Financial_Observations_Since_The_Start_Of_The_War
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai.
00:00:03.000 | There's this great quote from Lenin that says, "There are decades where nothing happens,
00:00:09.540 | and there are weeks where decades happen."
00:00:12.820 | And that's how I felt last week when the war broke out in Ukraine.
00:00:18.060 | And it's a terrible feeling because there's so much uncertainty, there's so much sadness,
00:00:22.620 | and there's so much anger that something like this could happen today.
00:00:26.480 | And there's also frustration because here in the United States, there's nothing you
00:00:30.960 | and I can do about the situation except to stand in solidarity with the Ukrainians.
00:00:35.920 | And as a parent right now, I just can't imagine having to flee San Francisco to find shelter
00:00:43.140 | and then take my kids out of school, leave my house behind, and so forth.
00:00:47.340 | So it's a really harrowing situation that I hope gets swiftly resolved.
00:00:52.040 | Otherwise there's going to be a humanitarian crisis.
00:00:54.960 | If you haven't realized it by now, black swan events happen all the time.
00:01:00.280 | They happen so often we might as well get rid of the term altogether.
00:01:04.800 | Financial Samurai was born out of a black swan event, the global financial crisis of
00:01:09.000 | 2008 and 2009.
00:01:11.520 | I had come up with Financial Samurai in 2006 after graduating from business school.
00:01:16.040 | And only after a financial crisis that was the worst in history that I say, "Okay, you
00:01:22.160 | know what, time to stop diddle-dalling, time to start this project that I've been thinking
00:01:27.200 | about for so long."
00:01:28.600 | So this site's DNA will always contain a cautionary strand or two because if you've ever lost
00:01:34.080 | a lot of your money very quickly or your livelihood, such as if you got let go and you couldn't
00:01:39.200 | find work for years, you will never want to repeat that experience again.
00:01:44.280 | So a lot of people over the years have said, "Sam, you write so cautiously.
00:01:49.040 | You always talk about these black swan events that aren't going to happen."
00:01:53.200 | But come on folks, since 2009 there's been a lot of things happening if you're paying
00:01:58.440 | attention and if you have real money at stake.
00:02:02.760 | I mean, yeah, if you have several thousand dollars invested and things go down 30%, 50%,
00:02:07.920 | it's okay.
00:02:08.920 | But if you have hundreds of thousands of dollars, millions of dollars, kids to take care of,
00:02:13.800 | parents to take care of, there's no messing around here.
00:02:17.320 | There really is no messing around.
00:02:19.280 | Money is too important to be left up to pontification, which is why I try to write and speak from
00:02:24.760 | firsthand experience.
00:02:26.160 | I am an ongoing student of finance.
00:02:28.240 | No matter how much I write, how much I speak, there's always something new to learn.
00:02:32.800 | And here are five observations since the start of the war.
00:02:36.580 | The first financial observation is this.
00:02:39.840 | Cryptocurrencies are not a defensive asset.
00:02:42.360 | There has been some debate regarding whether cryptocurrencies like Bitcoin and Ethereum
00:02:46.520 | are defensive assets.
00:02:48.120 | One idea is that as the US dollar loses its purchasing power, cryptocurrencies will eventually
00:02:53.120 | rise up and replace it.
00:02:55.320 | The thing is the US dollar has appreciated since the pandemic began in 2020 and the war
00:03:00.200 | began, not depreciated.
00:03:02.440 | We're talking about a 5% appreciation in 2021 against a basket of currencies for the US
00:03:07.280 | dollar.
00:03:08.280 | So the US dollar really isn't going anywhere.
00:03:11.400 | We approached the pandemic better than most countries.
00:03:14.560 | Further, our stock market did better than most countries.
00:03:18.120 | We're also a world reserve currency.
00:03:20.760 | So the US dollar is not going anywhere.
00:03:22.500 | So the idea that the US dollar depreciates to zero is probably not going to happen, right?
00:03:28.620 | And when it comes to finances, everything is relative.
00:03:30.980 | So yeah, you could bash the US dollar, but if other countries and other currencies are
00:03:36.400 | not doing as well, then the US dollar is doing relatively well.
00:03:40.660 | So in the morning when we all found out that Russia was going to invade Ukraine, gold surged
00:03:45.820 | higher and then Bitcoin collapsed.
00:03:49.220 | And then once the stock market started turning around intraday, gold started rolling over
00:03:54.100 | and then Bitcoin started shooting up.
00:03:56.660 | So bottom line is don't buy cryptocurrencies to hedge against a downturn.
00:04:00.580 | Buy them for more beta on the upside.
00:04:03.540 | Gold works as a much better hedge during times of uncertainty.
00:04:07.600 | Cryptocurrencies should continue to be viewed as highly speculative investments with high
00:04:10.900 | beta.
00:04:11.900 | The second financial observation is that uncertainty kills the market.
00:04:16.660 | Fear of the unknown is one of the biggest negatives for the stock market.
00:04:20.140 | The greater the speculation about a Russian invasion of Ukraine, the more the stock market
00:04:25.020 | sold off.
00:04:26.020 | And then only when the invasion actually occurred, did the stock market finally turn around and
00:04:30.740 | rally.
00:04:31.740 | So we can all feel that uncertainty unfold in our bodies if we were paying attention
00:04:37.520 | up to the invasion, right?
00:04:39.680 | The uncertainty creates anxiety, a lot of what-if scenarios in our heads.
00:04:44.760 | You know, a lot of us think about worst case scenarios.
00:04:47.280 | And then when you start thinking about worst case scenarios, you might end up doing things
00:04:51.820 | to prevent that worst case scenario from happening.
00:04:54.160 | But usually the things in our head, the fears in our heads, generally are much, much worse
00:05:00.120 | than reality.
00:05:01.480 | This is one of the key things that I realized when I left my job in 2012.
00:05:06.840 | Before you leave your job, you think, "What if you run out of money?
00:05:10.280 | What if you starve to death?
00:05:11.340 | What if you are thrown out on the streets?"
00:05:13.200 | A lot of things that could happen but likely aren't going to happen.
00:05:18.080 | So as a result, it's a real mind bender before you take a leap of faith and do something
00:05:21.900 | completely different.
00:05:23.660 | And this is why I want to constantly remind you folks that financial independence and
00:05:28.800 | doing things that you want to do is not just math.
00:05:31.440 | It's not just math at all.
00:05:33.160 | Math is maybe 30 to 40% of the equation.
00:05:36.240 | Your mental strength, your mental health really is the majority of your ability to change
00:05:41.600 | your life.
00:05:42.640 | So besides the fear of an invasion, here are other uncertainties that may hurt stock market
00:05:47.280 | performance to varying degrees.
00:05:49.920 | Concern over the magnitude and the number of rate hikes by the Fed.
00:05:53.400 | Since the invasion began, the expectations for the number of rate hikes have gone down.
00:05:58.240 | The expectation that the Fed will hike by 50 basis points in March has also come down.
00:06:04.280 | Two, fear over the outcome of a presidential election, especially if the potential candidate
00:06:10.720 | has some very extreme views.
00:06:13.400 | Concern over a reduction in government benefits.
00:06:16.240 | Worry over a new tax hike or change in tax policy.
00:06:20.080 | Fear over the impact of a new deadly virus.
00:06:23.300 | And fear that this war could get out of hand and create World War III.
00:06:27.680 | So these fears are going to put a lid on stock market performance.
00:06:31.800 | The more we know about an outcome, the more we can take steps to deal with the outcome.
00:06:36.200 | However, if you really want to benefit, you've got to take a chance.
00:06:39.180 | You've got to take action before that outcome is known because once that outcome is known,
00:06:45.040 | it's going to be too late.
00:06:46.120 | Here's the third financial observation.
00:06:49.200 | Extremely powerful and wealthy people are willing to detonate their finances for their
00:06:53.660 | ideology.
00:06:55.480 | So in some circles or in some estimates, Vladimir Putin is worth over $200 billion.
00:07:01.400 | However, Putin was willing to detonate the Moscow Stock Exchange in order to go to war.
00:07:07.600 | So on Thursday, February 24th, the day of the invasion, the benchmark Russia index closed
00:07:13.720 | down 33%.
00:07:15.680 | That erased $189 billion in shareholder wealth.
00:07:19.840 | And given Putin is a very wealthy man, he certainly lost a lot of money.
00:07:24.560 | Meanwhile, the S&P 500 closed up 1.5% for the day.
00:07:29.080 | How's that for a juxtaposition?
00:07:31.360 | This is the first time since 1987 that a sell-off of this magnitude has hit a market worth more
00:07:36.840 | than $50 billion.
00:07:38.400 | In the aftermath of the Black Monday crash that year, Hong Kong's Hang Seng index tumbled
00:07:43.760 | 33%.
00:07:45.560 | The worst single day drop over the past century in any market of any size was Argentina's
00:07:50.560 | 53% slump in January 1990, when the country was battling hyperinflation and a mounting
00:07:57.120 | economic crisis.
00:07:58.760 | So the Russia index, the MOEX, trades at roughly 3 to 3.5 times forward earnings.
00:08:05.120 | That's it, folks.
00:08:06.200 | And that's down from 5.4 times at the start of 2022.
00:08:09.960 | Whereas the S&P 500 is trading at 20 plus times earnings, forward earnings.
00:08:14.920 | So this discount in valuation reflects a risk premium that people aren't willing to pay
00:08:22.300 | a higher earnings multiple when there's so much uncertainty.
00:08:26.000 | Sure, there could be a lot of upside if that uncertainty is removed.
00:08:30.480 | Let's say there's a more democratic environment, better measures are put in place, checks and
00:08:34.680 | balances.
00:08:35.680 | However, let's not count on that.
00:08:37.320 | Therefore, you should probably continue to overweight developed countries with highly
00:08:41.040 | functioning democracies.
00:08:43.080 | The fourth financial observation is that compared to stocks, real estate is an oasis during
00:08:48.720 | a war.
00:08:49.720 | Obviously, cash is great as well.
00:08:51.960 | If you own both stocks and real estate, as most of us do, think about the amount of time
00:08:56.440 | you spent worrying about your stock portfolio versus your real estate portfolio during the
00:09:00.620 | onset of the war.
00:09:02.160 | Be honest with how many times you checked your stock app and logged into your online
00:09:06.200 | brokerage account before and after the invasion began.
00:09:09.720 | Now think about how many times you thought about how your real estate portfolio was doing.
00:09:14.320 | Did you really even care?
00:09:16.120 | If you're like most people, you probably worried much more about your stocks than your
00:09:20.040 | real estate.
00:09:21.280 | It's only if you own real estate in a country that is being invaded where you begin to worry.
00:09:26.600 | Depending on if the invading country wins and how aggressive they are, you could lose
00:09:30.920 | your property rights under a new regime change.
00:09:34.020 | If you tend to be a more anxious person, stocks may not be for you.
00:09:38.540 | And if you decide to own stocks, even though you're highly anxious, you need to figure
00:09:41.840 | out the appropriate net worth exposure percentage that you aren't feeling distraught with the
00:09:47.500 | urge to panic sell anytime there's a big downturn.
00:09:49.880 | I talk about this with the financial seer formula.
00:09:53.980 | And essentially, you want to equate your potential losses to how many months you would need to
00:09:59.040 | work to make up for those losses.
00:10:01.640 | So I'll link to that post in the show notes.
00:10:04.160 | But at the end of the day, money is time.
00:10:09.300 | And the older you get, the more valuable your time will get.
00:10:10.500 | And therefore, the more valuable your money will be, and the more you'll want to protect
00:10:15.120 | your capital.
00:10:16.420 | If you are feeling particularly jittery or moody during the latest war or geopolitical
00:10:21.500 | event, then you should probably lower your stock exposure.
00:10:24.780 | And on the other hand, if you've gone about your business without feeling any stress,
00:10:28.740 | you didn't check, you just kind of were happy go lucky, then you should probably increase
00:10:33.320 | your stock exposure.
00:10:35.240 | Only you will know how you feel.
00:10:37.660 | So figure it out.
00:10:38.920 | The fifth and final financial observation is that big intraday reversals haven't proven
00:10:44.900 | to be good omens.
00:10:46.560 | When the Russian invasion began, the NASDAQ began the day down 3.29%.
00:10:51.200 | It then ended up the day positive 3.36%.
00:10:56.020 | The S&P 500 started the day down 2.59%.
00:11:00.020 | It ended the day up 1.5%.
00:11:03.280 | These are massive reversals.
00:11:05.240 | However, when you look at history, when the NASDAQ had a plus 5% intraday reversal from
00:11:10.760 | the open, they all happened during the 2000 tech bust.
00:11:15.100 | And they happened multiple times between 2000 and 2002.
00:11:19.920 | And then it happened again during the housing crisis, right?
00:11:24.200 | In 2008, 2009.
00:11:26.640 | So in other words, they all happened during bear markets.
00:11:30.560 | I clearly remember the 2000 dot bomb starting in 2000 because I started working in finance
00:11:36.400 | in 1999.
00:11:37.980 | There were a lot of false hopes, many, many false hopes.
00:11:41.800 | The first couple of years, ah, things will be OK.
00:11:44.480 | Things will be OK.
00:11:45.620 | And after about a year and a half of declining, we just kind of capitulated and said, you
00:11:50.680 | know what?
00:11:51.680 | Things are not OK.
00:11:53.480 | And it was just, OK, the denial was just acceptance that we weren't going to make money in the
00:11:58.280 | NASDAQ and in technology stocks.
00:12:00.400 | Any longer.
00:12:01.480 | And then after about three years, right, starting in around 2003, things got a little bit better.
00:12:07.600 | But after topping in 2000, the NASDAQ really didn't reach that level until about 2015,
00:12:14.000 | 2016.
00:12:15.000 | So that's over a decade of waiting to get back to even.
00:12:19.560 | Now, currently, things are correcting much, much quicker.
00:12:23.200 | You're seeing a lot of the tech stocks correct by 60 to 80% in just six months.
00:12:29.800 | So the cycle of change is much quicker now.
00:12:32.640 | The velocity is very quick.
00:12:34.640 | However, I wouldn't look at these huge reversals as something of a good omen just based on
00:12:40.840 | history.
00:12:41.840 | I would just continue to have a lot of skepticism about the latest turnaround.
00:12:45.920 | There will undoubtedly be more volatile times ahead.
00:12:49.840 | So those are my five financial observations since the start of the war.
00:12:53.240 | I'd love to hear what your observations are.
00:12:56.560 | There is also one final point that is something worth thinking about.
00:13:00.440 | A war could ignite a bull market.
00:13:03.240 | If you look at history, during a recession, governments tend to spend and print more money
00:13:07.880 | to get their economies going again.
00:13:10.000 | For example, on May 6, 1935, President FDR issued Executive Order 7034 establishing the
00:13:17.840 | Works Progress Administration.
00:13:20.840 | Over its eight years of existence, the WPA put roughly 8.5 million Americans to work
00:13:26.400 | helping America get out of the Great Depression at the time.
00:13:30.280 | And during a war, there's heightened military spending that creates employment and additional
00:13:35.160 | economic activity.
00:13:37.280 | Also more money may be spent on innovation and technology that can carry through to the
00:13:41.240 | economy.
00:13:42.240 | However, there's obviously a cost to many other industries as well.
00:13:45.760 | The jury is still out on how a war affects financial markets long term.
00:13:50.760 | Here are some points on how war might actually help the stock market.
00:13:54.560 | One, it makes the Fed second guess their rate hike plans, which could help spur further
00:13:59.600 | borrowing.
00:14:00.600 | Two, it attracts more treasury bond buying, which helps put a lid on rising interest rates.
00:14:05.880 | Three, may reduce consumption froth and reduce inflation as more people hold on to cash and
00:14:11.560 | spend less.
00:14:12.560 | Four, it encourages more nations to collaborate, creating more opportunities for international
00:14:17.920 | trade.
00:14:18.920 | A lot of good comes out of darkness, generally.
00:14:22.120 | Think about a lot of the companies that were formed in 2008, 2009, and 2010.
00:14:27.480 | And then finally, it might motivate more people to spend more money on goods and experiences,
00:14:33.760 | given we realize that wars, pandemics, all of these things are proving that life is quite
00:14:39.880 | ephemeral and quite fragile, that we might as well spend more of our hard-earned money
00:14:45.840 | and live a better life.
00:14:46.840 | Thank you all for listening.
00:14:48.960 | Let us pray and hope this latest conflict will resolve itself quickly and peacefully.
00:14:54.480 | Please spend some time reaching out to friends, hugging your loved ones and your children,
00:15:00.440 | and just cherish them.
00:15:01.600 | Cherish every single day.
00:15:02.600 | Thanks so much, and take care.