New World Disorder

More about the war in Ukraine... China gives Russia an 'out'... New world disorder... Is Taiwan next?... A 40% gain in a day... A lesson in riding the bull market in oil... Notes from Warren Buffett... Your feedback on bread and beer...

We continue to analyze the consequences of the war in Ukraine...

We've shared an experience from on the ground there... from our colleague Bill McGilton's perspective. Just last week, he fled Kyiv, the country's capital, where he has lived on and off for 15 years.

On Monday, many of our editors gathered for a special Town Hall event on the conflict and what it might mean for the markets... If you missed it, you can watch it here.

They covered a lot of ground, like how the geopolitics might play out in stocks, inflation, and more...

And in the Digest, we've previously covered the war's influence on oil prices, and on the wheat and corn supply... Today, I (Corey McLaughlin) have another angle worth exploring and tracking... What the conflict tells us about a new global order... or disorder.

I'm not making this up...

At the very same time Russian tanks were rolling into Ukraine and jets were dropping bombs and shooting missiles, Chinese officials decided it was a great moment to publicly announce a new trade agreement with Russia...

It wasn't an accident... or poor timing. It was deliberate. And it happened to relate to something we talked about yesterday... wheat, which Russia produces more of than any other country in the world...

Last Friday, Chinese customs officials said the country would begin to allow imports of wheat from all regions of Russia. Before, the scope was limited – which made sense since China is the world's next largest producer of wheat after Russia...

Don't worry, we're not going in depth on wheat for the second day in a row...

But, as I'll explain, when you explore this small development, you'll find that it's more like a tip of an iceberg...

In other words, a much bigger story...

Billions of dollars of trade in the East...

China is the world's second-largest economy. It has ambitions of overtaking the U.S. as No. 1... and a big part of that strategy includes dealing with its neighbor Russia. They share more than 2,500 miles of border.

Since 2014, when Russia annexed Ukraine's Crimea peninsula and started being sanctioned by Western countries, trade between Russia and China has grown by more than 50%. Things picked up substantially in 2021, as global news service Reuters reported on Tuesday...

Total trade between China and Russia jumped 35.9% last year to a record $146.9 billion, according to Chinese customs data, with Russia serving as a major source of oil, gas, coal, and agriculture commodities, running a trade surplus with China.

The countries are undeniably linked. Construction on the Power of Siberia gas pipeline, which connects Russia to China, began in late 2019... and the countries have a 30-year contract worth more than $400 billion already on the books to use it. More from Reuters...

In 2019, China allowed the import of soybeans from all regions of Russia, and the two countries signed a deal to deepen cooperation in soybean supply chains, which saw more Chinese firms growing the beans in Russia...

China is also a huge buyer of timber from Russia's Far East, with imports of timber and related products worth $4.1 billion last year.

Why China isn't joining many other nations putting financial sanctions on Russia – quite the opposite, it's getting cozier – should be obvious in this context... China doesn't want the Russian economy to crater.

China could give Russia a financial "out," though it's not straightforward.

The ruble, Russia's currency, has lost a third of its value relative to the dollar in the last week. That's not good for Russia – or China's economy.

Russia and China have been working to rely less on U.S. dollars to do business over the past decade, with the countries using the Chinese yuan to settle 28% of Chinese export transactions in the first half of 2021... compared with just 2% in 2013.

That still means most trade is settled in dollars, but the two sides seem committed to their anti-West marriage for the foreseeable future.

New world disorder...

Lost in much of the news reporting – in the U.S., at least – about the build-up to Russia's invasion of Ukraine was the big, flashing warning sign that was a summit between Russian President Vladimir Putin and Chinese President Xi Jinping...

I've never quoted the New Yorker in the Digest, but there's a first for everything I guess... and the publication did a great job describing the scene from the meeting, beneath the headline: "Russia and China Unveil a Pact Against American and the West."

New Yorker columnist Robin Wright wrote on February 7...

In their matching mauve ties, Russia's Vladimir Putin and China's Xi Jinping last week declared a "new era" in the global order and, at least in the short term, endorsed their respective territorial ambitions in Ukraine and Taiwan.

The world's two most powerful autocrats unveiled a sweeping long-term agreement that also challenges the United States as a global power, NATO as a cornerstone of international security, and liberal democracy as a model for the world.

"Friendship between the two States has no limits," they vowed in the communiqué, released after the two leaders met on the eve of the Beijing Winter Olympics. "There are no 'forbidden' areas of cooperation."

When you read this now, Russia or China declaring war with anyone isn't surprising...

This week, U.S. officials are saying the Chinese government knew so much about a potential Russian invasion of Ukraine that it asked Russia to delay the start of it until after the Winter Olympics... Gee, thanks... Notice China didn't ask Russia not to invade at all.

RELATED: China Hasn't Copied the 'Soft Power' Blueprint – Yet

In short, it's not hard to see that Russia has been strengthening relations with China going on a decade. As our colleague and Stansberry Venture Technology editor Dave Lashmet told us in a private note...

That's what the China/Russia deal was about: It's a non-aggression pact and common market agreement.

When you look at world order (or disorder), it's worth thinking about this... China and Russia are aligned and lead a market that Dave says includes "Ukraine, Belarus, Estonia, Latvia, Lithuania, and the-country-that-used-to-be-called-Taiwan."

Dave's been closely following this story because of what it might mean for a few of his recommendations in Venture Technology and our flagship Stansberry's Investment Advisory, specifically in the semiconductor industry...

What's this got to do with semiconductors?

As you might know by now, the tiny nation of Taiwan is currently responsible for the production of an outsized amount of the world's semiconductors...

And we've reported before on China having ideas of a "takeover" of Taiwan, much like Russia has of Ukraine... and what the U.S. economic interest would be in such a conflict.

A few weeks ago, the idea of a major world power simply taking over a neighboring, independent nation might have seemed a bit far-fetched. Not so much today, especially when you consider the alliance between Russia and China… and China's prime target.

In last month's issue of Stansberry's Investment Advisory, Dave addressed this directly, describing how China is building up naval powers for one reason...

China wants to take over Taiwan. That would give China the island's strategic position in the South China Sea, its 23 million native Chinese speakers, and... some 90% of the world's supply of smartphone chips, made by Taiwan Semiconductor Manufacturing (TSM). Taiwan also makes plastics, does electronics assembly, and even makes the silicon wafers that are used in semiconductor production.

This dynamic came to light during the start of the pandemic, when supply-chain disruptions stemming from Taiwan meant that the powerful, tiny microchips made there became less available... to put into new cars, computers, phones, nuclear-power facilities, or washing machines.

As Dave wrote in a special report for his Venture Technology subscribers last August...

The U.S. government sees this risk... That's why it's spurring a silicon chipmaking renaissance in the U.S.

Dave's strongly bullish on the semiconductor industry, and he and our Investment Advisory team have put together several special reports and recommendations on several investment opportunities in the sector... Existing Investment Advisory subscribers can find last month's recommendation here and links to several special reports here.

If you don't already subscribe to our flagship publication, click here for more information on the "chip crisis"... and to learn how you could position your portfolio to profit from the massive amounts of money being put into the sector.

The latest example of the bullish tailwinds... When's the last time you saw the CEO of a chipmaker called out and applauded during a president's State of the Union address?

As NewsWire analyst Dalton White wrote about yesterday, Intel (INTC) CEO Pat Gelsinger was in the spotlight on Tuesday night for these reasons... as the Biden administration tries to pass legislation that would allocate $52 billion to the semiconductor manufacturing industry.

I could go on and on with the cascade of effects of a "new world disorder"...

For one thing, this Digest essay from December 2020 by our colleague Kim Iskyan – "We're on the Brink of Cold War 2.0" – rings true today.

But we'll stop here for now. The story isn't going away... The world is still turning, and we have a few more items to cover today.

Moving on, to a 40% gain in one day...

We have an update on a bullish short-term trade we mentioned that Ten Stock Trader editor Greg Diamond recommended on Tuesday... Greg closed out the trade yesterday morning for a 40% gain in what amounted to a few hours.

In an alert to subscribers, he said...

Buy panic and sell relief. That is our game plan on this short-term trade and that's exactly what we got. There's important inflation data coming tomorrow [Thursday] and the jobs numbers on Friday.

Can stocks continue to move higher? Yes, but I'm not getting greedy.

Let's record around a 40% gain in just one day on this trade. If there's more panic into the end of the week or early next week, we can reload on these calls. For now, let's take some profit off the table.

Not a bad day's work at all...

Riding the bull market in oil...

Yesterday, in his free daily Health & Wealth Bulletin, our colleague Dr. David "Doc" Eifrig highlighted another big winner from his analyst Jeff Havenstein...

In early December, Jeff made the case for higher oil prices. We've shared the reasons why in the Digest many times over the past year... In short, it comes down to simple supply and demand.

Oil drillers haven't reached pre-pandemic production levels, but demand keeps climbing. No matter how badly people might want electric vehicles or other alternative energy sources, the truth is most of the world is still addicted to oil... and will be for a while.

As Jeff wrote back in December, fears around the Omicron variant stifling the global economy pushed futures contracts of Brent crude, the international oil benchmark, down to around $67 per barrel... a 20% drop from its late-October high.

This was an overblown sell-off, Jeff wrote.

In fact, he said it presented "a great buying opportunity for folks who don't mind holding through some noise in the short term." Given the broader picture of the energy market, Jeff said there was at least 20% upside in oil prices...

Over the course of the next few months to a year, oil should easily climb back above $80 a barrel. I'd even make the case that oil should be around $100 a barrel.

By the end of January, futures contracts were trading for $88 per barrel and now, just four months later, oil is up 55%, including a 10%-plus spike through the $100 level in the last few days – stemming from the war in Ukraine and what it might mean to global oil supply.

As Doc wrote yesterday...

We were already in a very tight oil market with little supply... But this invasion prompted fears of further supply disruptions.

The fundamental case for higher oil prices still remains... But Doc wrote to Health & Wealth Bulletin readers yesterday: given the spike in prices in just the last week, those who took Jeff's advice in December might want to think about locking in gains now.

Kudos to Jeff... We'd take a 55% gain in four months any time.

On a related point, if you don't subscribe to Doc's Health & Wealth Bulletin, you should. It's a free daily letter, and a great mix of health and financial advice from Doc and his team... including the occasional trade recommendation like this one. You can sign up here.

Finally, today, a few notes from Warren Buffett...

Before it gets too "stale" and lost in the news cycle, I want to close my writing for the week – Dan will be with you in his regular slot tomorrow – with a few highlights from Warren Buffett's latest annual letter to Berkshire Hathaway (BRK-B) shareholders.

For investment geeks, it's required reading as far as I'm concerned. Think of it this way... Each year, one of the world's most legendary investors shares insight into the mind that built a $100- billion-plus fortune over his 91 years on Earth... Why not at least listen?

Buffett and his right-hand man, 98-year-old Charlie Munger (who, incidentally, still hates cryptocurrency and recently described it as a "venereal disease"), published their latest letter for Berkshire shareholders last Saturday.

You can read the whole thing here. It's not very long, and it's easy to digest, yet packed with pearls of wisdom. Here's a few highlights that I jotted down...

1. Buffett loves Apple (AAPL), its CEO, and stock buybacks...

This should already be obvious to anyone paying attention – Apple makes up nearly 50% of Berkshire Hathaway's stock portfolio – but Buffett put his reasoning and numbers down on paper illustrating why he likes owning shares in Apple so much...

In particular, Buffett was a fan of Apple's $85.5 billion of stock buybacks and $14.5 billion in dividends paid last fiscal year. Of Apple, Buffett wrote...

Our ownership is a mere 5.55%, up from 5.39% a year earlier. That increase sounds like small potatoes. But consider that each 0.1% of Apple's 2021 earnings amounted to $100 million. We spent no Berkshire funds to gain our accretion. Apple's repurchases did the job...

Our "share" of Apple's earnings amounted to a staggering $5.6 billion. Much of what the company retained was used to repurchase Apple shares, an act we applaud. Tim Cook, Apple's brilliant CEO, quite properly regards users of Apple products as his first love, but all of his other constituencies benefit from Tim's managerial touch as well.

No wonder Buffett used the same "let's just buy our own shares" strategy when deciding how to deploy the $140- billion-plus cash spike Berkshire Hathaway had on its books this year... He wrote in the letter that he simply didn't see many better values elsewhere.

2. A simple and powerful 'truism' about interest rates...

In explaining why he decided to repurchase 9% of outstanding Berkshire shares over the last two years, instead of investing money in publicly traded businesses... or acquisitions, he cited one powerful reason – low interest rates, set by the Federal Reserve...

They have allowed valuations of basically everything over the past two years to move higher, well into overvalued territory. As Buffett wrote...

Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important.

Keep this in mind whenever we talk about what the Fed and the world's central banks are doing with interest rate policy... and why we talk about it probably too frequently.

3. How teaching and writing helps Buffett think...

Buffett noted that he taught his first investment class 70 years ago and found that trying to explain ideas to other people made him organize his own thoughts better.

He finds the same true with writing. As he wrote...

Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly.

I agree... As someone who has been writing professionally for 15 years, I can't tell you how many times I've sat down to write something and an obvious conclusion (right or wrong) that wasn't on my radar beforehand eventually crosses my mind.

The ideas that come to mind this way tend to be the best ideas, or the ones that best reflect what I want to say or do. Give it a try – how would I explain this to an orangutan? – the next time you're stumped about something... You just might find the answer you seek.

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In today's mailbag, several of you wrote in with feedback on yesterday's Digest about our ideas on wheat and how the war in Ukraine will impact commodity prices... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I've been an Alliance member for a few years now and just recently retired so I have more time to read/listen to your publications. I found the Town Hall conversation very informative and interesting especially the section concerning agricultural commodities. The media seems fixated on the impacts of oil but the potential inflationary ramifications on food prices around the world has been grossly underestimated in my opinion.

"I spent my whole career with the world's largest agricultural company with responsibilities for North American grain exports so the comments on Ukraine's production and exports were of keen interest. They have grown exports from virtually nothing to tens of millions of tons of both corn/wheat of which the world is now dependent on with minimal alternatives, at least in the short term.

"The threat to not only grain production but the entire infrastructure could reduce available supplies for more than one production cycle putting significant upward price pressure on those commodities. It's too late for South America to respond and the U.S. does not have the excess free acres.

"In addition, Russia is a major supplier of fertilizer to the world and although some of those prices are already up 3X over last year, the price impacts have yet to be felt completely through the supply chain with potentially higher prices still.

"Eventually you have to think this will all flow through to food prices with a larger detrimental impact on U.S./world consumers than gas prices. Hopefully this all gets resolved but it appears less likely by the day and the probability of negative price impacts increasing significantly.

"Anyway, I enjoyed the presentation and thought I would comment for the first time given how it hit home from a career perspective." – Stansberry Alliance member Steve S.

Corey McLaughlin comment: Steve, thanks for putting your thoughts together and sharing the insight. I happen to agree with you that these are inflation pressures that we haven't heard many people talking about.

Glad you enjoyed the Town Hall and, please, write back in anytime.

"There are far fewer wheat beers than there are beers comprised of barley. In fact, the German Beer Purity Laws (Reinheitsgebot) specifically defined beer as needing barley so that brewers wouldn't consume all the wheat needed for bread, pasta, and other items by brewing beer with it. Current 'wit' beers (pronounced wheat, but meaning white) are a Belgian blend of barley and wheat and top fermented like German hefeweizen which must be 50% wheat.

"So, while breads and pastas should be on your list, the alliterative of 'beer' probably should not.

"Although current futures might be higher based on winter wheat yet to be harvested and shipped, many of the fallow, or unpaid fields in America currently waiting to plant corn, could easily take advantage of the futures market, sell a field at the current markup and then go back to corn next year. They mostly seemed to stop doing it when export prices from the middlemen made it uneconomical to do more than just the wheat America needed, and despite improvements in shipping techniques and technology haven't seen fit to push it (mostly because those wheat farms are not small farmers, but large conglomerates that can't/won't pivot easily).

"Oh, and how do I know (my bonafides)? I'm a beer brewer and I grew up on family farms in Wyoming with wheat, silage-corn, barley, and sugar beets." – Paid-up subscriber Steve B.

"The government pays farmers in our area not to grow wheat. All Biden has to do is turn that land loose so we can be independent. Same goes with oil. He's shut off drilling in some areas and shut down pipelines. We wouldn't have shortages and high prices if not for these government rules." – Paid-up subscriber Bernita B.

"The 'end game' of the war in Ukraine is unclear...

"A quick read of that sentence and my mind saw nuclear. Not sure if that was a play on the word but realized that the only difference between unclear and nuclear is the order of the UN." – Paid-up subscriber G.H.

McLaughlin comment: Ha, that was not on purpose. I'm not that creative (nor the kind to make a play on words about potential nuclear war). But thanks for pointing this out. Learned something new...

All the best,

Corey McLaughlin
Baltimore, Maryland
March 3, 2022