Weekly Reflection for February 24, 2023

The Week - An Update in Charts

All three major U.S. indices closed the week out lower, the second week in a row to do so. Mostly investors are coming to terms with higher inflation readings that have forced them to come to terms with higher future interest rates.

In bonds, the 10-year U.S. Treasury yield rose to 3.948% for a fifth straight weekly increase. Also rising is the 30-year mortgage rate, up to 7% as of today.

Most any product that could be made overseas in the last 20+ years, has been. The prices reflect our ability to capitalize on cheaper labor and manufacturing. A TV that cost $5,000 in 2020 is now $500. Clothes retail for about the same. But services and products sourced in the U.S. have seen prices spike. Even in years like 2008 when inflation fell, college tuition and healthcare costs kept pushing up.

"Sticky service prices" are contributing to continued inflation. As service expenses stay high, workers will demand more wages and thus service costs stay high. Wages are notoriously the most entrenched of all expenses. What the Federal Reserve is desperate to avoid is a wage-price upward spiral.

The number of home sales has dropped tremendously in the last year. There were some 37% less transactions last month than in January 2022. Home prices have not cratered as much as feared but have slipped 5% since June 2022.

Housing prices may may avoid a 2008-like crash but any negative change in the employment rate will bring negative knock-on effects for home prices.

In 2021 there were a record number of Initial Public Offerings (IPO) with 1,035 companies going public. A year earlier in 2020, 480 companies went public, which was notable because it was the most to do so this century to-date and well ... the pandemic. Although the companies raise billions for their efforts, it has been difficult for many to live up to the hype following their market debuts. In 2022, 181 went public, which is closer to the usual amount.

Sad War-iversary

On this day in 2022, Russian President Putin announced that he would launch a military assault on Ukraine. It became a war that quickly touched every soul on the planet given how integral Russia and Ukraine exports of food and energy are in a global marketplace. The Wall St Journal identified eight themes of the conflict as it continues to rage on with no conclusion in sight. To summarize a few:

NATO

Just a few years ago, the North American Treaty Organization, initially designed in 1949 to foster peace in Europe and to keep threats like the Soviet Union away, found its purpose again. More countries want to join and current members are paying their dues.

Small but Savvy

Although outnumbered and basically counted out of the fight at first, Ukrainian troops have adopted a smaller, shrewder way to conduct war. Adopting tactics used by guerrilla forces, the “hit-and-run” strategy has evaded and outmaneuvered Russia’s approach to war. Russia started out by relying on just a few troops (since they did not expect Ukraine to resist), with outdated, slow-moving heavy tanks and inflexible military hierarchies which left officers unable to react to situations on the ground while waiting for orders.

Russia Iced Out

Sanctions for Russia came swiftly last winter. Corporations withdrew their businesses, some 1,000 to-date per Yale School of Management (see graphic below). Russian banks were cut off from the international transaction system, their markets cratered and Russian overseas assets were frozen. Most of the world worked to buy oil from anyone other than Russia. However. Russia’s economy has not cratered. China, Brazil and India are happy to buy the oil, at a discount, that no one else will touch. Putin has found other countries willing

to supply other products needed to support their infrastructure and war. It is estimated that Russia’s economy only shrank by 3% in 2022.

New Connections

Russia has found new allies who, if not supporting its war efforts, are at least willing to share in the opportunities and profits it may afford them. So has the U.S. The western alliances have strengthened considerably, bringing in the wealthiest of Europe to the cause. Countries like former Soviet republics Moldova and Georgia are eager to join NATO as are Sweden and Finland. Less comfortable is the setup of geopolitical and economic competition between the West with Japan and South Korea versus Moscow-Beijing.

(Lack of) Trust Issues

Everyone in America consumes news data in some form or another these days, even if only word-of-mouth sharing. Young children know what’s happening in the world before being told by their parents or teachers. News sources run from the traditional television and newspapers to Facebook, Twitter and TikTok, which notably have no editors or moderators. (Call these the latest versions of word-of-mouth.) Whether one believes what they are being told is a whole other issue that comes down to who you are and where you are getting your

information. (Local news eclipses national in the trust war.)

Gallup and Knight Foundation have been tracking the declining trust issue for years. Today only 26% of Americans hold favorable opinions of the overall news media in the U.S. Most say that the media have the correct information on any given story but are skeptical that the data is shared in a fully transparent way. Rather they believe that it is being presented with a spin or sensationalized to achieve an organization’s agenda. And why would there be an agenda? Chalk it up to the money proliferating the newsrooms these days. The decline of print news funded by subscriptions and advertising has been replaced by funding from wealthy billionaires who have agendas to promote, or so goes the feeling by the majority of Americans.

How we “feel” is a major driver in our American discourse. This is a word used repeatedly in the survey results. It tracks back to what researchers call our “affective polarization”. When someone else’s political party or position differs from our own, we are increasingly negative. Our alignment to our ideology, race and religious identity is causing us to close ourselves off from interacting in positive ways with those of other alignments. Researchers cite the rise of this in other countries too, but not nearly to the degree in the U.S., which was first to the airwaves with 24-hour partisan cable news. Information overload also has lead to lower trust. With so much coming at us, it is hard to tell what to believe. More does not lead to more. It’s actually harder to be well-informed and it takes a lot more work to feel confident in what is being told.

One point that nearly all surveyed agreed on, 90%, is that the news organizations' own financial interests leads to reporters skewing the news. Although the report did not break down trust factors amongst the large media companies, there are many that are well-known to be aligned with either conservative or liberal ownership that consumers believe position their stories to align with their agenda.