Listen to Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management, analyze the global economic and market uncertainties created by the Russia-Ukraine war on Westwood One Radio.
Read below for a full transcript of the conversation.
Speaker 1:
We’ve all noticed higher gas prices and other cost increases since Russia’s invasion of Ukraine a month ago. We thought now would be a good time to check in on that, to see where we stand, and here to help us do it is Christopher Wolfe, Chief Investment Officer for First Republic Private Wealth Management. Christopher, good morning. Thanks for being with us.
Speaker 2:
Thank you.
Speaker 1:
So we’re well over a month now with the war in Ukraine, which also means that the impacts are being felt globally now for well over four weeks. Where do we stand big picture as far as the economy goes, first in the U.S. and then around the world?
Speaker 2:
Well, I think a couple of things. First for consumers, we probably have a period of higher inflation fueled by higher energy prices and higher food prices too. If you didn’t know it, Ukraine and Russia combined are worth about a quarter of the world’s wheat exports, according to recent data. So if you’re having a war, you’re probably not planting and that could be disrupted, so higher energy and food prices are one for consumers. That’s gonna last a while. I think for investors, what it’s meant is a lot more uncertainty about what the war means for markets, for commodity prices. What’s the central bank, the Fed, gonna do? Are they gonna raise rates faster or slower? Meanwhile, you have inflation moving pretty strongly. So those things are all part of the new calculus for investors.
Speaker 1:
Is there any point where we kind of settle into the uncertainty, if that makes any sense, just knowing that it’s going to be uncertain for a while compared to actually transitioning to maybe another phase? Is that where we are, and what does that look like exactly?
Speaker 2:
Markets don’t really settle into phases. I appreciate this sentiment. What I think we’ve been in, though, is, maybe you’re getting at this, is an information vacuum. So the first quarter is almost over. Companies will typically come out in April and tell everyone what they did in the first three months of the year. And they usually offer a little bit of guidance. “Hey, it’s gonna look better in the second quarter or the third quarter.” And without that kind of information, I think investors are just being buffeted by the news out of Russia, the news out of Ukraine, the news out of all sorts of places, you know, looking for any little bit of hope that something will be resolved. And make no mistake about it, if the war ended tomorrow, I think the stock market would rally pretty strongly, but that would reveal “Hey, where are the fundamentals for this market?” And that’s a little bit more questionable.
Speaker 1:
Yeah, absolutely. Now these impacts are being felt here, but they’re also being felt in Russia and in Eastern Europe as well. Can you dive into that a little bit for us? How’s it being felt over there?
Speaker 2:
Much worse than it is here. Relatively speaking, the U.S. economy is somewhat closed. I think you’ve heard at this point that Europe, broadly speaking, depends heavily on Russian energy exports, particularly Germany, which depends very highly on Russian natural gas. Now they’ve recently signed a deal with the United States. It’s gonna take a long time, though, to get all that natural gas in the U.S. into ships and into container ports and ultimately LNG terminals, which aren’t even built yet in Germany, to make all of this work. So, as I mentioned earlier, this is likely to last for a while. I think the odds right now of Europe heading into a recession in this year are quite high, north of 50%, given that energy prices and food prices, specifically in Europe, are sky-high right now. And they’re running into situations of stockouts. So that creates, I think, additional pressure on the economy and on most of the consumers in Europe. So think a recession’s in the cards.
Speaker 1:
We’re with Christopher Wolfe of First Republic Private Wealth Management this morning on First Light. And now I wanna get into energy, grains, metals. These are all areas that are being impacted here. Is this going to continue for these main industries? Or is this going to expand to other industries as this goes on, or are those the three that are being impacted the most?
Speaker 2:
Well, those three are being impacted the most. I think you’re right on there. But the idea here is that those three are what are called, you know, crude commodities. They’re usually inputs into other things. You need energy, for example, to process food, you know, you need energy to do other things. And so if the cost of energy moves up, then the rest of the costs tend to move with them. And that’s really indicating that costs are starting to creep into the structure of U.S. corporations, for example, and as costs creep into the structure, then companies are going to want to start to raise prices. And I think that’s really where you start to see these impacts take hold. So it would be wonderful if oil prices came down $30 or $40 a barrel. In fact, we think there’s about that much of a war premium in oil right now, but given what we’re seeing out of Ukraine and Russia, it seems unlikely that we’ll have an energy-reducing scenario anytime in the very near future. So I think what we’re set for is higher than expected energy prices. That means costs all throughout the system are likely to be higher than expected, and we’re gonna see these prices last well into the summer.
Speaker 1:
Now, Christopher, before we let you go, I did wanna dive into one thing, and gas prices have really been the focus of people in America because that’s one way that we’ve been impacted the most on this. What’s happening on that front?
Speaker 2:
So with respect to gasoline, a couple of things are going on. Number one is you’re coming out of the winter months. So less demand for heating oil and crude oil to be refined into heating oil, to help heat homes, primarily in the Northeast. You’re also having refiners step up their capacity to take oil and actually turn it into gasoline. There was some talk about releasing a little bit more from the strategic petroleum reserve to get more oil in the system. And I think also consumers are responding, you know, at some level, brow 110, 120, at least on oil. What that tends to do is what economists call is demand destruction. It’s so high that people will drive a little bit less. And that seems to be the case. People moderating their driving. Now there’s one other wild card here and that’s really that the work-from-home movement, everything that COVID has created in this economy means that folks are maybe living in areas where they don’t need to travel as much. And so part of that change in demand, which we don’t have the full picture on yet, is also, I think, the reason that we haven’t seen gas prices move to $7 or $8 or $9 across the country.
Speaker 1:
A lot of direct answers there, Christopher, but the frustrating thing is it is so uncertain and ever changing. So we appreciate you walking us through it.
Speaker 2:
All right. Thank you.
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