• Sun. Jul 14th, 2024

How to Navigate Financial Opportunities During Wartime

Ukraine, Middle East, Pacific… : war is back. As conflicts multiply, what is the optimal financial strategy to get rich in times of war?

Bankers getting rich

Performance of assets during wartime

In recent years, the escalation of geopolitical tensions, illustrated by conflicts in Eastern Europe and the Middle East, has highlighted the volatility of global markets.

In this context, it is imperative that investors remain vigilant and protect their assets, their retirement capital, and their children’s inheritances in an environment of increased uncertainty.

Today, more than ever, it is essential for investors to be strategically positioned to navigate this turbulent period.

The question that arises then is: what asset allocations should investors consider in the face of increased geopolitical instability?

The investment environment in wartime

In times of war, two economic trends generally emerge: increased public spending and rising inflation.

Take the example of the US Civil War. Public spending increased to over 30% of GDP at the height of the war.

To put this spending into perspective, public debt stood at $65 million before the Civil War, but by the end of the war, it had exploded to $2.6 billion, a forty-fold increase.

This trend repeated during World War II, when public spending soared to over 100% of debt relative to GDP.

Governments generally finance their costly wars by printing money (devaluing their currency), borrowing, or raising taxes.

Increased public spending is one reason why inflation is the other commonly observed economic characteristic in times of war.

Besides increased public spending, war also leads to a fragmentation of global trade and disruptions in the global supply chain.

This fragmentation leads to rising prices for oil, gasoline, food, and other commodities, which in turn causes more persistent inflationary pressures.

War is back

The IMF recently showed how fragmentation has negatively impacted global trade and income growth since Russia’s invasion of Ukraine.

As we assess the economic landscape shaped by ongoing global conflicts, it is evident that we might face sustained inflationary pressures similar to those observed in past wartimes.

This situation is due to increased public spending and disruptions in global supply chains, further intensified by the fiscal strains of recent years.

Since the onset of the pandemic, the US has recorded its highest deficits since World War II: 15% of GDP in 2020 and 12.4% in 2021.

In 2024, the deficit is on track to exceed 6% of debt relative to GDP, approaching the level reached during the global financial crisis. The trend observed since the beginning of the century is unprecedented and alarming.

A worrying financial situation

With inflation rates regularly exceeding the 2% target set by the Federal Reserve and no reduction in public spending in sight, the financial landscape is likely set for persistent inflation.

Under these conditions, and given the severity of current international conflicts, unprecedented in decades, it is essential for investors to identify asset classes that have historically performed well under similar economic conditions.

Should one buy stocks?

While stocks are often considered a risky asset class, they have historically performed well during conflict periods.

US large-cap stocks have not only surpassed their long-term average returns during wars but also exhibited lower volatility.

This unexpected resilience suggests that significant public spending during wars can stimulate domestic markets by increasing corporate revenues and profits despite broader economic turbulence.

This trend was also observed during the recent Russian invasion. After the invasion, the stock market experienced a sharp decline. It then hit its lowest point a few months later, before reaching new all-time highs approximately two years later.

This historical resilience underscores the potential benefits of maintaining a well-diversified stock portfolio during wartime. It challenges the instinct to flee stocks during crises and instead advocates for enduring short-term volatility to achieve long-term gains.

Should one buy bonds?

Bonds are generally considered safe havens, but their performance during wartime seems to indicate otherwise.

During these periods, bonds tend to underperform relative to their long-term averages, primarily due to increased inflation.

In times of war, governments significantly increase their borrowing to fund military efforts, flooding the market with debt and diluting the value of bonds.

This increase in government borrowing can raise doubts about a country’s solvency, pushing yields up and bond prices down to attract investors.

Historically, there is a negative correlation between bonds and inflation. When inflation rises, bond yields often rise with it, causing bond prices to fall.

Periods of conflict present a substantial inflation risk for bondholders. Although bond investors receive the full principal and interest at maturity, these returns often do not keep pace with wartime inflation, decreasing the real value of the investment.

This is why bonds have historically performed poorly compared to their average performance in wartime.

The combination of increased borrowing, rising rates, and inflation creates significant headwinds for bonds during wartime, explaining why bonds generally underperform other asset classes.

Should one keep cash?

Wars are expensive. That’s why governments tend to spend heavily during times of conflict to fund the war effort.

This increase in spending often leads to a currency devaluation, posing a significant risk to cash-stored assets.

Under such circumstances, cash does not keep pace with inflation and loses purchasing power. In other words, the dollars that once provided stability will inevitably lose real value in a wartime inflationary environment.

Warren Buffett succinctly described this reality in an interview,

“The one thing we can be sure of is that if we get into a very major war, the value of money will go down. I mean, that’s happened in virtually every war that I’m aware of. So, the last thing you want to do is hold money during a war.”

Given this reality, investors must consider more resilient solutions than cash during times of geopolitical turmoil.

Should one buy bitcoin?

Recent events in Eastern Europe and the Middle East have propelled bitcoin into the spotlight as a new safe haven to protect against confiscation, censorship, and inflation during times of increased geopolitical tensions.

This narrative came to the fore when Western governments imposed sanctions on Russia after its invasion of Ukraine.

When banks closed, ATMs were emptied, and payment companies like Visa and Mastercard ceased operations, many Russian civilians turned to the only open monetary network available to them, Bitcoin, to transact with the outside world and flee their war-torn country with their wealth.

The same dynamic occurred on the other side of the battlefield, as Ukrainians tried to flee the war zone with their possessions.

In times of war, refugees typically have to leave quickly with only what they can carry. Fortunately for them, bitcoin is very portable and can be stored in a person’s head if needed.

This is why we saw bitcoin trading volumes skyrocket in Ukraine at the beginning of the war. On a number of Ukrainian exchanges, bitcoin traded at a premium of nearly 10% against the Ukrainian hryvnia.

Will bitcoiners get rich because of the war?

As geopolitical tensions intensified with the Russian invasion and escalation of conflicts in the Middle East, bitcoin’s price experienced significant fluctuations.

Initially, bitcoin’s value jumped by over 10% in the week following the invasion, driven by increased market anxiety. It then dropped by 40% over the following 12 months.

Despite these fluctuations, as geopolitical risks persisted, the demand for bitcoin continued to rise, eventually appreciating by 68% to reach new all-time highs.

As a relatively young asset, it remains to be seen whether bitcoin can serve as a safe haven in times of global conflict. For some, bitcoin remains a volatile risky asset, while for others, it serves as a lifeline to escape their war-torn countries.

Often dubbed“”digital gold,” bitcoin shares many attributes with traditional safe havens but with additional advantages suited to wartime conditions.

It is rare, hard to seize, and easy to move due to its digital nature. These characteristics are particularly attractive in inflationary wartime environments and help individuals maintain financial autonomy in unstable regions.

The test for bitcoin

The current geopolitical climate is a litmus test for bitcoin’s role as a reliable safe haven asset, resistant to inflation, confiscation, and censorship.

Given its performance in a context of rising geopolitical tensions, investors should strongly consider including bitcoin in a well-diversified portfolio to mitigate risks and enhance returns.

Market reactions in times of war and crisis are notoriously difficult to predict and uncertain. Each conflict or crisis occurs under different market conditions, but some trends consistently manifest.

Specifically, governments tend to increase their spending and global trade fragments, leading to sustained inflationary pressures.

Given the inflationary consequences of war, history advises caution towards traditional safe havens like cash and bonds. These assets may not effectively preserve capital during turbulent times.

Investors are instead encouraged to diversify into assets that have historically maintained or increased their value during inflationary periods: gold, bitcoin, and stocks, for example.

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Satosh

Chaque jour, j’essaie d’enrichir mes connaissances sur cette révolution qui permettra à l’humanité d’avancer dans sa conquête de liberté.


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