No to War
Young Russians, just like young Ukrainians, and young Americans, hunger for a world that is more just and more peaceful. May we all work to bring it about as soon as possible.
Dear Clients:
New Capital Management, which helps its clients allocate their capital to finance and take ownership in productive projects all over the world for the benefit of human beings, sentient beings, and the planet, stands firmly against the senseless destruction of human capital (including the killing of innocent civilians), infrastructure capital (including the bombing of historic cities), and natural capital that the war by Russia against Ukraine represents.
I also stand against the irresponsible nuclear extortion that Russia explicitly threatens the world with, and also against Russia’s complete denial of truthful information to its citizens through its propaganda lie machine. I firmly support the actions of the U.S. and European governments to deny Russia the benefits of trade, commerce, and cultural exchanges, and to arm Ukraine to defend itself. I am especially gratified to see Americans of all political persuasions come together to denounce this violent and unprovoked war. The extraordinary heroism of the Ukrainian people is a lesson to us all in the need to defend liberty and democracy, upon both of which wealthy societies such as our own depend.
I was a Russian Studies major in college, under the very fine department at Amherst College, where I studied Russian language, literature, history, and culture. In 1986, when the Soviet Union was still in existence, and even showing signs of positive change under the new leadership of Mikhail Gorbachev, I spent a summer semester studying and living at the Pushkin Institute in Moscow. At the time visiting Russia as an American was a highly fraught experience, and I was warned that I, a mere college student, would be surveilled by Soviet authorities.
I had never been in such a place, where few basic rights existed; where food was difficult to find on empty store shelves; and where the society was ossified and sclerotic. At the time, I could not have known that in five years a wrenching and traumatic political, cultural, and historical event of incalculable impact would occur: the dissolution of the Soviet Union.
The breakup of the Soviet Union brought widespread hopes that a new Russia would emerge: democratic, capitalist, European. Indeed, Western bankers were often the first into the country, and Russian opportunists, now called oligarchs, took advantage of the moment to amass unimaginable fortunes built on the country’s oil, natural gas, steel, nickel, aluminum, and other natural resources which passed immediately from “communal” to private ownership.
Looking back, it is easy to see that the world was unfortunately less interested in Russia’s transition to a democracy than it was in its transition into a supplier and consumer of global products and services. I have not been back to Russia since 1986, but the photos of modern Moscow speak to a transformation that I could not have imagined in 1986, with material wealth evident in the office towers, fast cars, and luxury goods of modern Moscow, a gigantic city of immense power at the center of the Russian identity.
Many Russians likely credit Vladimir Putin with this transformation, especially far improved access - brought on by trade with the world - to food, clothing, household goods, automobiles, cell phones and other conveniences. And yet the costs to many non-Russians for these achievements has been high, as Putin made war in Chechnya, Georgia, Ukrainian Crimea, and Syria, inflicting devastating casualties in these places while the world, including the United States under both Republican and Democratic presidents, looked on. In the meantime, Putin, a former KGB agent, took all power in Russia for himself and violently eliminated all dissent. Russians, and the world, sadly, were willing to accept these actions in return for Gucci and Apple stores, a stock market, and many other material trappings of modern life.
Those gains for ordinary Russians, while they may seem trivial to Americans, are now endangered by the massive Western sanctions now being levied against the Russian economy. While Putin desires to return Russia to a 20th, or 19th, or 18th century past empire that now exists only in his mind, he may well succeed in doing so in ways that even he had not wanted, as the West wages a massive economic war.
There is strong and ample evidence that Russia is committing war crimes against the Ukrainian people, people who Putin claims are part of the Russian nation itself. The world is watching, via smartphones, as young Russian soldiers do their dictator’s dirty work. The Ukrainian refugee crisis of staggering proportions is not simply a result of Putin’s actions, but is instead his plan to empty Ukraine of those who oppose him and steal their land and property. Well-educated and democracy-loving refugees are thankfully being welcomed outside of Ukraine, and I expect them to contribute enormously to their new homes and to the world, much as those who fled Nazi Germany’s predations would eventually become valuable scientists, businesspeople, and citizens of free countries. I encourage clients to assist Ukrainian refugees in any way that you can - financial or otherwise. We are working closely with Fidelity Charitable and can provide you with a list of organizations involved in Ukraine - if you already have a Fidelity Charitable account you can log in and receive resource assistance directly.
In Russia, even mild dissent has been made completely illegal: simply referring to Putin’s “special operation” as what it is, a war, can now legally land one in prison for 15 years. As a result, all opposition press have closed their operations. Imprisoned opposition leader Alexei Navalny has called for Russians to demonstrate in mass and fill jails, yet the Russian people to a large extent likely remain under Putin’s sway, the result of decades of brainwashing, a continuation of decades of Soviet lies fed to its many vulnerable citizens.
Vladimir Putin’s obsession with the past, as it was with Hitler, should remind us all to be mindful to accept change and move forward with our precious lives, rather than trying to bring things back that can never again be. The invasion of Ukraine launched by Vladimir Putin is an extraordinary epochal moment, an attempt to “make Russia great again” by re-creating its past empire, and to take strategically vital geography between east and west, and all along the Black Sea. How this action will impact many things - geopolitics, global economics, the lives of soldiers and innocent civilians, and your portfolio - is impossible to know right now.
Hopefully, there are better days ahead for the world, beyond Putin. Young Russians, just like young Ukrainians, and young Americans, hunger for a world that is more just and more peaceful. May we all work to bring it about as soon as possible.
Portfolios
On my recent conference call, I described how Russian stocks composed less than ½% of portfolios. Index providers such as MSCI are in the process of removing Russia from global equity and debt indexes.
New Capital’s portfolios have been positioned to hold up, and have held up, relatively well during the world’s recent and current turmoil. My focus on less expensive value stocks and on boring U.S. Treasuries, inflation-protected Treasuries, and municipal bonds has enabled our portfolios to substantially outperform their benchmarks over the past couple of years of global turmoil. Nevertheless, performance year to date is generally negative in a generally down world, and the current high inflation figures are a substantial problem for all investors to contend with - I am evaluating a commodity fund based on a Bloomberg commodity index for inclusion in portfolios in order to hedge against further increases in global commodity prices. There are no - and I mean no - easy answers for investors these days, and that, of course, is part of Putin’s calculation: that we will eventually accommodate him in return for peace in our portfolios.
I encourage all clients to stay the course. I have made no sales out of my accounts and do not plan to make any. One of the most important “patriotic” things that you can do to help the world right now is to hold your ownership in the companies (many of whom have quit doing business in Russia) and securities in your portfolio, just as American citizens were proud to hold their U.S. savings bonds during World War II. For now, markets, except for Russian markets, have held up relatively well, indicating that they do not foresee Putin’s actions having significant long-term negative effects on company profits. Understandably, the picture could change at any moment. One thing I will not do is purchase Russian securities with your money, even at discounted prices.
The effects on global economic growth from Putin’s destruction of Ukraine are currently difficult to ascertain:
We could well see a huge burst of growth in clean energy projects, especially in Europe, as those nations sprint to cut their dependence on Russian fossil fuels. Such a result would be highly positive for growth and investment.
In the United States, we may well see additions to recent gains in oil and gas concerns that may fill shortfalls in global energy supplies; the U.S. may also see additional strong investment in the manufacturing sector in order to reduce dependence upon China, which is cozied up to Russia.
The Australian and Canadian economies, as well as emerging market nations, may well benefit from their natural resource sectors filling supply gaps left by sanctions and boycotts of Russia.
The role of China in the conflict remains ambiguous. In February, Russia and China signed a mutual friendship pact just a few days before the invasion, and it remains questionable as to whether China was aware of Putin’s plans. It is not difficult to foresee that the West and China may come increasingly into conflict over China’s closer relationship with Russia, and the effects of such conflict could well have greater impacts on markets than anything that Putin himself does. If China proves to be an unreliable partner to the allied democracies in the world, and proves to be a strong supporter of Putin, I will evaluate eliminating Chinese equities from portfolios as well.
The Houston real estate and job market could well be strongly supported as the world searches for energy. Just as high oil prices in the 1970’s and early 1980’s turbocharged Houston’s growth, I would not be at all surprised to see a similar period now.
In the meantime, our office is standing by to help you, our client, through the rocky period in markets that is now upon us. You have my promise that we will remain engaged and vigilant on behalf of your accounts, your family and loved ones, and your future.
Leonard Golub, CFA
Fiduciary Financial Advisor