Makes No Sense (Risks Not Factored In)

The equity markets are focused on near term earning and shorter-term comments regarding Fed policy. Although important, they are not factoring in other externalities and global geo-politics. Furthermore, they are not factoring in the certainty of a major recession next year which can last much longer than expected. 

Recessionary Risks: 

  • Europe is already in a recession, and it will be a hard winter because of energy prices.  

  • The inflationary forces in the energy market (and food), flow through the economy via the main producers of all industrial and consumer goods further deepening the nature of the recession and severity of it. 

 

Geo-Political Risks: 

  • It’s hard to fathom a scenario where the Russian/Ukrainian war gets settled via diplomacy and if it does, it doesn’t seem likely until the end of next year. 

  • We are seeing a further polarization of the world as Iran, North Korea and other states start to support the Russians with the Europeans and Americans are supporting Ukraine both militarily and financially. The size of the support for the Ukraine from the West is tremendous. 

  • The economic war between the United States and China has been going on for a long time. As China continues to feel more confident in its place in the world, the lack of clear leadership and confusing messages from the United States only increase the risk of their relationship getting worse. It is a symbiotic relationship, but production comes from China, and they are better positioned to handle a more difficult environment given their state-controlled government 

  • As the West is focused on their own economic and social situations, and with their large support of Russia, it has allowed other nations to take actions or create conflict situations: 

    • Iran and Saudi Arabia: Any action here will have an immediate and violent movement in the energy market. 

    • The Korean Peninsula: North Korea probably feels it has less to lose by a confrontation with the South than anytime since the 50’s. The rest of the world is focused elsewhere, and nobody would want an escalated situation – so a limited war or “situation” is a very real possibility. 

    • China/Taiwan: I feel the risk of a confrontation are low but possible. The only scenario I can see it happening is where another global break out of war occurs and the Chinese feel it’s an opportunistic time to do something. Instead, I think they would prefer a continued long run strategy but the Wests (particularly the U.S.’s) diplomatic recognition, visitation by senior officials, and military joint ventures are a poke in the eye of the Chinese. 

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