation, he appeared to be somewhat unhinged.
Now, Europe has further compounded the problem with their aggressive turn from nuclear power over the last few years, especially after Japanese disaster. This happened before green alternatives existed. Not only have they ramped up the use of coal, but they’re extremely dependent on Russian natural gas. And despite that natural gas, energy prices are going through the roof in Europe. This makes it more difficult for Europe to respond.
Sanctions being discussed are going to be targeted both at the nation and more importantly at Putin’s cronies. It’s a gangster state and gangsters need other gangsters to stay in place. That is the thinking, “Let’s go after the cronies.”
Arguably this situation that we’re in today is the biggest mistake of Putin’s dictatorship. He is really stuck in a hard place. US and global markets at the same time are expensive, they’re awash in cash, there’s a lot of risk out there. How do we manage those risks? First, we got to remember, and we saw this back in 2020, markets love to overreact. They love to overshoot. Second, we must never forget, markets always figure it out in the end, sometimes in surprising ways. We were all worried about a depressionary environment and what happens? The greatest bull run and maybe one of the three greatest in history. Third, and this is very Machiavellian, but wars aren’t necessarily bad for markets, unless of course those wars go nuclear. And if it gets that bad, we’ve got much bigger problems than the portfolio.
It’s an interesting exercise to go back to World War II or any other major war. The markets are almost indifferent after the initial news. The problem that we’re facing today isn’t so much the craziness in Ukraine, it’s that we have rich valuations, terrible safe havens, and an inflationary squeeze. It’s a global problem, nothing new. What Putin is, is a trigger. He could trigger all sorts of negative consequences in the next few months. So what do we do? Do we panic? If we got out of equities every single time we panicked, we’d never have returns ever. But we do need to de-risk growth.
Vanguard had a recent report, the growth side of the equity market is 95%, two standard deviations from its norm. So growth is something that we are personally de-risking. That means growth equities. Not value equities, not other asset classes, but growth. Anything we can do to de-risk growth is a good thing to do in this environment, within the context of managing taxes and so on.
We also can look for opportunity because whatever happens next, someone’s going to get a bloodied nose. I hate to say it, but when there’s blood in the streets, is the best time to buy in financial markets. So how do we get from here to there? We got to keep our cool, de-risk that growth and remember fear likes to prevail in environments liked to this. Don’t let fear dictate or overcome good judgment. We got through COVID. We got through 2008. We’re going to get through this. We wish you the best of investing success. Thank you.