Panic Journal Russia/Ukraine edition Part 3

The war

The war is now going on for more than a month. Every other day there are rumors that progress has been made with regard to negotiations and the Russian army is failing or withdrawing, but the bombings are going on and more and more Ukrainians are fleeing (~4mn at the time of writing).

In contrast, the major stock market indices, in particular the US indices but also the DAX are at the same level or even higher now than before the invasion. BTFD has worked and again and these days “anything is good for stocks” seems to be the only motto.

One explanation that I have read is that Russia and Ukraine are only 2% of Global GDP, so a “loss” of these countries is no big deal. Personally, I do think that this is not a very useful number. Russian oil and gas is powering a significant amount of European (and Global) GDP. A supply disruption from Russian oil and gas would impact a much larger share of GDP globally and might make Covid-19 supply chain disruption like a toddler party. But the oil and gas is still flowing, so why worry ?

Just a few days ago, the CEO of BASF gave an interview warning against a full embargo against Russia, because it will “destroy the German economy”. He was stating the obvious, but especially BASF in my opinion shares a lot of responsibility for the dependency on Russian gas.

As for the endgame: As much as I hope for a quick, clean victory for Ukraine, I do think that this is the most unlikely scenario. Russia and Putin cannot afford to lose which is also the essence of an interview with one of Putin’s former advisors.

Tunnel vision

One interesting aspect in this whole mess is to see how some investors are digging themselves deeper and deeper into a hole. Especially some investors who thought Russian stocks were a great idea before the war, are now trying to blame each and everyone for their losses (mostly the US or the Ukraine for not giving up etc.) instead of blaming themselves buying stuff that they did not understand or where the miscalculated the risks. Sad to see, but it should be a reminder that conviction is important, but realizing and acknowledging mistakes is even more so

Macro: Don’t look back

As I mentioned a couple of times, I am not a macro guy. However I do look at general macro trends from time to time as I do think a general understanding is required. What worries me currently is the fact that we are in an environment that at least I have never experienced before as an investor, despite having bought my first stock 35 years ago (at a VERY young age).

The world is just coming out from a pandemic (with China still somehow in it) , inflation is at levels that we have seen only 40-50 years ago and still rising, Central Banks are still in “unconventional support mode” with zero or below zero interest rates, supply chains are still strained, in many economies there seems to be full employment and Government debt is higher than it was since WWII. On top of that we still have wild speculation, for instance in Cryptoland or as another example, in Venture Capital, for instance with a 60 mn USD Series A funding round to bring back wooly Mammoths.

In such a situation, I don’t think it makes a lot of sense to look back in history and try to predict what is coming next by looking at the last 6 military conflicts or the last time inflation went up etc.

Honestly, in my opinion no one has an idea what is going to happen the next 2-3 years but very few investors have the luxury to be able to admit to this. Maybe stocks will do OK, but maybe not. Honestly, when looking in my portfolio, I do not really know how my portfolio companies will perform in absolute terms if inflation remains at 7-8% or even more and if we see much bigger supply chain disruptions.

Of course, well managed companies will do relatively better, but the big question is: relative to what ?

However I bet that you won’t hear this from a lot of other money managers. their job is to pretend to know, otherwise why would people pay them so much money.

Return expectations revisited (inflation)

I have written a couple of times that return expectations should be “anchored” on the risk free rate and then one should assume a return of maybe 4-6% above that for equities in the long run.

Wit inflation now running at 5-8% both Europe and the US, the question is: Will stocks provide a “real return” above inflation or not ? Most stock investors these days seem to believe so and maybe this becomes a self fulfilling prophecy. However one should be carefull, because inmost high inflation countries, stocks usually don’t do that well when measured in “hard” currency.

Maybe it is time to revisit all the Buffet letters from the 1970ies to learn about inflation, although business models have changed. Very few of today’s investors have any experience, myself included. However many money managers will gladly tell you what will happen. My personal take on inflation is that one should not assume that every company automatically can pass through costs and achieve “real” equity returns. Those that can’t pass on the costs, will be very bad investments.

Overall, I do think that now is the time to think a little bit more about (global and sectoral) diversification than I did before.

 A few thoughts on Energy

The longer the war goes, the more final it will become that Europe and especially Germany, Italy, Austria and Eastern Europe will have to stop to rely on cheap Russian pipeline gas as the (short term) price of energy is not the only thing to worry about.

Make no mistake, the owners of the hundreds of billions (or trillions) of European Natural Gas infrastructure assets will fight extremely hard to keep the status quo despite being relatively quiet at the moment. The landed a big lobbying success with the German Government “pre Ukraine” by getting included into the EU “green taxonomy” but I guess that will not help them that much.

Especially the Germans are now extremely traumatized and will do everything to have alternatives. The days where one would just go for the cheapest option (Russian pipeline gas) are over.

Short term, LNG will need to play a much bigger role. As far as I understand, the European Gas Grid has more capacity to accept LNG and Germany will build terminals very soon or hire floating ones.

However being dependent on Qatari or Saudi or US LNG is clearly not the endgame. It is clearly better because one can diversify sourcing, but still one depends on others.

The easiest short term fix of course would be trying to save energy but for one reason or the other, this is as unpopular as always.

Nuclear Energy

A lot of pundits claim that nuclear is the only other option because it is cheap and offers baseload power. I am pretty neutral myself on nuclear but one should not forget a few issues:

  1. It takes extremely long time to build an operational nuclear power plant. For instance even in a largely unpopulated country like Finland, the latest Nuclear Power plant only came on stream with a 13 year (!!!) delay, and the same seems to have happened in France and the UK. Building an new Nuclear power plant in Germany will be super hard. Germany is very densely populated and the broad population opposes most new infrastructure, be it wind mills or High Voltage connections.  Finding a new place for a new Nuclear Power plant will be VERY hard and it will take very long time. We don’t have that time.
  2. Extending the the life of the soon to be closed reactors will help a little, but again, the big problem is heating and industrial uses of gas and not electricity generation
  3. Nuclear, if all costs are factored in (e.g. non-subsidized insurance), is quite expensive, Uranium is mined in problematic countries as weill (Kazakhstan, thank you very much) and it is still not clear what to do with the nuclear waste.
  4. Big central Nuclear Power plants are a security risk themselves. Cyberwar or just outages can create big problems. France, which is the Nuclear poster child in Europe, suffers every winter from problems because a lot of the reactors are off line and the grid is not stable. Due to necessary maintenance, significant over capacity is needed which adds to cost.
  5. In any case, one still needs to fully electrify the economy in order to gain the full benefits which in itself is quite an effort.

Overall, without being “anti nuclear”, I do not think that Nuclear power plants are the big and quick fix for the current problem that some people claim. They might help a little bit but the problem is much bigger.

One big mistake was clearly not develop nuclear technology any further over the past 40 years.

Government / Central Bank intervention & Vaccines

During the Pandemic, in my opinion 2 factors contributed to the relatively swift rebound of stock markets: The rapid development of the vaccines and the extremely active roles of Governments and Central Banks that bailed out everyone.

This time, it will be a lot harder. With inflation rampaging how it is now, Central banks would actually need to start tightening sooner than later before inflation gets totally out of hands and additional Government spending will only increase inflation pressures.

And unfortunately, there won’t be a vaccine against the Russian or inflation.

The upside

It is currently difficult to see a lot of upside, however two points could be made:

First, for the time being, the West seems to be cooperating better than everyone thought. Maybe even for the European Union, this could maybe the catalyst that forges the countries together instead of slowly drifting apart.

Second, maybe this is the required push to really transform the economy into a more sustainable way of doing things instead of burning all the fossil fuels in this (and maybe the next) generation.


As always, I try to remain a cautious optimist, but this time around, the risks for a very unfavorable outcome look significant. I still try to avoid any kind of market timing, but one clearly needs to make sure that oneself is psychologically prepared to go through a very rough time for some time. I will also need to better understand how my portfolio companies are exposed to higher inflation.


  • One thing I’ve not seen covered anywhere, which seems at least to me to be extremely important.

    We have all time high debt across the financial system. This means that the linkage between increase in interest rates and reduction in consumption is the most sensitive it has ever been. And therefore the central banks have an extremely sensitive dial – turn rates up too high and they cause a deep recession. Don’t turn up rates and they cause a run-away inflation spiral. It’s entirely possible that debt is now so high that the system is uncontrollable – because the sensitivity of the dial is such that there is no middle ground. And if that’s the case then a policy “mistake” is inevitable – and it’s almost a 50/50 chance which type of mistake it turns out to be.

    As Buffett/Munger say, we live in very interesting times….

  • Wow, I agree with basically everything, but that makes it difficult. What is one to do? If you sell down investments and raise cash you pay a stiff price if inflation is 7%. On the other hand upside feels very limited and downside like falling off a cliff. I am quite good at holding, but I am starting to need a panic journal myself!

    • Inflation linked government bonds return a slightly negative real rate (to maturity), which looks better than it used to…

  • First of all, a big thank you again for this blog. I am learning an incredible amount here. I think permanently higher inflation is now inevitable. I’m also thinking right now about which sectors are best protected from inflation. Since inflation is energy price driven, all companies that can provide energy should benefit. Especially companies that produce wind and solar energy should currently benefit strongly, since these forms of energy are comparatively cheap, but on the revenue side receive an electricity price dominated by the gas price.
    In this respect, your portfolio does not look so bad to me.
    I wonder how much Nabaltec will suffer from the high gas prices. Shouldn’t you perhaps question your investment thesis there under the new circumstances?

  • I think, speaking from US financial market perspective and has someone who has lived through many cycles, the big question here is whether Russian and or other defaults will roil the credit markets. So far these markets are holding up nicely; risk on risk off seems to be a function of credit access/non access. IMHO

  • Thank you very much for this. Especially the part about Nuclear Energy let me rethink my position.

    With regard to inflation I wonder, if it will repeat the 70s or might pose less of a problem this time. Clearly I agree, that deglobalisation and decarbonization will impact raw material prices. That is not only energy but especially some important metals, e.g. copper, nickel and lithium. As companies will try to pass through higher input cost this will lead to inflation. On the other hand it was mainly the interaction of wages and prices during the 70s, so there is a chance of this spiral not happening again. If governments can support the poorest, i.e. the people that can not absorb higher prices on their own, we might learn to live with inflation rates above 2%.

  • Hi,

    First of all, I´m a huge fan of your blog.

    Regarding all this energy problem, and being myself an european, I believe it´s our fault and we are paying the price.

    Europe put itself in the “hands” of other countries in terms of energy. We like to have moral ground in terms of “green energy stuff”, but then, we get all our raw materials (gas, coal, etc) from other places in the world.
    It will happen again after this War is over, because the LNG will not come form the sky.

    In terms of nuclear I have a different view. I believe nuclear can/should be part of the electricity mix. In Finland they are doing it for quite some time and with good results. On the other hand I don´t believe big nuclear plants are the answer (i tilt towards SMR).

    The nuclear waste is a concern (how and where to store it) for all of us. Again, in Finland they have a way to do it, but the question remains, “is it the best way”? I belive it is a starting point that´s already way ahead and that can be improved in order to minimize the risks.


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