Before I get to the topic at hand, tax season is over for most of us! And while many of you would prefer to leave the topic of taxes in the rearview mirror, it’s an excellent time to see your Financial Advisor and CPA, and create your 2022 and 2023 tax plans. (Don’t have one? Click HERE to talk to an OFG CPA!) Now is not the time to create your future tax plan. Instead of throwing those documents into a shoebox, grab the opportunity to get on track to help ensure you aren’t overpaying Uncle Sam year after year.

Now on to the topic I want to focus on: The geopolitical uncertainty we have in the world today. I must admit that I never thought I’d see inflation rise like we did in the late 70s and the early 80s. We’ve experienced growth, and expansion. Inflation remained in check for the most part.I wouldn’t have predicted that we would see the type of inflation we are experiencing. The problem is that it looks like inflation is going to be  here for a while. James Bullard, President of the Federal Reserve Bank of St. Louis, recently said that he wants a 3.5% increase in the federal funds rate in 2022. Another article explained that the 30-year mortgage rate is 6.75%. We haven’t seen 6.75% on mortgages since the pre-dot com bubble.

We’re not in a recession yet, but we are in the throes of the possibility of a recession. Can the Federal Reserve engineer a soft landing? If they were on top of it, we wouldn’t be as extended as we currently are. This could mean that we’re on course to have a recession.  There is an index called the Geopolitical Risk Index or the GPR Index. (Higher geopolitical risk forewarns of lower investment and employment and corresponds with higher disaster probability and larger downside risks.) The GPR Index has only been higher twice in the last 30+ years. One incidence occurred in August of 1990 with the invasion of Kuwait. The other occurred at the beginning of the Iraqi War in March of 2003. Since current  numbers are so elevated, it’s not surprising  that we are experiencing a lot of geopolitical uncertainty. While this index wasn’t one that I was aware of until recently, it makes perfect sense for us to have a tool to understand the implications of what’s going on in the world and the effects that it may have on the economy and the markets.

Let’s talk about the Russia/Ukraine war. What’s going on here? In my opinion, Russia is thinking about oil as an essential country asset. Off the coast of Ukraine and Armenia in the Black Sea, massive oil and natural gas reserves were discovered in 2012. Putin wants to control those resources for multiple reasons; Russia provides a lot of the oil and gas used by the European Union and Ukraine. Russia is also the second-largest producer of oil globally, and they have the largest proven natural gas reserves in the world. The revenues from the sale of these resources comprise approximately 50% of the Russian government’s budget, and 30% of the country’s GDP. That’s huge. Most of their natural gas is sold to the European Union countries, tending to  35% of the EU’s gas supply. Germany relies on Russia for 50% of its natural gas. 

Here’s the issue: A lot of that oil and gas runs through a series of complex pipelines. Most of those pipelines were running through Ukraine, costing the Russians billions of dollars in tariffs for the utilization of them.Russia attempted to build new pipelines called Nord Stream 1 and 2. The thought was that the Nord Stream pipeline would eventually eliminate the need to use the ones that pass through Ukraine. Economics come into play here because the profitability increases for Russia. If you consider the reserves around the Crimean Peninsula and the Black Sea, Ukraine could have become energy-independent while also becoming an energy exporter. Russia, of course, wants access to those reserves.

Back  home, the  new Administration took their first steps to “make good” on President Biden’s campaign promise to  take on Fossil Fuels. “I want you to just take a look… I want you to look into my eyes. I guarantee you; I guarantee you, we are going to end fossil fuel, and I am not going to cooperate with them.” An Executive Order issued in January 20, 2021 called ” Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis” began the Biden administrations’ environmental regulatory onslaught. The focus, designed to push the United States toward “Green” energy solutions and away form traditional US fossil fuel production.  

One casualty of these initiatives was the Keystone pipeline. While the Keystone Pipeline would not have immediately alleviated demand, the completion date should have been within 12 months. And remember, oil isn’t only used for gasoline, but heat, producing electricity, asphalt, plastics, and even time-release aspirin capsules. While the canceled pipeline won’t halt the transportation of oil, it may have to be transported by semi trucks or trains which may be more costly and not as efficient. Let’s face it, Biden’s green energy policies, combined with the pent-up demand and supply chain issues, exacerbated the inflationary pressures on the United States and the rest of the world. And now, with Russia’s invasion of Ukraine, oil prices have skyrocketed, and it may not end anytime soon.

You may be asking yourself what all this has to do with retirement. How will your financial portfolio hold up under different economic conditions? Without stress-testing your retirement plan, how do you know it will weather the storm? Contact Osiwala Financial Group and schedule a free, no-obligation conversation with one of our Advisors. It can be done by phone, in-office, or virtually by clicking HERE.