Special MLLG New Year Posting…. DANGER: 2022 Will Be An Annus Horribilis

This posting is unplanned. After formulating my investment plan for 2022, as I do at the beginning of each year, I decided to share my analysis with readers. As I reviewed the geopolitical, economic and political landscapes, it scared the hell out of me. It looks like 2022 will be an annus horribilis with a phantasmagoria of likely horrors.

Russia has massed 100,000 troops, poised for invasion, on the border of Ukraine. No one other than Putin knows his intentions. Perhaps he just wants to use this threat to exact major concessions. Either way, it is a bitter pill for the US and Europe. China is seriously threatening Taiwan but is unlikely to act until after the Beijing Olympics in February. If Putin or Xi ever intend to invade Ukraine and/or Taiwan, they will do so in 2022 when the US has its weakest leadership ever. Moreover, Putin is visiting Xi soon amidst increasing evidence of an entente forming between Russia and China.

The geopolitical horrors also include Iran and North Korea. Iran could race to develop nuclear weapons, threaten Israel and Saudi Arabia and foment terrorism throughout the Middle East. Kim Jung Un could invade South Korea using the same calculus as Putin and Xi. The greatest horror would be multiple threats materializing simultaneously, such as if attacks against Ukraine, Taiwan and South Korea were coordinated.

The greatest economic horror, by far, is inflation. The 7% inflation the US has experienced in recent months is backward looking. In coming months, I expect inflation in double-digits. Inflation savages not just your current income but also your investments. If you have managed to save say $1 million toward your retirement, you will need to have $1.1 million at the end of 2022 (assuming 10% inflation) just to stay even. Inflation will have cost you $100,000 in one year; that’s how pernicious it is.

And inflation is just the beginning. The longer and higher inflation goes unchecked, the more Draconian will be the correction needed to restore the status quo ante. Ultimately, the Fed will have to surge interest rates; the last time inflation was this high, rates skyrocketed to 21%. Taming inflation will result in a deep and prolonged recession which will cause the deficit to go thermonuclear. Tax collections will plunge and Biden will print trillions upon trillions of borrowed dollars – all in a futile attempt to end the recession and to salvage progressives’ tattered political prospects. As always, the worst suffering will be among the poor and the middle class.

One more thing is needed to complete the circle of our horrors – non compos mentis and feckless political leadership. Biden’s cognitive struggles are apparent to everyone including Putin, Xi, Kim and the ayatollahs. Other top US leaders have been selected based on identity, not competence, none more so than Kamala Harris, who got her big break in politics on her back. Their weakness and ineptitude was on full display in the departure from Afghanistan. Did I mention Biden wants to cut defense spending?

The Biden political horror show encompasses every issue: (1) Afghanistan with 60,000 yet to be evacuated; (2) rampant inflation; (3) lack of control over immigration and the border; (4) science-defying lockdowns, vaccine and mask mandates and school closures; (5) lawlessness, looting, bail elimination and non-prosecutions; (6) supply chain disruptions; (7) loss of US energy independence; (8) canceling US pipelines while approving Nord Stream 2; and (9) BBB’s $5+ trillion of added spending.

All the aforementioned horrors profoundly impact investing. Financial and retirement plans of Americans are being savaged by inflation and are subject to unknown and unknowable risks. FYI – I have actively invested for 50 years and owned an investment firm for 40 years. Following are the actions I have taken in the past few weeks.

I have moved my investments into a highly defensive posture. I now have over 70% of my investment assets in cash, cash equivalents and ultra short-term assets. Virtually all my fixed income (bonds) assets have durations of only one to two years. I have doubled my allocation to gold and commodities, the best inflation hedges. I want to be positioned to weather the coming apocalypse and to reinvest at or near the bottom.

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I take no pleasure whatsoever in any of this and hope I am wrong about 2022; but I call them as I see them. Worst of all, the horrors all are self inflicted and for the wrong reasons. Americans voted for the phlegmatic government they now have mainly because suburban women voted on the basis of personality rather than competence. They sowed the wind and soon we all will reap the whirlwind!

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