War & Stagflation? (TWTW Feb 28-Mar 4, 2022)

War & Stagflation? (TWTW Feb 28-Mar 4, 2022)

Definition of Stagflation:

Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.

Sounds familiar? (minus the high unemployment)?

Well … without getting into all of the implications of the horrific aggression underway against the Ukraine (which brought forward higher oil prices on supply concerns), we were already in an environment described by Ninepoint’s Eric Nuttall as a once in a lifetime investment opportunity when looking at the Energy space. Oil is through USD100 and according to Eric, demand destruction, the only way that we have a chance of seeing supply meet demand in coming years, is around USD140 a barrel. Look at Natural gas prices in Europe, and at the issue of energy security … and you’ll get it: we have an energy crisis on our hands. Unfortunately, we also have a much more concerning issue: a humanitarian crisis triggered by Russia’s assault on the Ukraine, and their blatant disregard for the laws of war (surprised – anyone? apparently we got a preview of this in Syria, courtesy of a famous red line remark that was NEVER ENFORCED 🙁 … Sad, all of this, and horrific. Pray the violence and bloodshed stop very soon!

On that Energy “opportunity of a lifetime” note, Eric and his firm are launching an Energy Income Fund / ETF that will be available as of Monday, March 7, 2022. To listen to a replay from Eric as far as what this fund’s objectives and strategy will be => Click HERE! respectively for the related press release,  click HERE!

The definition above speaks of an oil shock – which we had in the early seventies, as Arab Nations decided to jack up oil prices, resulting in massive line-ups at the gas stations in America, with pictures of the time featuring the massive American automobiles (not exactly fuel efficient). No Teslas back then … (On another note, US President Biden this past week snubbed Tesla in his State of the Union address, opting to praise both GM & Ford for investments in Electric vehicles … With Ford announcing it will split its company into an Electric vehicle company and the rest … presumably they’d love to get themselves some of that Tesla “Valutation” premium – would be my guess …).

Anyways, Eric continues to nail the essence of the thesis, as he has for now well over a year if not two:

  • Underinvestment;
  • rising consumption,
  • inability to switch off use (40% of use is non-transportation),
  • exhausted additional supply sources;
  • producer discipline on capex …


all of which = sustainably higher Oil prices, with massive cash flows for producers …

oh, and ESG – which inherently dictates moving away from “dirty oil” to address the environment … notwithstanding the world can’t move away from oil at the flick of a switch.

THAT – unfortunately … whether we call it an oil shock or something else, isn’t going to be very helpful in terms of monetary authorities upcoming campaign against inflation. AND, if that campaign is successful, on the one hand it most likely will significantly hit growth; on the other, it may even tip us into a recession.

and all of that was “pre” Russian murderous attack on the Ukraine, which … all but removes Russian barrels from the equation, as well as pushing a whole host of commodities higher, from grains to metals, to … you name it. All of which … (very?) inflationary … Ouch.

This of course, isn’t to mention the unspeakable news overnight on Thursday/Friday of the Russians attacking Europe’s largest Nuclear power plant … in … the Ukraine. So whether the West likes the idea or not, it seems quite clear that the Russians won’t stop at ANYTHING.

What will the West ultimately do that will be successful in putting a stop to this unacceptable act of unprovoked war? Hopefully the right thing. In the meantime, interesting to note today that Gold is moving higher, and that gold stocks are responding strongly to the upside to that move in the commodity (despite a wobbly stock market … which … typically can result in gold stocks actually getting hit first before rising … but here we have it …)

BTW – as of Saturday, latest news from Putin is that he considers the West’s actions already as an act of war … guess he is really trying to emasculate NATO … a NATO which on Friday ruled out Ukraine joining the Alliance (or was it Germany ruling it out?). No matter – this ugly conflict isn’t looking to be going away in a hurry …

Now, in terms of market action, another ugly week:

Latest weekly performance numbers:


  • Leadership now even more concentrated? ie Energy and Materials, with Financials taking a backseat on concerns about the economy, respectively flattening yield curve, and recession risks?
  • Gold – not shown here, but also ending most recent week on strength. Shelling a Nuclear powerplant I am guessing will do that
  • Defensive also showing some relative strength: Utes and Staples


  • Travel getting hit hard this past week
  • Blockchain continuing on very significant pullback in recent weeks
  • ARKK – another difficult week …
  • Cyber security – benefiting from war being waged on all fronts – including obviously hitting internet infrastructure etc
  • Decent recent performance on the part of Green Energy – presumably in recognition of the fact that theme will need to be looked at with even greater sense of urgency now … given need to address energy security & clean energy


  • Min Vol doing well, delivering on its mandate and key objective imo
  • Small caps – benefitting from significant Energy exposure
  • Canada obviously supported on a relative basis by Energy and Materials in particular

Year to date numbers:


  • Energy and Materials – from strength to strength of late, and unfortunately … the war not helping in terms of the outlook for inflation. This past week: Canadian Natural increased its dividend by … 28%
  • Tech – quite the pullback in relatively short order … When is it “safe” to wade in?


  • Themes … pretty much on sale across the board, with notable RS shown on the part of Cyber & 5 G themes
  • Travel – if/when political situation straightened out … (how is that possible at the moment a bit of a mystery …) presumably still to benefit from pent-up demand. In the meantime, sell-off in Airlines and Cruises this past week


  • Several “Factors” delivering market beating performance – boosted by a combination of Value, respectively Fundamentals, as well as sector exposure – notably Energy. More of that likely on the horizon …


  • BoC raised 25 bps; RBA opted not to
  • FED’s Powell in testimony to Senate suggesting 25 bps is what we should expect at 15/16/3 FOMC meeting
  • Tesla … snubbed by Biden during his SOTU speech, but apparently acknowledged subsequently
  • Musk … actually calling for oil production to be raised (to offset loss of Russian Oil access)
  • Macron talking to Putin over 90 minutes, and coming away with conviction that the worst was yet to come …
  • Aeroflot denied air space pretty much anywhere …
  • Switzerland sanctions Russia as well …
  • Russian equities and the Rubble crash – with Russian ETFs down what … 95% before being cease-traded/delisted …
  • Index providers MSCI Inc; S+P Global; and FTSE Russell all removing Russia from traditional indices …
  • All-in – rapidity of sanctions and their broad adoption likely coming as a surprise to the Russian Regime, as much as to many observers in the West
  • NATO denying Ukraine’s request for No-Fly zone (BTW is bombing / shelling a nuclear power plant not … a tad dangerous???)
  • Oil … up up and away?
  • Volatility – more ahead?

As far as data points for the ETF industry, I reviewed what happened across Vanguard’s offering mid-week – “As go January / February … so too 2022? –  noting that the flows are still tilting bullish, and that to the end of February, AUM after two months of negative market impact, were pretty much flat with EOY levels (Dec 31, 2021) on account of net in flows. I also noted in passing, that coincidentally, negative performance in Jan and Feb essentially added up to pretty much the same negative $ impact of AUM as what we saw in March 2020 with COVID-19 => Read more => click HERE!

For more granularity as to what has been going on of late, looking at the top and bottom 10 performing ETFs (across the BMO ETFs offering) to the end of February in my view is quite informative:

last month:

  • already before additional as the ramifications of the conflict become more obvious, Metals, Gold, and Energy dominated performance last month (with the invasion kicking in 24/2 evidently some of Feb’s numbers already factored that in …)
  • possibly surprising is the fact that Clean Energy has a strong month in February (again – implications of the need to move away from oil’s political “problems”? likely …)
  • China … continuing to compound on the negative returns side of the ledger … (What did they know … and when regarding Russia’s intentions toward the Ukraine?)
  • EM bonds … lost quite a bit of ground last month … (equity risk?)
  • US Quality – not spared of late
  • Innovation ETFs – also continuing under pressure


  • Further deterioration ahead for March, with prospect of higher rates, as well as heightened volatility in markets related to war in the Ukraine?
  • What “defensive” actions are you taking in your portfolios? Remember the old standbys: 1) have some cash; 2) review your asset allocation and look at going back to longer term strategic weights if you have strayed from them 3) look at position sizes, which is also a critical element 4) revisit the concept of time horizon, which is what gives you the ability to tolerate volatility / market setbacks in exchange for the market’s longer term potential to produce positive returns 4) consider the ramifications of the current environment and context, and whether anything has changed in such a way as warranting some repositioning or tweaking in your holdings …


  • all of that and … be careful out there!
  • and have as good a week-end as you can 🙂