Volatile 2022

In this letter, we first discuss the difference between speculating, gambling and investing, and then examine causes of this widespread downturn. Read more about this current topic in the following report.

First, we confront the notion that investing is simply gambling and explain why that is definitely not the case: In the classic definition of a gamble, over the long run the house wins. While you could hit the jackpot at a slot machine or have a “lucky streak” at blackjack, the odds associated with a gamble are designed so that you will lose over time.

That is the nature of gambling – if it didn’t work that way, there would be no “house” to take the other side of your bet because the house would eventually go broke.



1. COVID shutdowns

The decline in stocks can be partly traced back to COVID shutdowns that slowed factory production just as stimulus payments and other government spending pushed up demand for goods. Factories could not keep up and supply chains snarled. With demand exceeding supply, prices rose (most things in economics get back to supply and demand). To avoid disappointing shoppers who were eager to spend, retailers ordered more goods. Shipping costs doubled and tripled, which fed into price increases.


2. War Russia-Ukraine

To make matters worse, Russia invaded Ukraine and the resulting disruption in oil and gas supplies has pushed up prices for fuel and electricity. That boosts costs for manufacturing, farming, and food. Russia and Ukraine are massive producers and exporters of fertilizer inputs and grain.


3. Supply / Demand imbalances

So, supply/demand imbalances pushed prices up, creating inflation. In response, central banks around the world, including the U.S. Federal Reserve, the ECB, and others, have been raising interest rates to try to push demand lower (to fight inflation). Lower demand raises the probability of a recession and makes future corporate profits less certain. That makes investors discount the value of those future profits more heavily.


4. Shift in spending from tangible goods to services

Then, as the pandemic was brought under control, consumers shifted from spending on things to spending on services, such as travel, dining out, etc. With the demand for goods falling, retailers cut prices. That is also hurting the outlook for profits, which is bad for stocks. So, stock prices are falling due to a sequence of events that have created high inflation and a great deal of uncertainty about future profits.


5. What about bonds?

Bonds generate income that usually acts as a “cushion” when stock prices fall. But bond prices are dropping by far more than the interest income those bonds provide. Why? Be – cause Inflation is forcing central banks to raise interest rates rapidly, and when interest rates rise, bond prices fall.


6. Gold as an inflation hedge?

Gold is often thought of as an inflation hedge (although historical data shows otherwise). Gold pays no interest, so when investors can earn a guaranteed, risk-free return of 2% or more by holding short-term government securities, gold loses its allure. So, gold prices are declining if real interest rates are rising. Additionally, Gold have suffered from U.S. dollar strengthening.


7. How about real estate?

Real estate usually does fairly well when inflation rises because rents often keep up with rising prices. Nevertheless, prices of listed real estate funds in Switzerland declined be – cause interest rates rose sharply, and because pension funds were forced to sell some real estate holdings as equities and bonds fell even more, to move back to their targeted asset allocation.


8. The U.S. dollar’s strength

The U.S. dollar’s incredible strength against just about every other currency is contributing to inflation in Europe and elsewhere. A strong U.S. dollar helps an Euro, Swiss franc and British pound investor, but the positive impact have been limited due to our defensive forex management.

Continue to invest for the long term

We continue to recommend that you invest for the long term and stay the course, even in difficult times like these. As always, we are here to answer your questions about investing and your portfolio.

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