It never feels good when we are in this kind of market, it is hard to find any optimistic news. From interest rate hikes to inflation fear, from Russia Ukraine tension to global recession. The financial market is upside-down and many cracks are spreading. How should you position your investment to protect your downside and yet capture the new opportunities? Here is my analysis.
First of all, we need to understand that the news sells fears because it is easy to attract eyeballs. But we need to see through the truth behind the sea of information and misinformation. On the surface, we are having a geopolitical issue, a “war” between Russia and Ukraine. But in fact, it is a financial war between the US, China and Europe.
Maybe the “Word War III” has already started, the battlefield is in eastern Europe, but the US has made sure that everybody is dragged into it, including even Switzerland and Singapore.
Who will pay for the bill?
Whenever the US announces “tightening”, it is a wealth redistribution process. It is like towards the end of a feast, everybody is looking at each other and waiting for someone else to pay the bill.
If you read my past analysis, you will know that there must be a big enough economy to bite the bullet.
- In the 1990s, it was Japan and Asia through Asian Financial Crisis;
- In 2008, it was the whole world through Global Financial Crisis;
- In 2010, it was Europe through the Euro debt crisis;
- In 2015, it was China through the stock market crash in A-shares;
After the US printed so much money and cause a huge asset bubble, it is time to reshuffle the global wealth again. When the US tightens, it means less money in circulation. They need to make sure there is still enough liquidity within the US to fill the gap.
I thought the target should be Japan. After all, the last time they were “harvested” was more than 20 years ago. That is why we sold our Japan position last month. But it has become increasingly obvious to me that Europe will be the biggest loser.
Why Europe is the biggest loser?
On the surface, the eurozone is an allay of the US, but if you really understand the situation, the US desperately wants Euro to fail.
Eurozone is an economic alliance and competitor of the US. The Euro currency is also a threat to the US dollar system. Whenever the euro gains some momentum, there will be “sudden” conflicts in the regions.
I think China, at the same time, also secretly wants a weak Europe so they have a weakened opponent. So if the two largest economies in the world want you to fail and you are threatened by the largest country in the world and you have no resources independency, you are doomed.
This can be witnessed from the EURO/USD exchange rate. Money is flowing out of Europe!
A weak Eurozone is not only beneficial for the US economically, but it is also good for them to strengthen their military influence. The euro needs the US “protection” more than ever now.
Europe is stupid enough to follow the US to sanction Russia while they forgot that the US is energy self-sufficient and they are not. At the forefront of the warzone, they will also suffer huge money outflows. High inflation is unavoidable and yet they will spend billions on military arms.
I think Europe’s economy may end up like Japan which goes into a prolonged downturn.
If we look back further, the US is the only country that has never gone through a recession for nearly a century because of WW1 and WW2. And every time, they became stronger.
Have you thought about why we have had no major war for more than half 50 years? That is because of the nuclear weapon. Making money from the war is one thing, but you need to make sure that you can spend the money while you are alive. That is why I was sure that the US and Europe will not get involved in a “war” with Russia.
Russia is not the real target
Ironically, Russia is not the focus of this “war” because the target is Europe and China. Russia has no real threat but is very useful for the US. Without Russia, NATO becomes unnecessary and the US’s continuous presence in Europe will be questionable. The same logic goes for China-Taiwan tension because the US needs to build an Indo-Pacific NATO.
I talk about these because you need to understand these backdrops so we can understand what will be coming. It may appear (from the English news) that the western world is cutting off Russia from all angles, but if you look at the chart of the exchange rate of the Ruble compared to the US dollar, it has recovered to the pre-war level.
Nothing is new
The global stock market is going through a chaotic turmoil in the first quarter of the year given the backdrop of rising interest rates, monetary tightening, the Russia-Ukraine war which was followed by sanctions, supply chain disruption, and rapidly rising inflation and the unfinished pandemic. But once we can look back to history, nothing much was new. Because the world was always run by the same human species who share the same greed, fear and hope.
The world is transiting from the old world order to a new order. And history shows whenever we are in this period, pandemics, depression, revolutions and even wars are unavoidable. However, that is not the end of the world. Because ultimately, most people desperately want peace and good lives, there will always be a resolution to the new monetary, economic and political system.
If you look at the chart below for just the past 10 years, there are dozens, if not hundreds of times you can find a reason to give up investing. But the stock market always comes back up because people’s hearts are towards a better future.
But it doesn’t mean that we should just sit and wait. Actively managing risks and exploring new opportunities help us avoid devasting losses and recover faster from market sell downs.
A TINA Moment for investors
This may sound counterintuitive but we have reached a “TINA moment”. TINA means “there is no alternative” in the financial world. Which ironically makes our investment decisions easier.
So what is obvious and mostly to happen this year? Here are my opinions:
- Stocks may do better than bonds;
- Developed market stocks may do better than emerging market stocks;
- US stocks may do better than other developed market stocks;
- Commodities prices may stay high;
What should you do next?
The difficulty of investing, as I have repeated shared, is not the strategy or instrument, but the temperament. If you do not have the experience and road map, it is understandably hard to go through a dark tunnel without seeing the light. And it is always easy to give up and walk backwards towards “safety”.
That is why I always write down my thoughts and it helps me see the directions. Because even if we are heading in the right direction, it doesn’t mean there are no obstacles along the road. There might be a river that caused us to detour or a mountain that we have to go up and down. The most important thing is that you need to set sail according to the plan. If you don’t get moving, you will never reach your destination.
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