This will be my last article for Early Investing. I have absolutely loved my time here. It’s simply time to move on. You all are in amazing hands.
I’m working on a new project called Convivium. More about that in a bit.
I hope to make this last piece a useful one. Because frankly, I think if you’re watching mainstream media, you’re not getting a very informed view of the world.
This is my blunt assessment of the situation today. It’s not pretty — but there are a few silver linings.
Great Reset, Indeed
The world is changing in ways most people can’t yet fathom. The financial and economic battle being fought now may reshape the global monetary and political order.
The U.S.-led sanctions have hit Russia hard — especially its currency and stock market. But it may not be enough. I’m sure the U.S. and EU have more tools they will utilize, but I am skeptical that we can win this economic war.
Russia is self-sufficient in food and energy and has very little debt, lots of gold, commodities and a large and capable army. The U.S. and Ukraine may need to win on the ground, and that will be difficult.
Worryingly, Russia appears to be backed politically by China, Venezuela and most of the Middle East. That’s roughly 80% of the world’s oil supply, plus… China.
Most major oil-producing countries (except the U.S.) are refusing to raise production to blunt price spikes. And neither the United Arab Emirates nor Saudi Arabia would take a call with President Biden, as The Wall Street Journal reported earlier this week.
The Biden administration also doesn’t seem interested in encouraging domestic drilling or reconsidering canceled pipelines. I’m hoping the capital markets will be able to push through additional drilling and pipelines.
Biden’s team visited President Nicolas Maduro of Venezuela in an attempt to warm relations after years of harsh sanctions. But Maduro also refused to open the spigots.
Major oil producers seem fine with the higher prices. But they also don’t seem afraid of harming relations with Washington, D.C.
Mexico, India, Turkey and almost all of South America and Africa have refused to join sanctions on Russia.
These are all bad signs for U.S. diplomacy. They point to falling influence and rising resistance to the (old?) world order. Unfortunately our foreign policy over the last 20 years has burned many bridges — Libya, Syria, Iraq, Afghanistan and Yemen.
Russia has announced significant export restrictions to certain countries, but we don’t have the full details yet. From what I’m hearing from reputable sources, they are preparing harsh commodity export bans against the EU and U.S. and their allies.
Russia could threaten to cut Europe off from 40% of its total natural gas supply. That would be absolutely devastating.
We’ve already seen industrial production in Germany begin to shut down over soaring electricity prices. And gas is still flowing!
It seems likely that Europe will have to give significant concessions to Russia in order to keep energy and commodities flowing out of Russia and Ukraine.
The U.S. should fare better than Europe, since we have less exposure to Russian exports. And we’ve got significant oil and gas production of our own. We are almost self-sufficient in agriculture.
But unfortunately modern farming relies entirely on fertilizers, which are mostly imported. And the prices of many fertilizers have soared. Russia was the No. 2 potash producer in 2021. Belarus, the No. 3 producer, is a close ally of Moscow and is participating in the Ukraine war.
It’s unclear what kind of impact this will have on global agriculture. But I think it’s something that bears watching.
De-Dollarization and Inflation
In the 1970s, Richard Nixon struck a deal with Saudi Arabia. The country agreed to only sell its oil in U.S. dollars. In exchange, it would get military protection and other perks.
The dollar quickly gained a monopoly in oil trading. For the most part, it remains so today.
But I am almost certain this will change quickly now. China, Russia, India and much of the Middle East have seen how the U.S. and EU froze Russian central bank assets abroad. They don’t want that to happen to them, and some will rapidly de-dollarize.
The world will likely increasingly trade using the yuan, ruble, rupee, lira, gold, new central bank digital currencies — who knows.
As Fed Chairman Jerome Powell recently admitted:
It’s possible to have multiple reserve currencies.
It’s important to keep in mind that this will all take time to play out.
Over time, this could significantly reduce demand for dollar assets and cause the U.S. dollar to fall against foreign currencies. Some say that before the dollar falls, it will dramatically spike higher. I don’t know if that will happen. But the overall trend seems likely to be down for a while.
This economic warfare will almost certainly result in higher inflation and potentially supply issues. The world could face a major food shortage unless fertilizer and other commodities continue to flow.
A New Multipolar World
For most of my adult life, the U.S. reigned supreme on the world stage. Its military and financial might was unquestioned.
We likely lived through the height of the U.S. empire. It will be one of the most studied periods in history by far. For one thing, it was the first digital century. So thousands of years from now, people will still be studying it.
The situation has changed. Russia, China and India have dramatically increased their financial and military power. At this point, everybody’s got enough nukes to deter direct combat — direct fighting between nuclear powers is no longer really an option.
I think this world war will be largely a financial and economic one. Economic warfare is extremely dangerous and could result in millions of hungry people in the near future.
Unfortunately, we have to realize that China and Russia’s economic power has never been greater due to the huge amount of resources produced and consumed between them.
A key moment in recent history was when Russia intervened in Syria. It got directly involved in the Syrian war to help President Bashar al-Assad against Western-backed fighters — and won.
If Putin wins in Ukraine, it may mark the end of the U.S.-EU alliance’s dominance. I hope it does not come to an all-out battle in Kyiv. There is still some hope for diplomacy. Goods must continue to flow over borders or things will get dicey.
We must find ways to build bridges again. We can’t fight this battle militarily. The stakes are too high when all sides have supersonic nukes. The U.S. is more than capable of defending our own and our allies’ borders. And for better or worse, Ukraine is not a member of NATO.
Wild Times for Investors
The investment implications are significant. It seems that U.S. oil and gas plays are certainly more attractive, for example. Pipeline operators are interesting, because who else has better inflationary pricing power?
If the dollar does fall significantly, that would also allow us to build a much stronger export industry. So some of the best investment opportunities in the U.S. may be in things like manufacturing. It is likely that we will start bringing back manufacturing operations that were shipped abroad.
Gold, bitcoin and silver are super interesting. Monero is getting more interesting.
This is what I am going to spend the next few years focused on at Convivium.
“Convivium” is a Latin word meaning “gathering” or “banquet.” I’ll be posting daily analyses of the global situation as it evolves. We’ll discuss the investment implications of these shifts and explore diet and wellness.
And thanks to my amazing teammates Andy, Vin, Allison, Aryelle, and Chris.