Three Figures (and some eyes)
For a holiday-shortened week, it has been one of the most hectic I can remember. While not a complete surprise, the invasion of Ukraine by Russia set everyone on edge. It was a bit of a roller-coaster in the markets this week as investors monitored the latest happenings. Oil surged to more than $100 a barrel for the first time since 2014, before dropping back to trade near the $90 level. The Nasdaq Composite even briefly went into a bear market, before turning a 3.5% intraday loss into a gain of 3.3%. If you’re as tired as I am, we all could use a reprieve from the news.
In response to the Russian invasion, a slew of sanctions was announced by the U.S., EU, and other western powers. The U.S. has cut off Russia’s biggest lender from the U.S. financial system, along with four other banks, but stopped short of banning its use of the SWIFT network. These banks represent an estimated $1T in assets. Also announced were export restrictions on semiconductors and aircraft parts, measures to freeze Russian oligarch’s American assets, as well as hampering Russia’s abilities to clear dollar trades on Wall Street. However, there was one glaring omission from the sanctions that Marc addressed yesterday in his special email update. Sanctions on Russian energy exports and aluminum supplies was strangely missing. This is largely due to Europe’s dependence on Russian oil, coal, and natural gas.
Closer to home is the issue of interest rates and monetary policy which could be affected by recent actions abroad. In just under three weeks, the Federal Reserve will decide on how much to raise rates and the pace of subsequent increases. However, the global risks created by the conflict have put it in a Catch-22 situation, where raising rates could exacerbate disruptions to growth, while standing by could worsen inflation and pose a threat to the economy. The risk of a policy mistake has never been higher. At this point we expect at the very least a 0.25% rate hike on March 16th, after its next meeting. Some suggest it could go more aggressive and put in a 0.50% rate hike, although this goes against its “smallest-steps” tradition. Beyond that, we are looking forward to how the Fed plans on shrinking its balance sheet and whether that might begin as early as June or July.
I wish I had other news to report, but trust me when I say, this is all that is being reported 24/7 on mainstream media including CNBC. I will add two quick mentions that flew under the radar. The first is that Carl Icahn, the first and perhaps most well-known activist investor, has gone on the attack against McDonalds. The 86-year-old investor is on a bit of an animal cruelty crusade and with his 200 shares is trying to put pressure on the company to improve its supplier’s treatment of pigs. He’s not claiming mismanagement, as often is the case, but instead is claiming the company is being unethical. With $17B in net worth, I suppose he could be doing worse with his time. The second story regards Airbus, which plans on testing a hydrogen powered engine on a modified A380 by 2025. While emission-less travel is certainly a wonderful goal, I might remind you the Hindenburg was once powered by hydrogen. I’m assured this time it will be different.
In closing, I have the strangest story I’ve come across in some time. I guess Russia just needs the spotlight right now. A Russian security guard in an art gallery some eleven-hundred miles east of Moscow, got bored and decided to draw eyes on a famous work of art. The piece is an avant-garde painting featuring three abstract, and usually eyeless, figures. Curator Anna Reshetkina said, “His motives are still unknown but the administration believes it was some kind of lapse in sanity.” Fortunately, he did not apply too much pressure and the painting has been restored. However, you should also know… it was his first day on the job. Now you know.
Bruce J. Mason, MBA