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How to Invest During Times of War

With last week’s Hamas terrorist attack and the swift response by the Israeli government, war has once again taken over the global conversation. While…

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5 months ago

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With last week's Hamas terrorist attack and the swift response by the Israeli government, war has once again taken over the global conversation. While the financial costs of war pale in comparison to the human costs, many investors are rightly worried about their portfolios. To this end, I will explore how to invest during times of war both as an observer (i.e. someone who is not directly impacted by the conflict) and as a participant (i.e. someone living in a war zone). This article is not meant to minimize the tragic impact of global violence, but to provide a better understanding of how to preserve wealth during geopolitical instability.

Investing During Times of War (as an Observer)

In 2011, Steven Pinker published an article in the Wall Street Journal titled Why Violence is Vanishing which demonstrated that global deaths attributable to war and large scale conflicts had been declining on a per-capita basis since the end of WWII: Though other analyses have found that the number of interstate conflicts have actually increased since WWII, these conflicts have been less deadly than the World Wars that preceded them. Due to this general decline in global violence, most people who invest during times of war in the future will probably be investing as observers not participants of war. Even in the United States, which has been involved in numerous conflicts since the early 1900s, the vast majority of its populous have been observers of war as well. Given this, it is also likely that you will be investing as an observer of war too. As an observer, you don't need to worry about the impact of war on your community or your immediate safety, but you do need to worry about how to preserve your wealth during a period of instability. So, let's take a look at how some of the major asset classes perform during war time. If we were to compare the median annualized return on U.S. stocks and U.S. bonds (10-Year Treasuries) during peacetime and wartime since 1900, we would see that both tend to underperform during periods of global war (e.g. WWI & WWII): Chart of real US stock and bond returns during war and peacetime going back to 1900 (for WWI and WWII only). Even if we were to include the next two largest U.S. conflicts (the Korean War and the Vietnam War), we would still see underperformance by U.S. stocks and U.S. bonds during wartime: Chart of real US stock and bond returns during war and peacetime going back to 1900 (for WWI, WWII, Korea, and Vietnam). In particular, both U.S. stocks and U.S. bonds had a median annualized real return that was ~5% lower during wartime than during peacetime. More importantly, the difference in the average return between wartime and peacetime was statistically significant for U.S. bonds at the 1% level, but not for U.S. stocks. What is the cause of this wartime underperformance? Mostly higher inflation.  As you can see in the chart below, inflation (CPI) tends to run about 3% higher (on average) during wartime than during peacetime [Note: This difference is statistically significant at the 1% level]: Chart showing CPI during war and peacetime in the US since 1900. Given this information, if the U.S. were to enter into another war in the near future, it seems likely that inflation would ramp back up due to increased government spending. Therefore, we can infer that investing during wartime is mostly an exercise in investing during periods of high inflation. And the best assets to own during periods of high inflation are overwhelming stocks and real estate: Table showing real asset class returns from 1972-2021. From this table you can see that U.S. stocks ("S&P 500"), real estate investment trusts ("REIT"), and international stocks are the best asset classes to own regardless of what is going on with inflation. You could even argue that U.S. corporate bonds are a great asset class to consider owning today given their higher yields and lower risk profile compared to stocks and REITs. This is the exact argument that Howard Marks made last week in his follow up to his Sea Change memo (emphasis his):
In early 2022, high yield bonds (for example) yielded in the 4% range – not a very useful return.  Today, they yield more than 8%, meaning these bonds have the potential to make a great contribution to portfolio results. The same is generally true across the entire spectrum of non-investment grade credit...Unless there are serious holes in my logic, I believe significant reallocation of capital toward credit is warranted.
I don't disagree with Marks' logic, however, if war comes and inflation is higher than expected, than all fixed income instruments (including high yield bonds) will get crushed. You can see this clearly if you were to examine the real median calendar year returns of all asset classes (from 1972-2021) when inflation exceeds 4%: Table showing real asset class returns from 1972-2021 when inflation exceeds 4% in a calendar year. No longer does fixed income look particularly attractive (even with today's higher yields) in a high inflation environment. This doesn't mean you shouldn't own fixed income today, only that high inflation is an ongoing risk, especially for those bonds with longer maturities. After reviewing the data on asset class returns, the evidence suggests that you should own equities, real estate, and short-duration fixed income instruments if you want to preserve your wealth during periods of international conflict. But don't just take my word for it. Barton Biggs, the author of Wealth, War, & Wisdom, concluded his wonderful book on the same topic with: 
In my considered but not necessarily correct opinion, a family or individual should have 75% of its wealth in equity investments. A century of history validates equity as the principal, but not the only, place to be. 
Unfortunately, if you came to this article wondering what kinds of equities to own during wartime, than you will need to go elsewhere. Not only is the data on this difficult to find historically, but shifting your equity portfolio in and out of defensive or energy stocks based on news headlines is not something I would recommend. Following such a strategy is akin to stock picking and marketing timing, both topics I've opined on previously (here and here). To sum it up, investing during times of war as an observer boils down to managing risks—particularly, inflation risk. Stocks, real estate, and short duration bonds are a great place to invest to counteract this, however, you will also need to remain disciplined to stay the course during this difficult time. Now that we've looked at investing during times of war as an observer, let's tackle the more difficult task of investing during wartime as a participant.

Investing During Times of War (as a Participant)

If you find yourself living in a country that is undergoing an active war, realize that wealth preservation will be low on your priority list. Finding food, clean drinking water, and keeping you and your loved ones safe will outweigh everything else.  With that being said, the best ways to hedge against the risk of war in your locality come down to asset portability and geographic diversity. Let's look at each of these in turn:
  • Asset Portability: When it comes to preserving wealth during times of conflict, your best bet is to own assets that are portable. You want to be able to take your wealth with you, wherever you go. As important as stocks and real estate are to building wealth during wartime, they won't be able to help you much if you can't access them. Stock exchange shutdowns and land confiscation are both common occurrences during wartime that could evaporate your wealth in a hurry. Therefore, if you want to make your wealth more portable, consider the following:
      • Precious metals: Owning gold, silver, and other kinds of precious metals as bullion or coins are an easy way to make your wealth portable in the event you need to flee quickly.
      • Fine jewelry/diamonds: In addition to metals, jewelry and diamonds can make for a great portable wealth preserver as these items tend to be smaller and more discreet than larger bullion. 
      • Cryptocurrency in a cold wallet: Knowing the seed phrase to a cryptocurrency wallet that you control is arguably the most portable wealth ever invented. Unlike any other portable asset mentioned thus far, you can have access to a technically unlimited amount of cryptocurrency wallet just by memorizing a set of words. And, unless someone knows your seed phrase, no one can take this wealth from you.
    • Downsides: Unfortunately, the risk of having portable wealth is that it is very easy for someone else to take it from you even if you aren't in a war. Jewelry and previous metals are both easy targets for theft as is cryptocurrency if you aren't careful about your seed phrase. In addition, moving lots of wealth across international borders without going through the proper procedures is illegal in many circumstances. While preserving wealth is important, keeping yourself out of prison is even more so.
    • Other considerations: The last, and arguably the most portable asset you should consider investing in is—yourself. Unlike all of the assets mentioned above, no one has the ability to take your knowledge away from you. While the knowledge you have won't be as valuable in every location and under every circumstance, it's better to have it than not have it. As Barton Biggs concluded in Wealth, War, and Wisdom, "Perhaps brains or a skill are the most portable and best wealth preserver."
  • Geographic Diversity: If you can't make your assets more portable, another option is to spread them out geographically before the onset of a crisis. A few options for doing this include:
      • Owning a safe haven/farm: Having a location that you can hide out in for a period of months (or even years) during wartime could be the difference between life and death. Whether that means having a country home or a remote farm that has access to food, owning a safe haven away from the areas of primary conflict can be of great use.
        • The downside to owning a safe haven is that they are very easy to confiscate once discovered. Many individuals learned this the hard way during WWII as the Nazis looted their way across Europe.
      • Having a foreign bank account: If you don't want to invest in a safe haven, another option is to have some money in a foreign bank account that you can easily access after you escape your home country. Unfortunately, opening a foreign bank account is easier said than done. Many countries have strict regulatory requirements that you will need to meet to open a bank account. In addition, if you open a foreign bank account in a country with an unstable banking system, there is no guarantee that your money will be safe there.
    • Downsides: While owning assets that are geographically diverse can help with wealth preservation, the difficulty in following this strategy is being able to escape your home country in the first place. While geographic asset diversity is a sign of planning ahead, making sure you have an escape plan in the event of a war is equally important.
    • Other considerations: How much of your assets should you consider investing into a safe haven or foreign bank account? Barton Biggs suggested 5%-10%. My recommendation is directionally similar—enough to start over. Fleeing your home country due to war is a traumatizing event regardless of what happens to your wealth. Surviving such an ordeal and having the ability to start anew, even if it means losing 90% of what you've saved, is still a gift in and of itself. Don't worry about what you lost, focus on what you saved.
Regardless of what strategy you choose to follow during times of conflict, realize that none of the proposals mentioned above are foolproof. As Barton Biggs ultimately concluded about wealth preservation during wartime:
There are no easy solutions or conclusions as to the best way to preserve or enhance wealth. If you have your wealth in a country that is conquered, occupied, or suffers an ecological or technological disaster, you are going to suffer immense losses unless you have escaped to a safe haven well in advance of the hostilities.
Preparing for the financial impact of war is fraught with uncertainty. The strategies mentioned above, from asset portability to geographic diversity, are about minimizing these uncertainties rather than eliminating them. Understand that during a war, the situation evolves rapidly and what works today may not work tomorrow. In the end, while we can't predict what will happen during wartime, we can strive to be as prepared as possible if it ever arrives.

The Bottom Line

War is unpredictable and devastating, making wealth preservation during such times a secondary concern at best. However, if you're looking for ways to safeguard your financial future in the face of conflict, remember—asset portability and geographic diversity are key. You want to move a portion of your assets before conflict erupts or be able to move them if it ever does. For those not directly facing conflict, you should focus your investments on those assets that do well during periods of higher inflation since inflation tends to be higher during wartime. Historically this meant investing in global equities, real estate, and short-term bonds, however, the future may not necessarily be like the past. While no one can guarantee the safety of your wealth during wartime, the principles above can help guide you in making hard choices during extremely difficult circumstances. Let us just hope that you never have to use them. Lastly, my heart goes out to the millions of innocent civilians that have been impacted by the recent conflict in Israel. Thank you for reading. If you liked this post, consider signing up for my newsletter or checking out my prior work in e-book form. This is post 368. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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16 hours ago

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March 9, 2024

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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1 day ago

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March 8, 2024

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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March 8, 2024

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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