The Dividend Cafe - The Fog of War

Episode Date: February 25, 2022

I have pretty much written each Friday’s Dividend Cafe on the Friday morning of the day you receive it every single week for over a year now. If there is an exception to that over the last 12+ months I do not remember it. I used to write the Dividend Cafe in bits and pieces throughout the week and then “pull it all together” on Friday mornings, but a little over a year ago I changed my approach and I have been happy with the results. Well, this week taking advantage of the Monday holiday and some extra peace and quiet in the very early morning hours of a day that the market was closed, I wrote what would maybe be half of a Dividend Cafe on the subject of capital, liquidity, and interest rates. I loved where it was going and felt it was a good base for a needed Dividend Cafe on a crucial subject at this point in time. And yet, here I am on a Friday morning, with images of Russian rockets striking all over the Ukrainian capital of Kyiv on my television set, and I am not even opening the draft of that work from Monday morning. Yes, I will be able to use it next week (or at some future date), but this is certainly one of those rare weeks where Dividend Cafe warrants a nod to current events. Markets have experienced volatility in the build-up to events of this week and in the events themselves, though I would argue it has been much less volatile than I would have expected. The mere presence of market volatility is not the reason to devote a Dividend Cafe to this week’s subject. I don’t much care about market volatility other than the frustration I feel when we don’t get enough of it. So welcome to a Dividend Cafe devoted to Russia/Ukraine, and may your investor knowledge and appreciation of global affairs grow as a result. To that end we work. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to a very special Dividend Cafe. I am actually recording at my apartment here in the city very early on Friday morning and not doing it in the studio at the office because I'm running from here to another place to another place. And this morning ended up writing a full dividend cafe on the whole situation with Russia and Ukraine, as you can imagine. I actually had pre-written about half of the Dividend Cafe for the first time in over a year that I came into a Friday morning with some Dividend Cafe already done.

But the topic can wait till next week, as obviously the fog of war has become a more significant factor. I can't really tell you where the market's going to end on the week. I started writing at 4 o'clock this morning Eastern time and futures were down 300 points. I'm recording right now a few hours later and futures are up 75 points. But just if you look at it from where the week opened to where we were as of the last moment the market was open, because I'm still talking within a pre-market Friday timeframe, the Dow's down about 850 points on the week, about 2.5%. Total from the all-time high of the Dow going back to earlier in the year, the Dow is down about 8%.

So, you know, if the Dow were down 8% right now and there was nothing going on in Russia, Ukraine, it really wouldn't be particularly newsworthy. The Dow still hasn't even got to a 10% correction. Now, again, the NASDAQ is down about 17% and the S&P also more tech heavy has gotten down about 12%. But again, that's clearly not related to the Russia-Ukraine situation per se, as there's more excess valuations and froth that have gotten taken out of some of the shiny object investing, all stuff we've talked about all year long. The Russia-Ukraine situation has absolutely exacerbated market volatility, and I have no reason to believe it won't continue to do so. But that's not what I want to talk about today. I got an awful lot of inquiries as to why the market was down almost 1,000 points on Thursday

as the news broke that Russia had indeed escalated violent military aggression against Ukraine, coming from multiple directions, not really anything targeted about their attacks, nothing narrow in the scope, what really appears to be and feels as if is an attempt at occupying a sovereign nation at a full-on geographical territorial overtaking of another country. And then people wondered why the market reversed and actually closed up on Thursday in response to this. Well, I put in DividendCafe.com today a chart of the last about dozen military conflicts that

have surfaced in modern times. And I was fascinated to see that in every one of those, the market dipped on the day of, and in almost all of them, except for one, basically, the market closed that day higher. There is a sort of consistency to a sell the rumor by the news, meaning a lot of the pricing of uncertainty and tension and conflict may have already taken place ahead of time. There is also the sense that with the depth and breadth and sophistication of market actors now, very few of them are able to price how exactly this should impact the cash flow generation of American-based companies. It's all fair enough. But again, the volatility has been exacerbated, and I don't see any reason why that would stop. And I want to talk more today

about where this thing may be going. Because I think when we look at the sanctions, there's a temptation to politicize some of it. Some people may think the sanctions are right size. Some may think they're not nearly strong enough. Some may say, for God's sake, don't put any troops on the ground. Others may say, let's go to war. There's different views people are going to have on all this stuff. And a lot of it you find in this day and age tends to be kind of politicized. But what I would like to propose is that where this thing goes with sanctions is kind of going to fill in the gray area that tells us how this ends. Because I do believe that the capacity for certain sanctions,

primarily just simply develop nations cutting off imports from Russia. You can cut off exports into Russia, and they are heavily, I put a chart of this too in Dividend Cafe, heavily reliant on NATO-based countries. There's a fair amount they get from China and a fair amount they get from non-NATO, non-China countries. But most of what they bring into their country comes from NATO bloc, including the United States. And obviously, the primary source of their revenue is their exporting of various agricultural and energy-based commodities. Once you get to a point where you're willing to pull that switch, the Russian economy is dead. I mean, decimated. And there is $640 billion of Forex reserves. We have helped to

make Russia a richer country than it otherwise would be back in the late 90s. They couldn't have withstood an hour of being cut off from the international banking system. They have a little more lifeline here now, but it also decapitates their ability to prolong this and utilize resources in any kind of perpetual state. So I think we will know more in the next 24, 48, 72 hours as to what the depth and breadth of sanctions will be, and therefore what the cards Putin will be left with to play. And economically, the market response I think comes down to, will you get out of these next one, two, three days some de-escalation? I don't think it's too late for that. Civilian casualties are not high enough yet, thank God.

And we pray it stays that way. I don't think it will. I pray it will. Civilian casualties are low enough that there are off-ramps available for some de-escalation that is in a lot of economic actors and nation-state actors best. What's the word I'm looking for? Is best for those entities. But de-escalation is very likely not the path that it's headed towards, in which case some form of capitulation.

And the question then becomes whose. And so if you end up with a Russian occupation of Kiev, the capital city of Ukraine, if there is a Russian flag flying above Kiev by three days from now, then I suspect markets may like the idea that there's probably some resolution like, okay, well, Russia's kind of won. And I don't think that markets should like that. I don't think that markets should like that. I think ultimately the capitulation to where the NATO bloc countries allow a rogue actor to occupy an independent country has profoundly negative ramifications long term. term that may not be able to be priced right away. It may not be visible right away, but that would represent a meaningful degradation of the international rules-based order. That is

what I'm watching for now, because I don't see a scenario here, apart from a de-escalation in the next two to three days, that doesn't end with either the Putin regime being effectively over, which could happen with a severe enough sanctions, or capitulation whereby Russia prevails in occupying Ukraine. And in which case, there's a real rewriting of the post-1990 understanding of international order. I'm only going short on the podcast and video here today because of time. I'm begging you to read DividendCafe.com where a lot of this is unpacked in more depth. There's more charts. There's a bit more economic explanation and historical context.

But this is the path that we see things on right now. This is the structure and framework in which we're viewing it. And I hope it's helpful for you. I do hope you enjoy your weekend. We pray for the people of Ukraine and you can reach out to us at the Bonson group with any questions you have any time. Thank you for listening to and watching the dividend cafe. The Bonson group is a group of investment professionals registered with

Hightower securities, LLC member FINRA and SIPC with Hightower advisors, LLC, a registered investment advisor with the sec. Thank you. is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates.

Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.