This weeks Friday thoughts will be short. Things are happening at such a rapid pace in Ukraine and there is so much uncertainty, that I’m trying to take my time to digest it all. I watched the attacks and fire at the Zaporizhzhia nuclear power plant last night with horror. Thankfully, it appears that hasn’t been any radiation leaked, so far.
As I said last week, my most important suggestion to anyone is not to overreact. These are troubling times and difficult issues. But, the world has often faced troubling times and difficult issues and we’re still here. Human beings can be awful, but are also amazing at their ability to adapt and adjust to circumstances.
In challenging situations, I try to find the good. I do believe that there is always a good outcome somewhere, even if it’s hard to see. I think the markets saw a little good in the conflict late last week, too, as they rebounded Thursday and Friday.
To me, the most encouraging thing coming out of Europe has been the global cooperation and coordination. NATO seems to be more united in their efforts to protect members than they’ve been in decades. The European Union is standing together with their sanction efforts against Russia. If it comes down to having to actually fight in a ground war, this unity may be hard to keep together, but at least we’re on the same page right now.
I’m also hopeful that the global unity in condemnation and sanctions against Russia is being noticed by China. They’ve made no secret about their desire to take over Taiwan. Now that we see the price to be paid for territorial expansion, perhaps they will now realize there is more to lose for that action than they would gain.
The other positive development for the economy is that the conflict will likely give the Federal Reserve some rationale for slowing their interest rate increases. The market had been expecting a 1/2% increase in the Fed Funds rate at their meeting this month. Since the Russian invasion started last week, the market has lowered their expectations to 1/4%. The conflict and the sanctions being imposed will more than likely lead to a recession in Europe. Recessions are typically deflationary, meaning it tends to drive prices on goods down.
However, with the likely suspension of purchases of Russian oil, it’s probable that oil and gas prices will stay high, or even go higher. Side note: I read yesterday that even though there is no ban on the import of Russian oil at this point, there are several tankers filled with Russian oil that can’t fund a buyer. They are offering to sell it at $20 a barrel discount and still no one wants it.
The Fed is in a tough spot right now. They need to raise rates to combat inflation. But, they also don’t want to negatively impact the economy already dealing with inflation and the impacts of the Russian conflict and sanctions. They have their work cut out for them to softly and safely land the airplane of the economy.
I pray that cooler heads prevail in Moscow and there is a resolution to this conflict. In the mean time, I want to encourage you to focus on what you can control. We can be aware of the global issues, but let’s not let it affect our daily lives.
While people can be awful and do horrible things, most are really good and caring people. Let’s all try to get out and spend time with our family and neighbors and be reminded of the better side of humanity. I hope that you have a great weekend.
The views stated in this letter are not necessarily the opinion of First Allied Securities, Inc. and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.