War divides the world, threatening prosperity
The invasion of Ukraine is a human catastrophe and threatens to be a serious problem for the world economy. The price of crude oil is up 60% this year and might be on its way to a record above $150. More than one recession has been associated with high oil prices, so we need to rethink some of our assumptions about the economic environment.
Higher energy prices are like a tax—they are largely unavoidable. Heating oil, natural gas, and gasoline must be purchased every day no matter the price. Consumers are forced to pay, leaving less to spend elsewhere.
On top of this well understood dynamic, the rest of the world has decided to declare economic war on Russia in an effort to avoid the real thing.
Russia, the 11th largest economy in the world, has been cut off from the rest of the financial world and has been impoverished overnight.
- The Russian Ruble is worth less than a US penny
- The value of the Russian stock market has dropped 90%, and remains closed
- Over 75% of payments in Russia are processed by Visa and Mastercard—that mechanism was turned off over the weekend
And, Russia is a large producer of oil, and Europe’s single biggest supplier of natural gas. What happens if those flows of energy are cut-off or reduced?
All this adds up to massive economic uncertainty and threatens to turn what has been a normal stock market correction into something much worse. Bear markets are often linked to an economic recession and the odds of both have increased in the last week.
We were net sellers of stocks in 2021 and we’ve made adjustments this year to remove risk from our portfolios. This process will continue as we monitor world events.
Daniel A. Ogden