The Wolf Den #826 - Investing In Times Of War
How do investors structure their portfolio in times of war?
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In This Issue:
Investing In Times Of War
Bitcoin Thoughts And Analysis
Legacy Markets
Cramer Says ‘Down’—Tudor Jones Says ‘Up’
Bitcoiners Are Getting High On Their Supply
Binance Freezes Hamas Accounts
Expect Massive Volatility In Bitcoin, Crypto & Stocks | Turbulence Is Coming
Investing In Times Of War
In yesterday's newsletter, I delved into the more abstract question of how Bitcoin might fare during wartime. The succinct response to that query was to analyze the historical performance of gold and draw parallels. In today's newsletter, I will explore the impact of war on the economy and the market. Additionally, I'll touch briefly on the concept of a portfolio designed to handle the effects of war. Let's dive right in.
Out-of-touch economists often deliver extensive dissertations on how war affects markets and economies, a perspective that may have held true half a century ago. However, in today's world, things have changed. The United States has not been involved in a major war since the Iraq War, which began in 2003. Since then, conflicts have been predominantly smaller in scale when compared to the wars of the 20th century. Consequently, recent conflicts in the Middle East and Iran have, for the most part, been largely ignored by markets.
While this may appear to be a distant memory, eclipsed by the events of the past couple of years, who still remembers the U.S. airstrike in January 2020 that resulted in the death of Iranian General Qasem Soleimani, sparking discussions of a potential World War III?
While the context of that attack differs significantly from current events, one could make the argument that the U.S. was closer to the brink of war at that time than it is today. Initially, news of the strike triggered a sharp decline in stock futures and a surge in oil prices. However, markets quickly absorbed this development, making way for other narratives to take center stage. Although I cannot offer a definitive explanation, several factors likely played a role in how markets reacted, including the shared reluctance of the U.S. and Iran to engage in a full-scale war, the principle of mutually assured destruction (M.A.D.), the market's desensitization to geopolitical conflicts, central bank intervention, and perhaps even the coinciding earnings season.
The only thing that can be guaranteed in markets is that there are no guarantees.
After reading this paragraph, examine the image below, sourced from LPL Research, which illustrates the reactions of the stock market to various geopolitical events. Another indicator of changing times is the market's current performance since Israel was invaded. When Russia invaded Ukraine, the markets experienced a brief disturbance, with the S&P 500 index declining by more than 7% in the days and weeks following the incursion. The moral of the story is that attempting to trade geopolitical conflicts is akin to trading altcoins. History teaches us that markets abhor uncertainty, yet the current state of the markets seems oddly confident as if it possesses a heightened sense of certainty during uncertain times. Kind of odd. We are in a rare Goldilocks Zone where markets seemingly shrug off news, both bad and good.
Here’s an interesting fact that goes along with the image: “As our LPL Chart of the Day shows, the S&P 500 fell 5% on average in 20 major geopolitical events dating back to the attack on Pearl Harbor in 1941. However, the S&P 500 recovered those losses in fewer than 50 calendar days on average.”
Carrying on, read this excerpt I found from Investopedia on the concept of the ‘War Puzzle.’ “In 2015, researchers at the Swiss Finance Institute looked at U.S. military conflicts after World War II and found that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. However, in cases when a war starts as a surprise, the outbreak of a war decreases stock prices. They called this phenomenon ‘the war puzzle’ and said there is no clear explanation why stocks increase significantly when war breaks out after a prelude.”
The key takeaway is that markets have been trained not to overreact to geopolitical shocks, thanks to limited escalations in such conflicts and central bank monetary policies. This likely explains in part why the market has maintained its upward trajectory since the recent conflict. In fact, we have seen capital flowing from the bond market to the equity market, which is the opposite of what you might expect. Now, let's transition to a new topic and examine how portfolios could be influenced if tensions continue to escalate and the U.S. becomes involved. Before I proceed, I must credit Bob Elliot for the ideas I'm about to present. You can find the Tweet below if you'd like to read more directly from Bob.
As Bob points out, wars tend to be inflationary because goods are produced rapidly and then destroyed without a corresponding increase in productivity. This makes it a particularly unfavorable time to hold cash... although when has holding cash ever been an attractive option? Additionally, during periods of war, governments often issue more bonds, and yields are typically kept low. This has yet to be seen in terms of yield, as bonds are currently receiving substantial attention. However, it's challenging to envision bonds continuing to be the ultimate safe haven, given the market's tendency to zig when everyone else zags.
When it comes to stocks, the question on everyone's mind is their performance during wartime. Historically, stocks tend to start poorly during conflicts but recover strongly when the outcome becomes clear, favoring the victors while punishing the losers. It's important to note that this historical data primarily relates to major wars, not the conflicts of the 21st century. Shifting to commodities, they have a reputation for performing well during wartime, with gold being a reliable hedge against fiat currencies. Bob's concluding remark is thought-provoking: “Many savers today have a significant bias towards peace in their investments. While this may persist, it's crucial to allocate at least some assets that can thrive in the event of escalating conflicts.”
The choice of assets you select to hold during a possible war is ultimately yours to make, but personally, I'm not inclined toward holding cash, and I find Bitcoin to be an appealing alternative. At this moment, my primary emphasis remains on learning and observation. So far, it seems that the conflict is persisting, leading to further destruction, division, and conflict. I genuinely hope for a resolution and a return to normal discussions.
Bitcoin Thoughts And Analysis
Bitcoin dipped briefly below $27,000 before experiencing a decent bounce. Price dropped slightly through the demand zone that I shared on the 4-hour chart. If you draw a similar zone on the daily chart, then this acted as perfect support, as you can see above.
Bulls would love to see the daily candle close with the candle it has now, or higher. That would be a nice hammer reversal, with a long wick down and small body. It would be even better if it turns grey.
What we have basically just experienced is a sweep of the lows of the current small trading range. If it holds, we should head back up to the top, around $28,000.
Still quite boring.
Legacy Markets
Amid escalating tensions in the Middle East, investors are flocking to safe-haven assets, causing U.S. Treasuries and European bonds to rally. The 10-year Treasury yield fell notably even as Federal Reserve officials hinted at possible rate hikes to curb inflation. The geopolitical unrest has investors concerned about a wider regional conflict, which could significantly impact crude oil supplies and introduce further volatility into markets.
In Europe, the stock market rally showed signs of stalling due to less-than-stellar corporate news. LVMH, a luxury goods giant, saw its shares slump, casting a shadow on the post-pandemic luxury boom. This downward trend also impacted other companies in the luxury-goods sector. Meanwhile, U.S. stock futures showed a slight increase, following moderate gains in the S&P 500 and Nasdaq 100.
Attention is now turning to the upcoming minutes from the Federal Reserve's September meeting, and upcoming inflation data. There is growing speculation that the Fed might adopt a softer stance on rate hikes, especially given the recent surge in Treasury yields. Investors are keen to interpret any signals that might indicate the central bank's future monetary policy direction.
Key events this week:
NATO defense ministers meeting in Brussels, Wednesday
Russia Energy Week in Moscow, with officials from OPEC members and others, Wednesday
US PPI, Wednesday
Minutes of Fed’s September policy meeting, Wednesday
Fed’s Michelle Bowman and Raphael Bostic speak at separate events, Wednesday
Japan machinery orders, PPI, Thursday
Bank of Japan’s Asahi Noguchi speaks, Thursday
UK industrial production, Thursday
US initial jobless claims, CPI, Thursday
European Central Bank publishes account of September policy meeting, Thursday
Fed’s Raphael Bostic speaks, Thursday
China CPI, PPI, trade, Friday
Eurozone industrial production, Friday
US University of Michigan consumer sentiment, Friday
Citigroup, JPMorgan, Wells Fargo, BlackRock results as the quarterly earnings season kicks off, Friday
G20 finance ministers and central bankers meet as part of IMF gathering, Friday
ECB President Christine Lagarde, IMF Managing Director Kristalina Georgieva speak on IMF panel, Friday
Fed’s Patrick Harker speaks, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 0.2% as of 11:02 a.m. London time
S&P 500 futures rose 0.2%
Nasdaq 100 futures rose 0.3%
Futures on the Dow Jones Industrial Average rose 0.2%
The MSCI Asia Pacific Index rose 0.9%
The MSCI Emerging Markets Index rose 1.2%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0604
The Japanese yen was little changed at 148.67 per dollar
The offshore yuan fell 0.2% to 7.3010 per dollar
The British pound was unchanged at $1.2287
Cryptocurrencies
Bitcoin fell 0.5% to $27,273.38
Ether rose 1% to $1,575.8
Bonds
The yield on 10-year Treasuries declined 10 basis points to 4.55%
Germany’s 10-year yield declined seven basis points to 2.71%
Britain’s 10-year yield declined 10 basis points to 4.33%
Commodities
Brent crude fell 0.7% to $87.05 a barrel
Spot gold rose 0.5% to $1,870.35 an ounce
Cramer Says ‘Down’—Tudor Jones Says ‘Up’
Legendary investor Paul Tudor Jones endorsed Bitcoin the same day as Jim Cramer slandered it. You gotta love it. Thank God it isn't the other way around, because we would be doomed. Below is what the two of them had to say, starting with Tudor Jones.
“You look at the big shorts in gold, more likely than not, in a recession, the markets are typically really long assets like Bitcoin and gold. I like Bitcoin and I like gold right here.”
And then… “I just can't be in something where Mr. Bitcoin is about to go down big. I would not touch crypto in a million years, these people who own these things should now own them.”
Bitcoiners Are Getting High On Their Supply
It hasn’t exactly been easy to invest in crypto this year, but Bitcoin enthusiasts have undoubtedly had it the best. Bitcoin has shown tremendous strength relative to the rest of the market. Currently, Bitcoin's market dominance is on the verge of hitting a multi-year high, reaching 51.2% recently and nearing the two-year peak of 52% seen at the end of June. While some may interpret these facts as proof that 'Bitcoin is superior' or 'the only cryptocurrency that should exist,' I see it as an indicator that Bitcoin is leading the way in breaking free from the current constraints. Bitcoin was always poised to be the first to recover and regain its strength, but so too will Ethereum. A select successful altcoins will also follow suit.
Binance Freezes Hamas Accounts
At the request of Israeli law enforcement, Binance has taken the steps to freeze accounts associated with Hamas militants. In an effort to provide clarity regarding this request, Yi He, co-founder of Binance, emphasized that this decision was made in compliance with legal obligations and is specifically aimed at Hamas, not the broader Palestinian population. This action aligns with the United Nations' designation of Hamas as a 'terrorist organization,' meaning it’s likely that other platforms may similarly be compelled to take the same actions as more accounts are discovered.
Expect Massive Volatility In Bitcoin, Crypto & Stocks | Turbulence Is Coming
My special guests are Sidney Powell from Maple Finance, with whom we are going to talk about what's going on with the DeFi market, and Charlie Burton, a trader, who will talk about stocks, the Fed, and much more!
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.