Citi Global Wealth overview | | 19 Investments The past three years have seen both the fastest including WWII have not caused turning points in on “unlicensed” US citizens from working for pace of economic contraction on record and economic activity – FIGURE 1. Chinese firms in producing advanced chips. the fastest recovery. The period has also seen a new ground war in Europe on a scale not But what about the exceptions? World War II was As COVID-related supply chain disruptions seen since World War II, with nuclear warnings a grave catastrophe for humanity that deserves highlight, there are acute vulnerabilities in from global leaders for the first time since the special consideration. That conflict aside, the the trade of intermediate products such as 1980s. Relations between the US and China are OPEC oil embargo of late 1973 catalyzed a world- semiconductors. Disruptions could hamper a critically important to both sides yet precarious. wide recession and higher consumer prices at much larger share of the economy than the In short, this is not an environment in which to the same time. value of individual components might imply. The have overly confident views. world’s vast dependency on Taiwan-sourced The present Russia-Ukraine war – along with semiconductors represents such a concentrated In response to nuclear rhetoric from Russia, the first Gulf War of 1990 and Iraq-Iran war supply risk in our view – FIGURE 2. President Biden drew parallels with the Cuban beginning in 1980 – has strong similarities to Missile Crisis. The 35-day standoff in October- the OPEC embargo shock. Each of these events November 2022’s meeting between Presidents November 1962 arose when the USSR sought to had significant negative regional impacts and Biden and Xi helped boost confidence that station nuclear weapons on the island just 90 some notable global effects. Importantly, central neither side seeks immediate escalation – see miles (145 km) from the US mainland. It stands banks have never been able immediately to Asia: Broader re-opening to enable regional as a powerful example of binary geopolitical risk. offset the inflationary impact of supply shocks recovery. The world can only hope that the G2 It is widely regarded as the closest the world has no matter what their hoped-for inflation targets superpowers continue to prevent their strategic come to nuclear warfare since the end of World might have been. competition from evolving into conflict. War II. The leaders of the US and USSR pulled back The risk of overlapping shocks If inflation persists from the doomsday scenario. Subsequently, the world economy grew strongly between 1963 and Today, we worry about overlapping shocks and Massive fiscal and monetary stimulus in 1969. The US economy grew an average 4.3% the willingness of the US to pursue multiple response to the COVID shock tested the global annually during the period, including a recession problems at the same time, creating “joint economy’s “speed limit.” Policymakers took that began fully eight years later. With one probability risk.” Monetary tightening, strategic too much for granted, and inflation surged short bear market to endure, investors enjoyed competition with China and isolating Russia worldwide. Large shifts in demand within the strong equity market returns over most of the are all being pursued simultaneously, raising economy led to shortages of goods. Some remaining decade. the likelihood that a trigger event will cause consumers were willing to purchase these goods a cascade of impacts that ripple across world at much higher prices. Within the short period of grave nuclear risk markets and the economy. that could have ended very differently for all of Following a surge in goods prices and a humanity, US equities dropped less than 10% The decision of the US administration to limit temporary drop in employment, US consumers before regaining it all and more. So, what is the US content in China’s computing industry – turned their sights on labor-intensive services. lesson of the Cuban Missile Crisis for investors? particularly advanced semiconductor equipment Demand persistence – and a labor force still Among many conclusions, we would highlight – was expected. However, the extent of the suffering from COVID distortions – has had that 90% of geopolitical shocks since and US’ actions went much further than most second-order impact on wages. These have risen investors ever expected. It included prohibitions by the most on a per-person basis since the early 1980s.