The War In Ukraine

Dear friends, family and clients,

The loss of life, liberty, and resources we are witnessing in Ukraine is truly heartbreaking.  Sadly, this is not an isolated event in history or even current day. Atrocities are also happening around the world in places such as Africa, Central and South America, and the Middle East. This is not to diminish the tragedy unfolding in Ukraine, but to give some context to what we all are reading, watching, and feeling.

Since the beginning of humans spreading across the planet, the region of Ukraine has been situated on the crossroads of humanity. Laying in one of the junctions between Europe and Asia, aside the Black Sea and the Sea of Azov and part of the Eurasian Steppe, it was and is an important migration and trade route. Because of this location, wars have been fought for its control since before Alexander the Great. The list of empires, historical figures, country states and religions that have fought over the region is breathtaking. Romans, Vikings, Mongols, the French under Napoleon, the Ottoman Empire, the Poland-Lithuanian Empire, Prussia, Austria-Hungary, Peter the Great, Catherine the Great, Stalin, Hitler, Muslim Persians, Christian Crusaders, Roman Catholics vs Orthodox Christians, and displaced Jews are just a few.

Here in the United States, we have deep cultural memory of events such as the Civil War, which was our deadliest war in terms of troops lost (nearly 2% of the total population or ~650K). Ukraine and Eastern Europe have events such as the Civil War multiplied in terms of death and more complicated by the many peoples and powers that have struggled over it throughout history. As an example, nearly 4 million Ukrainians died (or 13% of the population) in the Ukrainian famine, directed by Stalin, between 1932-1933.  In WWII, some 8 million Ukrainians died. The territory of Ukraine has been named and renamed time and time again.

My point is that this is old world power dynamics being played out in a modern, largely globalized, digital and nuclear age.

The West, including the US, is walking a tight rope of support for the Ukrainian people, without starting a pan-global nuclear war.

The challenges ahead are not small but they can be overcome, and I generally believe the global community will find a way forward.

What does this mean?

The short answer is that we don’t know. The longer answer is that this is a region populated by people that will fight with courage and conviction. It is not just because they are defending themselves and their homes and families. It is part of their cultural history to resist, to survive, to be respected – traits that history shows us are innate human characteristics or inalienable rights (as described by Locke and later Jefferson). Even if the battles or the war are “won” by Russia, history shows us that it is certainly not definitive.

What does this mean for the economy and markets?

This too is complicated. As many of you have seen and felt, energy prices are going up due to the world largely isolating Russia and refusing to purchase its oil and natural gas. This will cause already high inflation to rise even more. Just as we were seeing the supply chain start to untangle from COVID, higher energy costs and disruptions to supply chains in Eastern Europe will have a negative effect. There is ample energy in the world to fill the void, but it will take time to fill the gap. It certainly incentivizes us collectively to look at renewable energy as not only a path that can help with climate change but also make the world a safer place by lessening our reliance on resources that can be fought over.

Russia has also been isolated by sanctions against its financial system, which has caused the Ruble to plummet, the dollar to soar, and equity markets to continue to be volatile.

The Federal Reserve is in a tight spot. It needs to raise rates to cool customer demand and lessen inflation but it doesn’t want to further disrupt an already fraught situation.

Russia and the Ukraine, combined, provide nearly 30% of the world’s wheat, which is now in jeopardy. This could cause other humanitarian and political turmoil in the world.

In the developed equity markets, everything outside of Russia and China, many large companies may have earnings and margin misses, but they are also largely buffered by very inexpensive debt and equity valuations that are still historically high. Employment is still very high and the consumer seems to continue to be on a buying spree.  There is resilience in the system, and vast incentives for peace, not just due to humanitarian and security concerns but as all the mobsters remind us in movies “War is bad for business.” We shouldn’t underestimate the global financial system’s collective desire to get back to the business of business. This includes China, which is a subject for another newsletter.

What does this mean for our portfolios?

It is for situations such as this that we take such care to discuss risk profiles and financial needs with our clients. We endeavor to have you invested in portfolios that you can understand and which won’t cause you and/or us to make poor financial decisions that as humans we are pre-programmed to make (ouch this hurts. Stop stop stop!!!)

It is also for situations such as this that we dollar cost average into allocations over time and retain cash or fixed income allocations to shift capital into equities gradually and opportunistically. We want to carefully plan when you need to draw on capital so we can adapt the time horizon of your portfolio accordingly.

Although the S&P 500 is down 12% YTD, we have not seen a true capitulation of the market yet (closing down over 5%  in a single day). Will this happen? Maybe.  If so, we want to have conviction to invest incrementally into corrections. We may speed up dollar cost averaging or slow it down, but we want to stay true to our allocation and seek appropriate diversification across asset classes.

The one thing we don’t want to do is to sell and go to all cash in a market that is in free fall. Why? Because we can’t time the up curve any more than we can time the down curve. Anyone that can tell you they can is either lying or delusional. These up trends have and will occur faster than any of us can invest into them, similar to downturns. With inflation as high as it is and with the amount of cash in the market (over $4 trillion in money market funds in the US alone), I believe the equity markets will correct to the upside if/when valuations seem attractive. This may very well be scary for everyone, but remember, this is why we have a plan and why we are available to talk any time. Please remember that you/we are not alone.

I hope this letter find you and your family well.

All the best,

Rob Santos

About Arrowroot Family Office, LLC

Arrowroot Family office is a registered investment advisor* and financial and tax planning firm. Arrowroot Family Office was designed with the goal of providing the family office approach to holistic wealth management, regardless of the client’s net worth. With a deep belief in the transformative power of technology and collaboration, the principals and staff of Arrowroot Family Office provide a high level of service, transparency, and value to its clients. For more information, please visit