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The Most Shocking Wall Street Report I've Ever Read

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empirefinancialresearch.com

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wtilson@exct.empirefinancialresearch.com

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Mon, Mar 7, 2022 10:06 PM

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I apologize in advance if this Wall Street research report gives you nightmares... On Friday, BCA Re

I apologize in advance if this Wall Street research report gives you nightmares... On Friday, BCA Research's Chief Global Strategist Peter Berezin published a report titled "Rising Risk of a Nuclear Apocalypse." Fun! The piece included this hair-raising sentence in the upfront summary... Although there is a huge margin of error around any estimate, subjectively, […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Most Shocking Wall Street Report I've Ever Read By Berna Barshay I apologize in advance if this Wall Street research report gives you nightmares... On Friday, BCA Research's Chief Global Strategist Peter Berezin published a report titled "Rising Risk of a Nuclear Apocalypse." Fun! The piece included this hair-raising sentence in the upfront summary... Although there is a huge margin of error around any estimate, subjectively, we would assign an uncomfortably high 10% chance of a civilization-ending global nuclear war over the next 12 months. That may have been the craziest sentence I have ever read in a sell-side research report. But the even crazier bit is the conclusion of the report... Bottom line: The risk of Armageddon has risen dramatically. Stay bullish on stocks over a 12-month horizon. What? This was my tongue-in-cheek reaction to it on Twitter: Source: Twitter/@Hedge_FundGirl Whether you think the guy is off his rocker with that 10% or you think he is right – and you are ready to go hide under your bed covers after stocking up on iodine pills – his logic isn't totally off... The markets are imploding because of fear over a cataclysmic event. If the situation is resolved, we're due for a heck of a relief rally. And if the worst-case scenario unfolds, you won't give a crap about your investment account. Or as Berezin puts it... If an ICBM is heading your way, the size and composition of your portfolio becomes irrelevant. Thus, from a purely financial perspective, you should largely ignore existential risk, even if you do care about it greatly from a personal perspective. But there's a lot more to worry about in the markets than just that apocalyptic worst case... At the top of the list, from a financial standpoint of course (there are much worse human losses to worry about) is the word on everyone's lips these days... Inflation. We've already seen oil prices surge more than 30% in a couple of weeks. Crude oil hasn't traded hands at the current level of around $120 since the summer of 2008, based on the price of the generic crude oil futures on the New York Mercantile Exchange. Wheat futures are up even more than that... more than 60% in the last two weeks. Russia and Ukraine made up a quarter of the world's wheat exports. It's planting season right now for wheat in Ukraine, and farmers are faced with a tough decision on whether or not to even plant. Access to fertilizer is difficult under current conditions, and it's not even certain that farmers be able to harvest and ship later if they do plant. The supply chain issues they are facing make our recent holiday supply chain situation look like a minor inconvenience. Other commodities are also soaring. Nickel rose almost 90% today on the London Metal Exchange over fears of shortages – Russia makes up about 7% of global production of the commodity, which goes into stainless steel and electric-vehicle batteries. Other metals that Russia produces, like palladium, are also soaring. These increases will soon be felt at the grocery store and in other consumer products, just like they are already being felt at the pump. As inflation hits a lot of non-discretionary consumer spending categories like food and gas, investors rightly worry what this will do to consumer discretionary spending in areas like retail, travel, and durable, high-ticket goods. For many companies, input costs will go up significantly – whether for raw materials or energy to run plants and facilities. Some businesses will be able to pass on these costs in higher prices, others will see margins and earnings take a hit. You can see the inflation fears manifesting everywhere... but perhaps nowhere more clearly than in the airlines, which now have to contend with soaring jet fuel costs. Stocks in the group are trading off between 9% and 16% today, as investors fear they won't be able to raise fares enough to cover jet fuel inflation. Turning back to the BCA piece, after the eye-catching intro about Armageddon, Berezin made many astute observations... First, as much as Russia is a nuclear and military power, this chart from the report shows what an also-ran its economy is after sanctions. At the current ruble-U.S. dollar exchange rate, Russia's economy is smaller than Mexico's and ranks just above the state of Illinois in size... Source: BCA Research Keep in mind that Russia, with a population of 144 million, has more than 10 times the people of Illinois. This chart may actually overstate the size of the Russian economy as a percentage of U.S. GDP right now... It's not clear what exchange rate BCA is using to size the Russian economy. As of Friday when it last traded, the ruble was at 120 to the dollar... but it hasn't traded since then and the street rate in Moscow for dollars is at least a third higher than that. The BCA report goes on to predict a "freak-out moment" for the markets in the next month or two, similar to what we saw in the beginning of the pandemic in March 2020. Pointing to the fact that oil futures are lower at year end than for the near months (a phenomenon called "backwardation") and projecting that longer-term geopolitics should calm down (and back to the first point – if it doesn't, you won't care about the market), the report concludes that a great buying opportunity is setting up. So to sum it up, it's short term very bearish but longer-term bullish. I think it's too early to say... but if you apply the playbook from our last crisis – the onset of the pandemic – BCA could be right. The other big takeaway from the report is that a new cold war could usher in an era of higher rates, as increased spending on "defense and alternative energy sources," especially in Europe, as well as a retreat from globalization lead to structurally higher inflation. Also, a more dangerous world could prompt a lower household savings rate. As Berezin writes... It does not make sense to save for a rainy day if that day never arrives. Lower savings implies a higher equilibrium rate of interest. The prospect of structurally higher rates is a headwind to the markets. And BCA, while bullish with a 12-month investment horizon, is more cautions on the two-to-five-year outlook. --------------------------------------------------------------- Recommended Links: [Four metaverse stocks to buy immediately]( This could be like getting in on the NEXT Amazon... the NEXT Google... or the NEXT Facebook. Some investors are already staking their claims. You should be, too. [Here's why](. --------------------------------------------------------------- [Elon Musk's secret fuel?]( In addition to leading the charge for batteries, electric vehicles, and solar-powered homes, the Tesla founder is quietly working on a new type of fuel to power his SpaceX rockets. McKinsey, a leading consultancy, claims this technology will change our lives forever and create a $4 trillion industry. And one little-known company at the forefront of this industry has the potential to become "America's Next Big Monopoly." If you missed out investing in Tesla, Apple, Amazon, Google, or Netflix early on... this could be your second chance. [Get the details here](. --------------------------------------------------------------- Meanwhile, the number of Western companies suspending operations in Russia continues to increase... Last week, Swedish furniture giant Ikea closed all its stores in Russia, as well as in its ally Belarus. It has also stopped sourcing from these countries. Sweden's other global mega-retailer, H&M (HM-B.ST) has also closed its stores in Russia. Not only will furniture soon be harder to find in Russia... so will cars. German automakers Volkswagen (VOW3.DE), BMW (BMW.DE) and Mercedes-Benz (MBG.DE) stopped exports to Russia, and perhaps even more damaging, have stopped local manufacturing in Russia. Closed plants obviously equals Russians out of a job and without income because of a war they didn't ask for. Japanese automakers Honda Motor (7267.T) and Nissan (7201.T) have also stopped exporting to Russia. Honda cited the obvious problem that it is really hard to get paid for any product the company sends in. American automaker Ford Motor (F) has also suspended its JV that makes commercial vans in Russia. Meanwhile, Spotify (SPOT) has closed its Russian office and removed content from RT and Sputnik from its service, following the lead of tech giants Alphabet (GOOGL) and Apple (AAPL), who had already punted these services from their App stores. Streaming provider Roku (ROKU) has also pulled RT off its service. Oil giant ExxonMobil (XOM) [has followed Shell (SHEL) and BP (BP) in exiting its Russian JV]( as anticipated. Last night, two major U.S. accounting firms – KPMG and PricewaterhouseCoopers – both announced they would be exiting their Russian operations... And this morning, their rivals Deloitte and Ernst & Young followed suit. Also yesterday, American Express (AXP) joined rival credit card processors Visa (V) and Mastercard (MA) in suspending Russian operations. The corporate exodus is simply overwhelming, as displayed on this graphic – which is already a few days out of date... Source: Twitter/@DAlperovitch The sports world is being affected as well as German athletic giant Adidas has suspended its multiyear partnership with the Russian Football Federation. Elsewhere in football (soccer) news, both FIFA and UEFA have banned Russian's national and club teams from international competition, and Russia and Belarus athletes have been banned from the 2022 Winter Paralympics, which began over the weekend. Nike (NKE) has stopped allowing e-commerce orders from consumers in Russia and closed its stores there. Boeing (BA) announced that it has suspended operations in Moscow, which includes maintenance, parts, and technical support. Rival Airbus has done the same. Given most airlines – and I presume Russian ones are no exception – only carry a few weeks' worth of spare parts on hand, these actions will be crippling to the Russian air travel industry. Of course, with airspace closed to Russian-owned airlines, international flights were already facing major cancelations. But now it will soon be impossible for much internal, domestic travel to take place. Everyday Russians will have trouble not only getting their hands on dollars, but replacing TVs, cars, phones, and furniture that breaks, and even visiting friends and family in other cities. Not surprisingly, reports abound on Twitter of Russians rushing to the border trying to get out. Getting cut off from the global economy is clearly not fun... On a lighter note, I'll be presenting at the MoneyShow Accredited Investors Virtual Expo this Wednesday, March 9 from 4:30 p.m. to 5:00 p.m. Eastern time... I'll be talking about the big fourth-quarter disappointment at streamer Netflix (NFLX) and what it means for the streaming media industry more generally... as well as what to do about the stock now. My presentation – and the whole expo – is free to accredited investors. For those unfamiliar, accredited investors meet one of the following criteria: - Net worth, excluding primary residence, of $1 million or more - Individual income in excess of $200,000 in the two most recent years (or a married couple with a combined $300,000 in income over the same time period) - Corporations, partnerships, or business trusts with total assets in excess of $5 million. Again, it's completely free for accredited investors... You can sign up [here](. In the mailbag, more thoughts on the Russia-Ukraine situation and a comment on dealing with losers in reaction to mea culpa last week on Foot Locker (FL)... Are you doing anything to prepare for inflation, like building your inventory of certain items or reworking your budget by cutting out certain things or canceling planned big purchases or vacations? Are there other ways the increased geopolitical tension is affecting your behavior, habits, or spending? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Berna – Putin doesn't serve at the pleasure of Oligarchs. The Oligarchs serve at the pleasure of Putin. Economic sanctions will not work until long after Ukraine has been bombed into submission. "What would the West do if Ukraine was a member of NATO and Putin threatened nuclear war? "If we don't act as if Ukraine is a NATO member, then we may find out when Putin expands his desires. "Read Fiona Hill. Putin is in WW3 and believes chaos and destruction is good for Russia." – Andy S. Berna comment: Andy, I agree with your first two sentences entirely – the oligarchs aren't going to come to Ukraine's rescue. I have also read what Hill has written, and it is terrifying. The people of Estonia and Latvia, among others, are clearly watching Putin's next moves extremely closely. "Thank you Berna, As a typical American who never goes anywhere and obsessively consumes the perspective of a single news source, I know best about what is happening and what should happen and remain confident that everyone is grateful and humbled that I voluntarily share that here and everywhere I can. "Seriously Berna, when you write 'I'm no military or war expert, nor am I qualified to opine at length about complicated geopolitics... so don't expect that kind of analysis from me,' it is an expression of something I learned at school and then in my professional and personal life: know your weaknesses as well as you know your strengths. The quickest way to grow a problem is to falsely claim that you know how to solve it; any experienced manager knows this and values this in others, and that's why I take this opportunity to say that you have reminded me of the good decision I made to trust you for your advice about your field of expertise." – Ricky M. Berna comment: Thank you, Ricky. I know I understand the money stuff... I am merely a student of the geopolitics, like most people who haven't worked in intelligence, the military, academia, or diplomacy. Thank you for putting your trust in me. "When to sell? I think you have to trust a small number of financial advisors or letter writers. If possible, not more than three with diverse competences; ETFs for income, blue chips and dividends, growth stocks. Because too much information is too much temptation. You follow them and never look at the price of your stocks. There is no way an individual investor can make a correct fundamental assessment for each stock in a diversified portfolio and I'm a CFA. But it is difficult to find that small number of financial advisors with whom you feel comfortable. But after a while, you find them. "I like your idea to double down or start a position on Foot Locker (FL)." – Fabian H. Berna comment: Fabian, I agree with what you said that almost all people need trusted advisors. Even after doing this for 25 years, I struggle to keep up with all the stocks in my personal accounts... and this stuff is my full-time job! Regards, Berna Barshay March 7, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](

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