Our Take on the Eastern European Situation

I didn’t learn anything about the nation of Ukraine when I learned geography in high school. I suspect
most of us didn’t. When I was in high school there was no independent nation of Ukraine. From 1950
through 1991, there was only a Ukrainian Soviet Socialist Republic, a part of the Soviet Union.

Ukraine Today

• Ukraine’s land area is about the same as that of Texas – about 233,031 square miles to Texas’ 268,000.
• Ukraine has 50% greater population than Texas – 44 million inhabitants to Texas’ 30 million.
• But its economy is far smaller – GDP of Ukraine is about 200 billion US dollars or a little under $5,000 per person. Texas by comparison produces $2 trillion per year which equates to nearly $60,000 per person per year.

Recalling Soviet times

• In the 1980’s the Soviet Union’s economy was about 2/3 the size of the economy in the US.
• In the 30 years since the fall of the Soviet Empire, our economy has grown much faster than has Russia’s.
• We produce about $63,500 per person about $21 trillion in total, Russia produces about $10,000 per person or $1.5 trillion in total.
• Russia’s population has declined since the Soviet times from about 148 million to about 144 million today, while the US population continues to grow.

Why is Russia still so powerful? The main answer is natural resources.

• Russia is the largest country by size in the world. It takes up 11% of the earth’s total land mass.
• In that land mass are rich deposits of cobalt, chromium, copper, lead, zinc, titanium, oil, natural gas, coal and many others.
• Mines and wells with limited environmental or governance oversight, often a great distance from population centers, provide Russia with dominant regional or even global positions in the market for such materials.

Western Europe has evolved in a different direction from Russia. The European Union was founded on the principle of peace through interdependence. The history of Europe is rife with war but has shown consistent peace between trading partners. Historians debate whether trade was the cause or the effect of peace. Germany, notably, but other countries too have tried to persuade Russia that peace through mutual interdependence was the way to a prosperous future. Russia, however, continues to believe that peace is maintained through military strength, the economic dependence on Russia of foreign countries, and a physical buffer in the form of a border of vassal states.

What does Russia have to gain and what do they have to lose? Invading Ukraine will have major costs. Controlling a country the size of Texas with 44 million inhabitants will take manpower and resources. When NATO forces went into Kosovo in 1999, the Washington Post reported that NATO used a formula of one soldier for every 40 inhabitants to keep the peace. If that formula holds, it will mean a commitment of more than 1.1 million Russian soldiers. Russia currently has 900,000 soldiers on active duty. Ukraine on the other hand, has more than 350,000 active-duty soldiers. On paper they’re no match for Russia, but local insurgencies have defeated great military powers many times over the years. An occupation of any duration would likely prove too costly for Russia to bear. Russia’s achievable goal
may only be regime change, though Ukraine’s population may not acquiesce. With nothing to gain economically and a heavy price to be paid in lives and costs to maintain control, most experts expect Russia’s occupation to be short lived and limited in scope.

What does it all mean to my bottom line?
Bonds

• Fear remains dominant in the market.
• Fear generally causes investors to run from perceived risky assets to perceived safer assets.
• Money is flowing from stocks to bonds and from the rest of the world into dollar denominated assets.
• Market estimates for the pace and extent of interest rate increases have dropped. Interest rates will still increase this year, but perhaps by only 1.5% rather than by 2% as was the consensus last week.
• Rising interest rates generally reduce the value of bonds, so while expectations for the total amount of change in interest rates have changed the direction of their impact hasn’t.

Stocks

• As reflected by the S&P500, stocks have declined so far in 2022.
• Corporate earnings have not.
• There are very good companies whose prices have declined in the face of their earnings increasing, and that often means that there are opportunities for investors.
• We don’t believe that the actions of Russia in Ukraine will have a meaningful impact on US corporate earnings, save for perhaps a net benefit to oil and gas producers.
• Markets, while volatile in the short term, typically follow corporate earnings over time.

Cash

• Cash does not look attractive right now
• Inflation remains high and while we believe that inflation will be less in 2022 than the 7% it was in 2021, it will remain higher than we’re accustomed to.
• When inflation has been high in the past, bank accounts have paid reasonable interest. These days you’re not likely to be rewarded with much of any interest in a savings account.

I’ve attached below a list of major historical events going back to the start of World War 2 and their impact on the stock market. Following these 37 events, 22 times the market was down one month later, 15 times markets were higher. Looking out one year, markets were lower 12 times but higher 25 of 37 times. Since the start of the 21st century stock markets have told an even clearer story. There have been 15 such events with positive markets one month out 10 times, positive three months out 11 times and positive one year out 10 out of 14 times with the pull out from Afghanistan being only 5 months ago.

There is no need to reach out to us. However, we are always available if you would like to have a conversation regarding this topic via email at Andrew Betts at Andrew.Betts@bickling.com; Spencer Betts at Spencer.Betts@bickling.com, Dorothy Bickling at Dorothy.Bickling@bickling.com, Bruce Goodman at Bruce.Goodman@bickling.com or at 781-862-9792.