The Distraction du Jour
by Danno
So apparently Ukraine matters.... who knew?!?
Strictly as an investor, the really short version of this blog today:
-If you are still in your peak earning years and making money like crazy, the highly technical term for this is a "buying opportunity".
-If you are retired and not earning anymore, this is called a "rebalancing opportunity".
The End.
If you wish to continue reading, you may want to leave your sensitivity training at the door...
The last time I wrote on here was January 30th. I ended with "What happens next is almost always a surprise. What's important to acknowledge is that you don't know what happens next, and to have an investment approach that will work over the long term regardless of what happens next."
This Russia-Ukraine thing is not without precedent, and this is no time to panic. Markets are down because inflation is cooking for the first time in 4 decades, and the expectations have been ramping up that the Fed is going to raise interest rates to combat inflation faster than the market is comfortable with. This Russia stuff is just more engaging than the Fed for the moment, therefore Russia gets more run on TV and social media than the Fed. That makes market participants feel uncertain, and many will act irrational.
***I have no geopolitical expertise, I can only share how I contextualize this stuff so I can stay calm, do my job, and live my life.***
This sounds like WWIII to Americans right now, especially new investors, but this is nothing new when it comes to Russia and that region. The two most recent instances that rhyme with this are the Russian "invasion" of Crimea in 2014 and the "invasion" of Georgia in 2008. Crimea was annexed, and 2 portions of Georgia had their "independence" recognized by Russia. Both were over within weeks.
While I've never been to the area and am by no means an expert, I've read enough about this stuff to feel like I can put a framework around it that helps to make sense of it to me.
Through my eyes, it would be analogous to if the City of Toronto and it's surrounding area (on the border of the State of New York) consisted of 95% Canadian citizens, was ruled by Canadian law, but 70%-75% of the population were strongly leaning toward President Trump's COVID policies and against Justin Trudeau's (the liberal Canadian Prime Minister).
Now instead of waiting for mid-term elections in Canada, imagine if they were having that trucker convoy protest on a daily basis against the vaccine mandate a few months earlier, and before Trudeau got around to sending in enforcements to break it up, Trump sent troops in to support the rally and declared that we are going to recognize the greater Toronto area as its own independent republic, and welcome them with open arms as the 51st state of the United States.
As compensation we would give them the Detroit Lions franchise in Montreal, tell them that they are 1 quarterback away from a Super Bowl, and then disappoint them for the next 50 years (in Russia, just substitute oil for the Lions).
In this hypothetical scenario Canada broadly would be pissed, but they wouldn't want to throw down against the US military. The US would tell the story that Trump "freed Toronto from the Canadian communists", and 70%-75% of the locals would be happy.
Imagine if the City of Toronto was already a part of the US from 1922 through 1991, when the geopolitical tides were different.
Doesn't really seem that farfetched, does it? We are 1 St Lawrence River/Great Lakes away from being in Canada. Somebody drew a line, perhaps just because it seemed easier than building a bridge.
I wonder what we could have gotten if we had given up the U.P.?... maybe we could have gotten Toronto ;)
While the divide between liberalism and conservatism inside and across the US and Canada borders isn't as wide as the divide between capitalism and communism globally, you get the point. These are still just groups of people with different ideologies and agendas.
I'm not comparing Trump to Putin, this isn't MSNBC. Biden vs the liberal Canadian PM just wouldn't work with this analogy. I'm simply saying that just like in the US there are groups and areas with political differences 1/2 way around the world as well, with lines drawn wherever they were drawn back in the day. We have red states right next to blue states, and blue counties in red states, and red counties in blue states. Sometimes the wind changes direction, the tide shifts, and a certain population finds themselves on the wrong side of some line on a map that someone drew 30 or 100 years ago.
I am by no means an expert, and geopolitics in Europe and Asia mean very little to me. This is certainly a tragic sequence of events for some people. This is just how I simplify and contextualize things that I know very little about.
That helps me to remember that it's always something, somewhere... many people will always focus on whatever the biggest current "problem" is in the news. Sometimes that thing is the cause of a market selloff. Other times, that thing is just what gets linked to the selloff afterward because it's the news of the day. A ridiculously high percentage of the time today's biggest "news" thing is a total headfake and we just keep on marching higher.
One last thought... this is normal. Over the past 2 months the S&P 500 is 12% off the 2021 highs.
Here are the selloffs and the assigned narratives for each since the bottom of the crash in March 2009:
1) "The Flash Crash". May 6, 2010. 9% selloff that literally lasted 36 minutes.
a) After a same-day recovery, the market proceeded to drop 16% in the next 2 1/2 months.
2) "The European Debt Crisis". Late-summer 2011. 20% selloff in 2 1/2 months.
3) "The Fiscal Cliff". Fall 2012. 7% selloff in 2 months.
4) "Ebola". Fall 2014. 7% selloff in 1 month.
5) "The First Fed Rate Hike since 2007". Late-summer 2015. 12% selloff over 6 months.
6) "SARS". January 2016. 13% selloff over 1 1/2 months.
7) "Too many Fed rate hikes in a row". Q4 2018. 20% selloff over 2 3/4 months.
8) "The Trade War". Spring 2019. 7% selloff over 5 weeks.
9) "COVID-19". This time 2 years ago. 35% selloff over 4 1/2 weeks.
(notice that the Crimea invasion of '14 didn't even really make a blip on the markets...?)
That's a lot of words... do you prefer picture books?
Here is what that 12-year picture looks like:
Add that all up, over the last 144 months the S&P 500 returned over 380%. So your $100,000 would be worth $480,000 if you just didn't panic and waited a month or two. It'd be worth a hell of a lot more than that if you were saving consistently the entire time.
So the point is to focus on the things that can effect you and that you can effect. Focus on your family, your diet, your fitness, and your sleep. Financially, focus on your work and your savings rate. Put all those in whatever order and proportions you want.
Just don't get caught up in the distraction du jour.
If that's not working, take 2 Austin Powers movies and call me in the morning.
Now go drop some knowledge on a friend. I'm out.
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