Markets And Investing Amid War In Ukraine

looking at wheat trading in Chicago. It was blow eight hundred just a couple of weeks ago, and here we are at thirty four for wheat. So that goes to bread, that goes to beer, that goes to a lot of stuff. Commodities are ripping, So we figured we need to check in with Mike mcloon, Senior Commodity Strategies for Bloomberg Intelligence. Mike, what are we seeing in your space these days? What's going on? Hey, Paul, bread and beer? I like that. With The key thing is it's it's there's only one

thing that matters. It's this war and the potential supply disruption. And you mentioned wheat. I'm glad you didn't because to me, that's part of the key thing. I fully expected probably have some sustained issues with SURVID disruptions, but it's an absolute boom for the corn belt US farmers. That's the good side, but that will come on. And expect massive supply coming from the US this year, most notably corn and soybeans. But the big kit picture is crude oil.

And what's unique about Rudel It looked almost exactly that's the same as it did this time March two eight. It crossed above a hundred dollars and five and the end of the year round forty. I suspect that's the risk of a rhyme, and it means similar for other risk assets like the dock market. By the way, I was thinking about this, and I was thinking about you

the other day. If corn is it becomes so valuable that we decide to use it solely for food, is it possible you guys can take it out of my gasoline? I have benue you'd go there. Well, that's very unlikely because the problem is it's still well below the highs all time highs. And about the crop, they're just going to produce much more corn. Remember this country in a lot of countries still pay there we do, we pay our producers not to produce. So I think that's going

to change. This is a war economy now and means if the US can pick up its supply of commands, which I fully expect there will, it's going to help save the world from the oppressive government in Russias. How do you how do you guys in the Midwest square that circle? Because everybody I know out in fly Over Country, including you know, I'm from there, my family is from there.

Um is very you know, traditionally conservative, free market capitalist, and yet that they all get behind these like communist subsidies of farmers. How is that Okay, it's survival, Um, it's survival, because that's the problem with Cornville. He's just like the average price of corn for the last five years was on four three or four hours of bushel. Now it's up near seven eight, and barren farmers were just barely breaking even. Thank God for the ethanol mandate

because it helped them make some money. Now they're making real money. So I think a lot of subsidies come back. Well, this is just part of that major transmocrification of society. When you know, humans juice to feed the others everybody else. Now it's only one percent, and it's still cont declined because of rapidly fanti technology. But the corn belt is going to crush it in this situation, and so will shale,

US liquid fied, the US energy looquified natural gas. To me, that whole area is going to do very well to help save the world for democracy. All right, Mike, thanks so much for joining us. As always, always appreciate getting your perspective. Mike mcgloon. Longer I had many more. I know, I know we got a busy skype A trust issue right for farmers, the small family farms should be growing

the food. We should bust down these big monopolies. And I wanted to ask him because you were talking about wheat. When are we gonna see weed weed traded on the Chicago in the Chicago pits. I don't know, but Mike, if it's there, Mike will trade it for sure. All right, let's switch gears. Let's take a look at these markets here. I want to bring in Ted Oakley, founder and managing

partner of Oxbell Advisors. Ted um give us a sense of kind of how you guys there at Oxford we're thinking about trading and investing in a world where we've got a real shooting war over in your How do you think about that? Well, for us right now, I mean, you know't been carrying quite a bit of cash now for some time, and we still have it. We think it's a bit early. Uh, you know, we really feel like the markets or will be coming at you the

next three or four months. And so just between everything going on between the FED and just what you mentioned over there. Uh. And the real point is that if you look at energy and food there, they spiked to a point that they were like only two other times, at both times we went in a recession. So we run a fairly high risk right now of of moving into the recession. Especially talking about your former guests, they were commodities and energy in the in the light. So

how does the how does the FED handle that? Do we expecting about face? They raised rates a couple of times and then go back. Well, unfortunately, you know, I've watched the fit since Paul Poker. So the thing about it is that probably more than likely they're always looking backwards. Unfortunately they don't. They don't deserve with them to look forward because they can't get out on a limb on it.

So that's the problem. And my guess is you're going to have a you know, your prints and obviously in January February going to be you know, fairly high inflation numbers, but you get into base effects in April, May, June, July, they won't be that high. But I think the bigger thing is when they're headed to say, uh, when you're going into situation where you have a slowing economy and

they're raising rates, that's that's sort of a disaster. So I'm expecting now that by the end, by the last half of the year, that there will be at least changing uh, changing their rhetoric. They may not be I can't see them ever getting to six point six races this year. All Right, Given that backdrop there said, how

are you positioning your portfolios here? Um, given the geopolitical issues have risen over the past couple of weeks, given what we've heard from this Federal Reserve UH and this president in the State of the Union address, how are you thinking about your portfolios? Well, in a couple of ways, I'll just split them between our income portfolios and in

growth portfolios. But on the on the income side, we have just over the last few weeks, well excuse me, we've taken up a fairly large position in the twenty and thirty year treasury. UM. We we really, we really feel like that there'll those rates will all come down eventually over the next six to twelve months, particularly the next six months, and we think people are really positioned wrong on that. So we've for the first time in a long time, we've pushed out and bought a fairly

large position in the twenty and thirty year treasury. And in addition, uh, if you look at two year and three year and meek munities, they've finally gone to a point where you can move out a money market fund and buy that for you know, one and a quarter or so for so that's changing things. And then on the equities, IID we just have quite a bit of liquidity.

It's a bit early for us. Even on the growth companies we own, they're going to have to get um at least a bigger discount than they are for us to be able to use that cash. Right now. We think UM, but we think there's probably you know, just get back to normal excuse me, normal multiple I would guess you would have to go, you know, at least another ten or fift I just wondered quickly, only about twenty three seconds. But um, I know you're very active

in charity work. Um down there. What do you think about what we see now in Ukraine? You know, it's really sad for me because I know I always think about the kids, you know, because that's what the kids are, what your next you know, that's that's your future. And I always worry about not only their future, but the future they would have for somebody else. And I know a lot of people really want to help them, and uh and and my I would do that as well. All but I I just think that's a sad situation.

I wish it was different for the for the for the mothers and the kids and the families. Um. And to sort of see how it's gotting in it's too bad. Yeah, all right, Ted, thank you so much for joining us. We always appreciate getting your perspective. Ted Oakley, Founder and managing partner of Oxbow Advisers. All Right, we've got the waning period hopefully of this pandemic. We've got rising inflation. Now, we also have geopolitical uncertainty in the form of the

invasion of Ukraine by Russia. UM, A lot of folks are trying to get a sense of what that means for the outlook for these markets. Let's bring in Anahn, vice president equity strategist at Wells Fargo. So, and how does this war in Ukraine affect your calculus if at all, as you think about where these markets can go. So absolutely, I think it really shifts the picture here. The direct impact of the situation between Russia and Ukraine the US is not that explodes when you look at corporates in

the US. We don't have that much earnings exposure to them. But it's more the ripple effects that we're concerned about. So you think about how the FED looks to be more conservative due to that geopolitical uncertainty, and that brings in the point of probably longer term inflationary pressures due to the crude oil and the natural gas supply that Russia supplies. So you put that all together and that's

going to impact yields. So you see nominals coming down eighteen BIPs, the real yields are down forty basis points from their peak. I think that's the picture here that we need to focus on how much longer do you think we're going to see this kind of inflation Because we've been talking to supply chain people for months and um, you know, they thought maybe in the first half things would get a little better. Now the second half. Now we're seeing some people say out in and that just

threatens um prices out that long as well. So you bring up a great point when it comes to supply chain. In lead times, we did see hints that perhaps the worst was over, that you know, it wasn't going to suddenly all you know, funnel through, but that the bottlenecks were easing. But inflationary pressures are not just a supply chain. It's energy prices. It's the excess demand that we've been having.

So perhaps the rate hike would address that demand directly, but energy prices and supply chains are things that even if the Fed hikes, it's not gonna attack directly to ease those pressures. I think that these inflationary pressures could last a bit longer than we initially suspected coming into the situation. And with that, again, yields are reacting to that. The equity markets are reacting to that. So I think that's where you see sort of this give back in

the value versus growth trade. So what are you telling your clients now, and are you telling them to kind of favor some core underlying growth stories or sticking perhaps with that cyclical trade that's worked so well over the past, you know, not eighteen months or so. I would say, first and foremost always depends on the time frame of

my client. If you're looking more longer term, like a twelve twenty four months, I still think that there is a cyclical trade to be played here, but for the short term, more tactical and more nimble folks, I wouldn't tell them to chase this market. We're down, uh, you know, about ten percent or so. That's something that we called very coming into the year that it was a possibility.

I wouldn't chase a market. But at the same time, I do think that's sort of stalling in nominal yields and especially the pullback in real yields could be an opportunity for small cap growth. Small cap growth has been very oversold technical balance as possible, and especially with some of the small cap short covering that we might see and the fed U being a little less Hawckets or

you know, somewhat doblins. Given the geopolitical situation, I think all that could bode well for a tactical trade and small cap growth. How do you model in the geopolitics? I mean, um, you strike me as someone who is very scientific. Um. Just look. And you know, Anna, by the way, spent the last few years at Yale studying what was it, supermassive black hole. Really yeah, um, which sounds totally cool. But I'm guessing that you model things a lot. And how do you factor in this kind

of stuff? I think the important thing expects you when there's uncertainty is to consider your scenarios. Uh and and also put a probability to that as best you can. So you know, our main base case. We had a guest speaker who was a former NATO Supreme Allied Commander, and some of the base cases he laid out were very interesting, one of them being the main possibility was we get this Balkan style compromise with Russia. In other words, they're going to gain some portion of Ukraine in exchange

for stability. Another case, a little less likely is that putting backs down following some strong Ukrainian resistance even less likely Ukraine has bombed into submissions, leading to this cold war to scenario with massive sanctions. And then the least likely, as he laid out, was that perhaps potent is removed from power, is the fight drags on and sanctions really just frontal Russia? And now again the most the biggest probability that he laid out was the Balkan style compromise.

So that's what I do. I look at the possible scenarios, whatever is most likely, and from there we can assign really what do we believe or measured to be the equity reaction. And I think here is the question that really inflation a pressure slowing down the said and how the yield move is going to uh affect equity markets. I think that's our focus for now and also on equity risk. All right, Anna, thank you so much for joining us. Really appreciate getting your perspective there. Anahn, vice

president equity strategist at Wells Fargo. Yeah, I don't know how you model in war. I mean, I guess it just kind of goes to global GDP demand, And you know, I don't know how either, But I also don't know how you figure out what's going on in a supermassive black hole. Yes, and that's why Annas seems like the perfect person to ask that question, and probably that's why Wells Fargo thought she was the perfect person to hire for the job to be equity strategist at the Wells Fargo.

It is that time of the day, that time of the week we bring Barry rich Holds on to talk about, um, what's going on in markets and many other things. Um, Barry, I think you know we're kind of focused on the FED right now, although yesterday, you know, the smartest people in Washington question him. Now he's going in front of the Senate. What do you take from the the position that he's in. It's not enviable, right, they were behind the curve and now the curve has changed. Were they

really so behind the curve? I would challenge your premise because, well, we have inflation at more than seven and it's probably gonna be an eight percent print the next time we see it. But what is raising rate's gonna do to make more semiconductors of it? Eleble? What is raising rates going to do to untangle the supply chain? The most important thing that we can do to bring the demand supply balance back into normal is to get people out of their houses and and get people, you know, reopen

the economy so we're not just buying stuff. We go back to the service versus goods economy. The pandemic and the lockdown forced us all to become goods consumers instead of service consumers. So yes, for sure, there's been wage increases. There'sn't been a lot of things that have taken place where the FED has some impact, but you know, the best estimates are around two thirds of these increases. The

FED is not going to do anything about it. When when people are buying homes by liquidating crypto, you're not which by the way, eleven percent of new home buyers are doing. You're not gonna stifle inflation with higher rates. That's not to say we shouldn't see the FED move towards more normalization, but it's still a very different situation than normal times. When the FED raises rates eventually causes a recession and we end up with things going back to normal. Barry, we now have a hot war in

r What does that mean for equities? So historically, and I'm assuming you're referring to the Business Week piece that we published yesterday. Historically, when we see these geopolitical events, sometimes it's a war, sometimes it's terrorism. Sometimes it's an assassination attempt or successful or not, there tends to be this emotional spasm. There tends to be this knee jerk

reaction and investors panic a little bit. And going back to Pearl Harbor attack that brought the United States into World War two, historically we learned that that's a terrible strategy. That what typically happens is that markets wobble a little bit and then they go about back to doing what they were doing, uh the prior trend before the event took place. The worst of these events, the World War two,

the one of the worst wars in human history. Markets sold off for It took about six months before markets bottomed, and less than a year later markets were back to their US markets were back to their prior high. So if the worst case scenario was World War two and it's a year year and a half later, think about the GDP of Ukraine, think about the economic impact of Russia.

The reason these events don't really affect markets is because they're too small in terms of global GDP to really impact corporate revenue and profits, and and so the markets kind of shake them off and hope we stay hopefully, uh, they stay that small, right, And the concern is um and that not just the war in Ukraine is hot, but um that the Cold War between the US and Russia becomes a hot war. That's I guess the nuclear option. Um,

there's no playbook for that. That well, you know, if there's a nuclear war, I think the value of your long term stocks and bonds becomes quite secondary at that point. I mean, look, did you read um Stravites's book. Uh? I thought it was awesome and there worse. I don't want to spoil it for anyone who hasn't read it, but there are some nuclear strikes in there. Yeah. No,

it's it's certainly an option. Look to me, the bigger concern is not the idea of a nuclear conflagration, because that means, you know, my my equity portfolio is irrelevant. The bigger concern, for the more realistic, we're probable concern is that this spills from Ukraine into Belarus into Eastern Europe, and if you have boots on the ground and a hot war between Europeans and Russia. Well, at that point

that can really become very, very problematic. And I think the uncertainty around war isn't that we don't know what's going to happen, it's that things can happen that just are not imaginable. Well, I mean, even if we don't get that far, did you I know that Masters of Business is probably the most successful podcast that we have here, But there's another podcast, Odd Lots and they had Zold Times Calls are on the other day. Did you hear that he was talking about the possibility of the dollar

no longer remaining the world reserve currency. Um, you know, uh, send me all of your worthless US dollars for proper disposal. I will take care of them. I have been literally hearing that my entire adult life. So let's stop and consider your alternatives. Well, but but, but but you you will understand why, right, because no, I don't. I've you know, we've kind of have been wrong for half a century.

You have to stop and say, you know, a large like twice a year, if large economies like and I'll go ahead and say the Soviet Union even though I know it's not that right or the People's Republic of China, if they realize that the currency they rely on UM can just be turned off by another country or another culture, they might decide to try and use something else. All of a sudden, These rubles are backed by dollars, all

of a sudden, UM. You know, the yuan is digital, so you know, maybe we see some some change there. So so change is constant that you can assume that change is always gonna always gonna happen. However, so when we look out and I don't like to look out twenty thirty years because events have a tendency of getting in the way of those forecasts. But just stop and

think about this for a second. Your alternatives are the end where no one's really talking about that because Japan's economy and markets have been, you know, doing so poorly since nine the row, which is problematic holding that group of very disparate countries UM together is really a challenge the Chinese one who who when China is not happy with UM, how their corporate sector is doing, they just demolished them. Look what they did to Ali Baba, what

they did to ten Cent. Who is gonna willingly say, oh, sure, I trust the dictators and the communists in China, and you know, we people talk about bitcoin um obviously all over the map over the past couple of days. To me, the most interesting challenge to the dollar is going to be a stable coin, not a bitcoin, but a stable coin that's backed by some consortium of central banks, uh like, like a combination of the old Trilateral Commission, like the EU,

Japan and the United States. If a group of those three country areas say we're gonna allow a free translation of the stable coin into dollars again, and I think what that does is that tracks Look, if you're an expert in central bank behavior, if you're an expert in global monetary systems, which clearly pooping is not. He might have thought he was, but he's not. There's nothing different that was done. It was just the first time since

World War Two. Then everybody got together and said, oh, that country is a rogue nation like Iran, like North Korea, and so we're gonna put them into the penalty box. This isn't, this isn't. It goes back to Cuba. We're gonna We're gonna have to leave it there, my friend, because of time, we always appreciate getting your thoughts. Will pick up on Cuba next time you have Bloomberg opinion columnists.

Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three at on False Sweeney. I'm on Twitter at p T Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio