Everything is too interconnected.

We showed you neon last week. Without it we can’t make semiconductors. Without semiconductors we don’t get much of anything these days.

Then we have energy. Whoo boy! I won’t rehash what you already know well by now. Going into this fiasco we had a massive issue with respect to decades of falling capex in the energy space. Then we had Covid lockdowns which continue to impact both supply and especially supply chains, and now… we have Russia on top of it. An energy and food behemoth.

You literally HAVE to be long commodities and energy here. But what’s worrisome is that the stock market seems not to have fully figured this all out yet. We are in a financial war and contagion is likely to hit any minute.

In the coming weeks and months you’re going to start hearing all about “counterparty risk”. Wait for it!

Here’s just one example. The Euro Stoxx Bank index:

Now take a look at the high yield bonds. Here’s HYG, a good enough proxy for the entire ball of wax.

Given the stresses in the system now there is no way that we don’t see some blow ups. We will definitely see some funds going belly up, but where during previous market crashes and panics the Fed could and did step in they lowered rates, flooding the market with liquidity mostly via bank reserves, this time they can’t do that. Well, they can, I guess, but lowering rates when inflation is skyrocketing is just adding fuel to the fire, and this time it’s not just credit that’s impacted because creating new credit isn’t going to repair the inevitable holes on European banks’ balance sheets (Russian collateral, anyone?). No, this time they really have screwed the pooch.

Out of Hand

When things get out of hand, they really get out of hand. Panic, mayhem. It is, of course, in such times that it is critical to keep our heads about us.

The way to do so is to at least anticipate and run the probability of various outcomes at any given time and then to continuously (I know, it’s an ever-changing dynamic thing) reassess as new information comes in and must be analysed, incorporated, discarded, and so on.

Sounds hard but really isn’t that what we do day in day out on trivial things? Of course it is. Now is simply a time when we need to really strap in and buckle up. We have historical experiences of ours and that of our forefathers that helps us with this. The reason that works is quite simple. We may have fancy iPhones and elasticated underpants now, but human psychology never changes.


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