European Wars and US Portfolios – the keep the money at home hypothesis

As the Russian/Ukraine war evolves, American investors need a clear strategy for their portfolios. The first question for investors is, of course, do I need to adjust my portfolio to reflect the war. For a typical individual’s portfolio, the short answer is no. Specific war time adjustments are not generally required. So do not sell all your stocks and move to cash. The reason is simple. America, like other major nations, has been in nearly constant war for a century. As a result, American firms and governments have implicitly already adjusted to war. At least the average war.

Portfolio allocations in this time also include another level of complexity. Crypto currencies are a growing asset class for individuals and companies. Cryptocurrencies are an especially important concern for young investors. Crypto is functioning like a risk asset, falling as war news increases. It is international, so there is no keeping the money at home. All one can do is hold less of it. It has not been the inflation hedge that was hoped for, and inflation is, at this point, the greatest threat from this European war. But it is a war of a particular type, and the risks are large.

We have been warned

The Russian/Ukraine war is a particular type of war—it is a European war. These wars have had an especially ruinous history for the world and need special consideration. In these wars the rule for individuals and corporations is keep the money at home until the dust settles.

When the idea of the United States was formed in the 18th century, a group of the founding members of the revolution produced a set of papers, which were published in New York City. One of these papers was the product of John Jay. He argued that the country should not give other countries a reason to attack us, and that we should not put ourselves in harm’s way.

John Jay would have known that we needed to balance the benefits of European military alliances which have helped keep the peace in Europe since the end of World War II, like NATO, against his warnings to stay out of harm’s way. The alliances themselves invite the US to be deeply and immediately immersed in European conflicts.

The Federalist papers are especially relevant to our current situation with Russia. The papers discuss the causes of war for monarchs. The glory, ambition and revenge of a dictator are all at the core of the Russian motives, and not the needs of the people themselves. And I quote from John Jay,

“. . . absolute monarchs will often make war when their nations are to get nothing by it, but for the purposes and objects merely personal, such as thirst for military glory, revenge for personal affronts, ambition, or private compacts to aggrandize or support their particular families or partisans. These and a variety of other motives, which affect only the mind of the sovereign, often lead him to engage in wars not sanctified by justice or the voice and interests of his people.” [1]

The nature of dictators seems constant over the years

There is more danger in this war than most wars. The European nature of this conflict means that investors need to be especially cautious. European wars have long been pernicious for us, embroiling us in world wars. The elements of a world war are emerging now just as they did almost a hundred years ago when there was a war in Europe that preceded the full-blown World War II.

Today Russia is aligned with a formidable Asian foe, China. This creates the distinct possibility of a two front war, possibly a World War. If this happens, domestic asset classes would then go to a very heavy overweight indeed.

Crypto and the war

The combination of the stock market correction and the Russia/Ukraine War provide an important test for the blockchain Cryptocurrencies. A currency performs a variety of functions. It is a standard for valuating payments now and in the future, a medium of exchange, and a store of wealth. A currency operates like a dollar or euro.

At this point, crypto currencies have acted like risk assets and not a standard measure of value. On the positive side, crypto has operated as a medium of exchange, allowing assets to be bought and sold. But as a store of value and measure of value, its volatility suggests that it has failed basic currency functions.

In fact, this conflict may become a serious drag on the adoption of cryptocurrency. The criminality in cryptocurrencies is reported on an almost daily basis. Crypto is ripe with state sponsored theft. Russia is at the heart of the ransomware industry. Russia and Iran as well as North Korea have used cryptocurrency to thwart US sanctions. All this suggests that the Russia/Ukraine war will intensify the regulation of cryptocurrency in the US. This will be another negative for the market, depressing prices.

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[1] Jay, John, The Federalist Series, “FEDERALIST NO. 4: Concerning Dangers From Foreign Force and Influence,” Independent Journal, November 7, 1787.