Long Term Economic Fallout From War In Ukraine

[BeachOrCity]

I thought I would start a discussion thread on what the long run economic effects from the war in Ukraine are and how they will affect us as early retirees living off our existing assets.

A few observations I have:
(My assumptions are based on the Ukrainian Gov't eventually falling, even if the war continues on Guerrilla style as well as the current sanctions not being lifted quickly. If Russia withdraws and / or sanctions are lifted much of this can / will be avoided).
-- Europe will be squeezed severely for Natural gas. Besides the higher prices, they will have to shut much industrial production because the gas won't be available at any price. This will tank their economies. More LNG and renewables can be introduced but will take years to do so.
-- Oil will be higher for longer. Russia being starved of capital won't be able to keep production up even w/ more buyers. Higher oil means higher inflation and lower economic growth.
-- There will be a severe food crises materialize over the next year. Ukraine and Russia are much of the worlds food supply. Wealthy countries will deal with the inflation. Poor countries people will starve. Political instability
-- Auto manufacturing will be crushed, as catalytic converters need palladium (atleast currently). Russia is worlds largest Palladium supply.
-- All kinds of other things made in Ukraine / Russia will have problems.
-- China (as well as other countries) are looking at the USA / Europe freezing / seizure of FX reserves and will view it as "our money is no longer our money when its in Euros or Dollars. They will look for alternatives. Maybe crypto, but.....
-- USA and Europe now see Russia / Oligarchs avoiding FX rules and trying to use crypto....so they use this as an excuse to "go after crypto".

In short, I think (assuming we don't find a way to stop this war / end sanctions) that a reordering of things will be underway. No way to know the outcome (and none of us can affect it)...but how can we as early retirees protect ourselves?

One thing comes to mind is hard assets, cash flowing businesses that are well hedged vs inflation.

Would like others thoughts and discussion as well.

(...and of course our hearts are with all of the suffering people from the war itself)

 

[Markola]

Seems a little doom and gloom. People have had recent practice in using less fuel while stuck at home. Substitution effects will develop. People are more united against a common foe than in a long time.

Regardless, I don’t have a better financial strategy than staying globally diversified with a 50/50 balance of index funds, plus my various kinds of property, some part time income, and managing expenses, as always.

 

[OldShooter]

... A few observations I have ...

How have you changed your investing to reflect these predictions?

 

[Car-Guy]

IMO, not much, IF it doesn't spill over to other countries.

 

[BeachOrCity]

How have you changed your investing to reflect these predictions?

It’s a good question. I haven’t changed anything in the past two weeks of significance.

I am heavy into energy cyclicals and real estate and since interest rates went negative I have a much lower cash allocation.

But I opened this thread to hear peoples thoughts on if the situation does indicate higher allocations to other things such as gold crypto or whatever.

 

[OldShooter]

It’s a good question. I haven’t changed anything in the past two weeks of significance.

I am heavy into energy cyclicals and real estate and since interest rates went negative I have a much lower cash allocation.

But I opened this thread to hear peoples thoughts on if the situation does indicate higher allocations to other things such as gold crypto or whatever.

Many years in project management taught me that the contingencies I planned for were almost never the ones that arose. So I try not to be fragile against the broad range of bad things that could happen, but from that point I am slothful as Buffett advises.

My question was not original. The original is from Nassim Taleb: "Don't tell me what you think, show me your portfolio."

 

[Sunset]

I've decided to NOT put any more money into emerging and foreign ETF's. I've always had a very light allocation to it, less than 5% and recently have thought I should increase it and hold more. After all that is what the "experts" say to do.

I think in the US the natural gas supply is ample and Canada has a bunch to supply the US so the price here will be cheap compared to Europe price.

Higher oil prices will help the oil industry here and there won't be any shortage, just high prices.
Wheat exports for Canada and US will increase due to the higher prices and may spur a boom in farming by getting more $$ per bushel. There will be no shortage of wheat here.

I can forget about visiting Russia for a few years, so other places will get those tourist dollars.

 

[razztazz]

Seems a little doom and gloom. People have had recent practice in using less fuel while stuck at home. Substitution effects will develop. People are more united against a common foe than in a long time.

I've always been told war is good for business even if there's usually a large pot hole coming out of the driveway. And it assumes you win.

Not sure VP has the muscle he thinks or has been told he has. Not sure we're seeing actual sub-optimal execution or just western propaganda for westerners, but I am recalling some insightful Cold War briefings I had many years ago that seem right at home today.

Putin wants to "win" so I'm not sure he will really go nuts. Winning requires you have something left. You can spin the rest. That stuff about nukes on alert was probably more for domestic consumption. Or perhaps a liberal western media interpretation. I read many articles and the headlines never matched what he actually said, if they quoted him at all. Made me wonder...? If he loses his money and his friends and crashes Russia, as long as he's still "Boss of Things" at home he'll be OK. Not sure we should start cheering for an "Arab Spring" uprising in St Petersburg or start meddling for succession. New hires can be unpredictable. Let it run it's course.

If he does push the button we've covered that before along with meteors. My pacemaker/ICD battery has eight years left on it

 

[razztazz]

As far as actual investments... not buying anything. Let it shake itself out. In the short run it means nothing. In teh long run if I guess wrong what's a few bucks?

 

[Chuckanut]

Any person or organization who invests directly in authoritarian countries needs to go back to Trust but Verify. Or risk losing it all. Indirect investors have to realize they may see some of their profits go POOF! if the local authoritarian leader decides it's to his advantage.

Maybe defense stocks will rise if countries like Germany actually keep to their recent decisions. Note the countries that currently meet or exceed the 2% standard. There is a lot of room for improvement.

The United States is on target to spend just over $730 billion on its military this year, equating to 3.42% of its GDP. It's joined above the threshold by Bulgaria (3.25%), Greece (2.28%), the United Kingdom (2.14%), Estonia (2.14%), Romania (2.04%), Lithuania (2.03%), Latvia (2.01%) and Poland (2%).

Lots of room for more arms purchases in the older NATO countries.

 

[yhoomajor]

I thought I would start a discussion thread on what the long run economic effects from the war in Ukraine are and how they will affect us as early retirees living off our existing assets.


-- China (as well as other countries) are looking at the USA / Europe freezing / seizure of FX reserves and will view it as "our money is no longer our money when its in Euros or Dollars. They will look for alternatives. Maybe crypto, but.....

This is the biggest outcome from this EU/US - vs Russia hot war.

China has now seen that so-called dollar/euro denominated reserves are not so LIQUID that they were told to believe. In fact these have proven to be 100% ILLIQUID when you need them MOST.

So:
- China and other emerging countries will slowdown accumulation of USD/Euro in the long run.
- That would mean less appetite for US/Euro debt outside of US/Europe.
- US Federal Reserve / ECB will become permanent hoarders of US/EU debt

- Biggest of all (one that impacts most of us): Chinese import will be come Expensive going forward.
- If we bring manufacturing home (should have been done 10 years ago), things will cost 3 times more

- What changes I am making: Buy XLB (materials), Physical Gold, AM, ET, EPD, XOM.
- SCHD: For dividend flows.

 

[Midpack]

Maybe wait and see if this takes weeks, months or years, if/when there’s a sustained escalation or not, and who seems to prevail (might be hard to tell). Russia might “win” and never gain acceptance from Ukrainians, I’m hoping Russia lives to regret this and it undoes Putin - but I’m not predicting anything this early. The talking heads all say it’ll get worse before it gets better and I don’t doubt that. We can’t know yet…

 

[daylatedollarshort]

We actually come out ahead with high inflation because our expenses subject to high inflation are pretty low and covered by our Social Security income, which is inflation adjusted, our house has been going up in value and our TIPS ladder income is up (7.5 - 10%), between the inflation factor and coupons. We refinanced last year when rates dropped, so now our mortgage arbitrage between the low interest, fixed rate mortgage vs. the equivalent in TIPS income is working out well.

I can't control wars, interest rates, inflation, the stock market etc. so I'm not going to worry about what I can't control - just prepare for it as much as possible by sticking with an asset matching strategy and moving toward self sufficiency. Like this year's projects may be reducing our water and energy bills with solar panels, a heat pump, an energy audit, xeriscaping, etc. to reduce our overhead even further.

 

[pjigar]

I've decided to NOT put any more money into emerging and foreign ETF's. I've always had a very light allocation to it, less than 5% and recently have thought I should increase it and hold more. After all that is what the "experts" say to do.

I have been out of foreign equities for about a decade. My theory is that we have enough US listed companies who sells enough to foreign countries to get the piece of the pie from the foreign economies. Besides I trust the companies listed in US more than any other countries (for fraud, etc.). YMMV.

 

[ivinsfan]

DLDS ..I think the civil unrest that comes with some of these scenarios is a bigger issue. Our country isn't exactly "at peace " domestically in the present.

 

[Montecfo]

On the investing side I expect it to be bullish for oil companies.

Auto production will not stop due to lack of palladium, if that develops.

Crypto will be regulated as things are heading that way as it is.

I tend to doubt this will result in longstanding crisis. Everyone will adapt. Supply chains will gradually be diverted to friendly nations. I also doubt it will be long-lived as the sanctions will help end the conflict. Russia will suffer greatly and needlessly.

As far as what we do, I think stocks with pricing power are a good hedge and oil (but not so much gas) pricing will be above recent history and a decent hedge in this environment. Same for defense stocks.

I do not see direct sanctions on Russian energy as Europe lacks the stomach for that.

Also our government lacks stomach for much higher oil prices. But we can eliminate imports of Russian oil. That would be largely symbolic.

In my view we should not make the worst case the base case. Things seldom play out in that fashion.

 

[GenXguy]

We actually come out ahead with high inflation because our expenses subject to high inflation are pretty low and covered by our Social Security income, which is inflation adjusted

SS probably isn't adjusted enough to make up for the higher costs. Medicare Part B went up something like 14% this year. And while your house might be increasing in value, you need to live somewhere, and it's going to cost you a lot more in maintenance on a house now, plus higher property tax and homeowner's insurance. It's going to catch up with you sooner or later.

 

[braumeister]

SS probably isn't adjusted enough to make up for the higher costs. Medicare Part B went up something like 14% this year.

Despite a smaller percentage increase, the SS payment is larger so it's still a net increase when looking at those two.

 

[daylatedollarshort]

SS probably isn't adjusted enough to make up for the higher costs. Medicare Part B went up something like 14% this year. And while your house might be increasing in value, you need to live somewhere, and it's going to cost you a lot more in maintenance on a house now, plus higher property tax and homeowner's insurance. It's going to catch up with you sooner or later.

Mortgage is fixed, property tax stays low due to Prop 13. We need to live somewhere but not in a big house in a HCOL area. Whether we downsize and sell or stay and leave the house in our estate for the kids, a higher home value is still a big plus for us.

DH's Medicare went up $20 a month this year so that really isn't a material impact on our budget. Home maintenance and insurance are included in our budget, and the part of the budget subject to high inflation is much smaller than our inflation adjusted retirement income (SS and TIPS ladder). Last year I cut the budget $7K which helped make our personal inflation rate less than CPI inflation. I modeled various high inflation scenarios in a spreadsheet before we retired and we always came out ahead. YMMV.

We bought gas for the cars for the first time this year in March. Yesterday I made soup stock with saved up vegetable trimmings in a non-electric thermal cooker. I use Tightwad Gazette tips for grocery shopping, Groupon concert tickets are still $20, and my new clothes and jewelry for this year all were free from a product review program. Our exercises are hiking, yoga and free Youtube videos made by a personal trainer. We just don't spend that much so we aren't impacted as much by high inflation as a big family with high food bills, day care or people who have long work commutes and buy a lot of gas.

 

[BeachOrCity]

On the investing side I expect it to be bullish for oil companies.

Auto production will not stop due to lack of palladium, if that develops.

Crypto will be regulated as things are heading that way as it is.

I tend to doubt this will result in longstanding crisis. Everyone will adapt. Supply chains will gradually be diverted to friendly nations. I also doubt it will be long-lived as the sanctions will help end the conflict. Russia will suffer greatly and needlessly.

As far as what we do, I think stocks with pricing power are a good hedge and oil (but not so much gas) pricing will be above recent history and a decent hedge in this environment. Same for defense stocks.

I do not see direct sanctions on Russian energy as Europe lacks the stomach for that.

Also our government lacks stomach for much higher oil prices. But we can eliminate imports of Russian oil. That would be largely symbolic.

In my view we should not make the worst case the base case. Things seldom play out in that fashion.

Good points....
I definitely think we need / hope that someone blinks and steps back from the ledge here.....

 

[yakers]

I saw this in the Financial Times:"The idea that Europe can choose the good life over military clout is over"
It is maybe the end of US dollar as the international reserve currency, a high price to pay but maybe one we must pay to keep free. The Economist had a good article about how there was extensive free trade around 1900 whcih ended by war.
Money/prosperity is important but it is not the most important thing. The question is what will we fight for.

 

[Closet_Gamer]

I feel this is pretty binary.

Scenario 1: Russia loses
Regardless of whether Russia keeps Ukraine or not, Russia loses this thing.

If he loses and evacuates Ukraine, his economy comes back but modern Russia is over for a generation in terms of its global role. His military is being utterly humiliated right now.

Putin's best case scenario is now that he becomes Cuba with nuclear weapons and a side helping of Afghanistan. If he takes over Ukraine, he will have a completely crippled economy for years or decades and an insurgency that he will struggle to put down in such a large country occupied by a clearly de-motivated military.

Perhaps Putin gets taken down from the inside, which I think is increasingly likely. That's the best case variant of this scenario.

The world will feel the loss of commodities exports, but not really much else and it will flex around those. Renewables pick up steam to deal with the fall off of Russian fossil fuel exports.

Europe finally gets its head in the game on defense and energy security regardless of what happens. Fracking probably stops being a four letter word and Lockheed is pressed to put out 2-3x the number of F35s. SpaceX wins because Russia is out of the satellite launch business for the western world. The AUKUS deals gets accelerated through creativity and there will be a dramatic expansion of naval ship building capacity in the US and abroad.

Net impact on FIRE: not much.

Scenario 2: Russia escalates
Whether due to some NATO intervention or Putin being cornered with no way out, he goes nuclear or finds some way to attack a NATO country and radically expand the scope of this. He can't win but he can still make everyone lose. He is in the mode of testing boundaries and international conventions. Nuclear blackmail through those nuke plants, traditional nuclear weapons or that insane sub with the nuclear torpedoes could easily be in the cards. The west may decide to somehow preempt selected scenarios through covert, cyber or direct attacks on key nuclear capabilities or C&C.

Or he convinces China to get in the boat. The latter is only likely if they see some sort of nuclear or other exchange which so pins the US into Europe that they have more freedom of action in Asia.

The detonation of one or more nuclear weapons would be world historic in its impact. Significant market and economic dislocations will ensue immediately. God only knows where that leads. The world will never be the same in our lifetimes and scenarios/permutations of outcomes are all too bad to think about.

Impact on FIRE: My plan to buy a beach house is the least of my worries.

Let's all pray for option 1.

My own position is "accidentally hedged" as I'm hoarding cash for to buy the beach house. That's dramatically shifting my AA towards a far more conservative posture, which buys me flexibility in case I need to call off the beach house purchase.

 

[BeachOrCity]

I saw this in the Financial Times:"The idea that Europe can choose the good life over military clout is over"
It is maybe the end of US dollar as the international reserve currency, a high price to pay but maybe one we must pay to keep free. The Economist had a good article about how there was extensive free trade around 1900 whcih ended by war.
Money/prosperity is important but it is not the most important thing. The question is what will we fight for.

Good thought....
I love the FT, but the subscription price is so expensive...unless you get it thru work or school.

 

[BeachOrCity]

Love your signature re: Luck is where preparation meets opportunity.

While i am hopeful that his own people take him out (literally or figuratively)....I always remember what Colin Powell said about how to keep the peace afterwards.

Sadly, I just don't see a "likely" outcome where "the world" is largely ok. There is going to be a very high price (financial, life / lives, etc) in excess of what we have seen today. The question is what is the price and who will be paying it.

The lowest price I suppose is putin is gone, literally / figuratively. How to keep the peace afterwards assuming the replacement doesn't continue the war

Very (VERY) sadly, the second lowest 'price' in the short / medium term is for the "west" to capitulate. But in all honesty, I think that means the end of the baltics and much of former eastern europe as far as freedoms go.

From there the price gets quite high in almost unthinkable ways.

No matter what happens there is a global power reordering happening incl China and the speed of it dramatically accelerated in the past two weeks.

 

[ivinsfan]

Great post gamer, you talk about renewable energy. Here's a thought what if everyone in the affluent countries used one car per family, lived in and owned one small house with one bathroom and didn't fly on jet plans? Most of us live with much much more yet have no problem telling people with one days food in their homes they need to go overthrow their oppressive government. I'm not as optimistic as you are that the US standard of living isn't going down. A bushel of corn ATM costs over 7.50 are you not going to eat..meat,dairy chicken.