We have a lot of headlines right now that are spooking the markets. They are inflation, interest rates, and Ukraine. I shall take them one at a time.
Inflation is being driven by both supply issues and demand issues. Demand is the result of the fiscal and monetary stimulus that the pandemic made necessary. I believe that we are very close to a return to normalcy globally. This should relieve many of the supply-chain issues that are creating imbalances. I pointed out in the newsletter several months ago that bond markets have not been signaling long-term inflation.
In the short term, central banks are tightening to reduce inflation expectations so that they do not become a long-term problem. Once inflation expectations become ingrained, they are very difficult to control. This is why the Fed is eliminating bond purchases and reducing its balance sheet. I think Chairman Powell will be aggressive.
I also believe that things are better than most people think right now and that the Fed hikes will be justified by better-than-expected economic numbers. This will probably hurt the companies that have no earnings, but overall, there are many parts of the economy and the markets that should benefit. Rather than a massive correction, we expect pullbacks and a rotation out of pandemic winners into traditional companies that were left behind.
Ukraine may become a humanitarian crisis once again. I personally lament the decline of the liberal international order (not to be confused with politics) that has existed since the end of World War II. Perhaps the current challenges will move us to remember who we are. Descriptions of the Ukrainian Genocide (the Holodomor) of 1932-33 are too horrible to read and cannot be quoted here.
Nevertheless, the Cold War coincided with Les Trente Glorieuses and the German Economic Miracle. I do not expect Ukraine to derail the transition from the pandemic phase to the the endemic phase. I already paid for my trip to France in June and expect to have a great time.
We are reviewing our positions and will act when appropriate.