An exogenous variable

Not 48 days ago, I wrote the following in our annual letter to clients and friends:

“In general, I think it most likely that in the coming year, (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system with some resultant increase in interest rates, (e) inflation subsides somewhat, and (f) barring some other exogenous variable – which we can never really do – equity values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they’ve been soaring since the market trough of March 2020…Please don’t mistake this for a forecast. [If it’s wrong] my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we’ve made, and not at all by current events (emphasis added).”

Exogenous means the variable or the event is coming from outside.

Russia/Ukraine is the exogenous variable du jour. The investment policy of goal-focused, plan-driven, long-term stock investors, like you and I, should be unaffected by it.

That concludes this memo’s core message; everything else is commentary.

Under the heading of commentary:

(1) The Russia/Ukraine event has nothing to do with “democracy.” It has to do with energy, which is the lifeblood of the Russian kleptocracy. Russia supplies 40% of Europe’s heating fuel, in the form of natural gas. One of the two aging pipelines through which the gas is transmitted runs through Ukraine, which had lately evinced a growing yearning for increased ties to the West. Putin could never allow this. (See Lukas Alpert’s essay on MarketWatch.)

(2) At around 4,100, the S&P 500 has experienced a drawdown about equal to its average since 1980.

(3) At the risk of making a political statement: A great deal of good can come out of all this, if and to the extent that it leads both the United States and Europe to a significant reappraisal of their respective energy policies, to the detriment of Putin’s Russia.

My thoughts and heart are with the people of Ukraine and our US military personnel deployed in Eastern Europe.