What Next?

How did you like the U.S. government’s announcement of when and how exactly Russia will invade Ukraine? Or Bloomberg’s headline stating that Russia’s invasion had actually started? And what did you think of Canada’s ultra-woke Prime Minister when, a few days ago, he compared protesting truckers to Nazis? Trudeau has a habit of getting mixed up. Consider his statement of a few weeks ago, when he labelled Canada’s unvaccinated citizens “extremists who don’t believe in science, who are often misogynists, also often racists…,” before following up with the question, “Do we tolerate these people?” What the hapless Prime Minister said reminds me a lot more of circa 1937 Nazi Germany than what the truckers stand for.

Before I move on, one more question: how did you react when the Canadian Broadcasting Corporation asserted that Russian actors may have been supporting or even instigating the trucker’s convoy descending upon Ottawa? My own thoughts: I keep asking myself what level of intelligence our politicians and the media attribute to us. Evidently none. And yet, is a material percentage of citizens starting to see the light? How many people are ready to relegate figures like Trudeau, Biden and a dozen other liberal and conservative sociopaths in key governments to the trashcan of the corrupt and incompetent? How many recognize that our media complex is deeply compromised? If I had to take a guess I’d say that their number is by now sufficient to threaten the current order.

Of course, the political and media establishments are not the only travelling circuses visiting town. Adding to the entertainment are central bankers, some of whom couldn’t run a milk store but resort to complex mathematical models that lead us closer and closer to economic collapse. Then there are the health authorities and medical schools, which unhesitatingly parrot the lines taught them by the pharma industry. And all along, we have our armaments industry desperately pushing for the next war and a handful of tech giants moving us steadily closer toward a surveillance state straight out of a dystopian novel.

Taking Responsibility

Which raises an important question. In a world where politicians, an increasingly monopolistic corporate establishment and their propagandists in the mainstream media can no longer be trusted, where do we look for guidance? The answer is unnervingly simple: within ourselves. We have to take responsibility as individuals, make an effort to study all aspects of a given issue—not just gobble up what our favourite TV-channel or legacy newspaper states. Then we can make our judgment and engage.
A friend recently told me that he had no respect for any politician and felt alienated by most pandemic related edicts, but tried to balance those feelings with being a good citizen. I wish he’d used the term ‘patriot’ instead of ‘citizen’, because I could have thrown my favourite Thomas Paine quote back at him: “The duty of a true patriot is to protect his country from its government.” Still, my friend got me thinking. What is a good citizen? Someone who goes along with patently abusive regulations, because they’ve been issued by executive order or even enacted by a legislature? Or someone who speaks up against the consistent erosion of personal rights and freedoms?

To what extent have our freedoms really being curtailed? I’ll let the statisticians provide the details. The two leading compilers of relevant data, America’s Cato Institute and Canada’s Fraser Institute, come to very similar conclusions in their recently released studies. Here are their top findings.

  • For 80% of the world’s population, freedom has eroded. Areas in which most of the decline occurred include the freedoms of expression, religion, association and movement.
  • The decline in freedom did not start with the pandemic, but Covid-related measures have materially compounded the negative trends.
  • The use of government emergency powers has now become normalized.
  • An unsurprising aside is that Canada, in terms of its freedom ranking, is no longer part of the world’s Top Ten.

A Responsible Approach To Investing

Taking responsibility on the investment front is as daunting and inconvenient a task as that of taking responsibility as a patriot or citizen. Not long ago, a potential client reacted very negatively when I suggested that, as a precondition to working together, we had to make sure we understood each other’s values. For me, that meant I wanted to know what his expectations and his risk tolerance were; I also hoped to gain some insights into his background and character. Conversely, I thought he should know what my particular approach to investing might look like.

As it happened, my would-be client bristled at such thoughts. What he wanted me to do, he explained, was to make money for him—no discussion needed. That ended our dialogue.

Here is what I would have explained to him, had we actually met:

  • Embracing a narrative such as “the economy will continue to be propped up by the central banks” or “imminent rate hikes will bring the stock market miracle to an end” is at best a naïve and at worst a reckless approach.
  • The outcome to half a century of badly flawed policy platforms is unpredictable. The catalysts to a severe crisis are being unleashed, one by one. What lies ahead is unknowable.
  • Such grave uncertainties emphasize the need for a strategy. Ours is based on being prepared for a variety of outcomes, on having to constantly reassess and being nimble with portfolio adjustments.
  • We also believe that, going forward, quality is imperative. While it’s possible that the age of zombie companies and extreme leverage may continue, times of upheaval typically force a return to sustainability.

An Abundance of Wild Cards

Several of the political, economic and social dynamics in play can make for vastly different outcomes. Here is a small sampling:

Central banks and inflation. If monetary policy makers raise interest rates too much, the economic fallout will be brutal. If too little, inflation will continue along its upward path (see the chart at left, tracking U.S. consumer price inflation).

The evolution of oil and natural gas prices is another unknown. High energy prices (see light crude oil price in the chart below) restrain consumer spending, aggravate inflation, and by doing so, put upward pressure on interest rates. In Europe, U.S. inspired opposition to the Nordstream 2 pipeline bringing natural gas from Russia has added to a severe energy shortage; a military confrontation over Ukraine would do even more damage.

The Ukraine crisis is also of vital importance in terms of political developments. U.S./UK posturing (with significant help from NATO headquarters) has not only accelerated the creation of an effective and powerful Russia- China axis, it’s also sowing discord among America’s European allies. As U.S. policy blunders abound, the Washington-dominated postwar order continues to crumble. Regarding Ukraine, I doubt that Russia’s game plan includes an invasion, but it’s a situation that needs to be closely watched.

Amidst this complex and highly volatile backdrop, 2022 has so far been good to us. Bonds, which we’ve been avoiding, have sold off sharply, while the segments we’ve favoured have gained. We’re encouraged by gold’s recent showing, but what’s contributed to appreciation more than anything are our exposures to energy and other natural resources.

As I said before, we will continuously reassess and make adjustments where we feel they’re warranted.

Best Wishes,

Peter Cavelti