As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.
September was another very challenging month for markets and the Paper Portfolio. The Paper Portfolio declined 12.8% while the SPY declined 9.3%.
As we enter the last few months of the year, investors are forced to take stock. Many investors likely see little scope for optimism for the remainder of the year. And as they look ahead, there’s very limited visibility on whether 2023 will be better or much the same.
On the geopolitical front, the war in Ukraine remains tense. Ukraine’s recent counterattack has allowed Ukraine to recapture a significant portion of lost territory. By April, Ukraine had already pushed Russia out of the north.

Source: CNN
And in recent weeks, Ukraine appears on the cusp of completely collapsing the eastern front.

Source: NYT
However, despite the mounting evidence for several months that Russia is not winning the war, Russia has chosen repeatedly to not go down the prudent path. Every time Russia comes to a fork in the road, it has chosen the harder path, including escalating its energy war with Europe. Recently, Russia began drafting its citizens for war, a strong signal that Putin is not ready to give up.
On the other side of the world, US and European relations with China also continue to deteriorate. China likely sees an increasingly dangerous world and feels compelled to take actions to defend its own interests, including Taiwan. However, western relations with China are stuck in a trust-less negative feedback loop where anything either side does is perceived in the most negative light possible. The West views China as going down an increasingly authoritarian path that is potentially going to result in war with the West. Likewise, China views the West’s actions including in areas like technology and weaponization of sanctions against Russia as non-negotiable risks that must be eliminated. Negative feedback loops are hard to break because it requires trust. If both sides believe war is inevitable, their sheer belief and preparation for such a potential outcome will likely make it a reality.
Similar to Russia, China (and the US) have repeatedly chosen to go down the harder path every time there is a fork in the road. Both sides are likely telling themselves that this is the harder path near term, but it is the easier path long term. But the path that both countries are walking down is only easier for the victor in the long term.
And in two weeks, China’s Party Congress will reveal whether / how China’s leadership composition will change. Many investors including many Chinese appear hopeful that policies will loosen after Party Congress. If so, this could be a significant shot in the arm for the Optimists, but still – China has repeatedly chosen the harder path for some time. A Realist would say Reality is already clear.
But why does this matter?
All of these things matter because the world is interconnected and complex.
Not only do global affairs affect investor sentiment and investor capability to take risk (as well as US policies and politics), it is currently having a dramatically negative impact on inflation.
Which brings me to the third “war” that is waging closest to the home front – The war on inflation.
As you probably know – likely from your own personal experiences at the store – inflation has risen significantly over the last two years. Although the initial spike in inflation was likely due to stressed supply chains affected by Covid lockdowns in 2020, inflation has sustained at incredibly high levels due to geopolitics. The war in Ukraine has exacerbated energy and food inflation. And extended Covid controls in China despite the availability of vaccines has lengthened the impact on supply chains. Perhaps this is truly a health issue, but it’s hard to not at least wonder whether domestic politics or geopolitics has played a role.
Against this backdrop, the Fed is determined to uphold its reputation and credibility as the most powerful force in the universe when it comes to inflation. The Fed is determined to break inflation no matter what it takes.
But, of course, this is silly.
The Fed’s toolbox is quite simply lacking to control the current sources of inflation.
If anything, the most egregious offense in domestic policy is perhaps the extremely generous fiscal checks sent to people during the lockdown and well after lockdowns ended. But it’s going to take a whole lot of effort for the Fed to use monetary policy to fix a fiscal offense.
Reiterating a common quip – The Fed can’t print oil or food. And the Fed certainly can’t change what China is doing all that much.
But here we are because the Fed has a reputation to defend.
And the Fed is determined to crush inflation by raising interest rates until demand breaks.
The Fed rightly recognizes that the current problems are driven by the supply side (decrease in supply of energy and food, stressed supply chains; geopolitical choices leading to countries to try to onshore supply rather than continue to purchase supply from un-trusted countries). The issues with rising wages and labor tightness are also primarily driven by supply. While the demand for labor has risen, the primary issue is that the labor pool has shrunk. This was a primary reason for the Fed’s initial hesitation to raise interest rates despite mounting inflation coming out of Covid.
However, now it has decided that if it can’t fix supply, it can “fix” demand.
Will it work?
It’s not clear.
It’s not clear because the world is complex. Nothing is black and white. Every coin has its other side.
The Fed can “fix” demand by raising interest rates and raising the price of money (making consumption more and more costly), but it cannot guarantee that it only affects demand. Many businesses (both large and small) depend on the availability of credit for their operations. There is a non-zero chance that raising interest rates so dramatically may further shrink supply. If businesses start to become stressed, supply will further contract.
This is not just a problem for businesses. Entire countries are now facing the same issues. Even countries with reserve currencies like the UK are starting to run into stress.
Will it work?
It’s not clear.
What is clear is that the world is complex, and things can change on a dime. Both good and bad.
It should be abundantly clear by now that this is not a business cycle. Covid initially induced a business cycle. But, unfortunately, Covid also created opportunities for some countries to carry out geopolitical plans. Covid initially revealed the US to be weak, likely convincing some countries to take advantage of the US weakness. Instead, the US has emerged from Covid relatively unscathed.
And now the world is stuck in a new geopolitical reality where multiple parties have taken geopolitical risks that did not pan out.
We are in a Chaotic Era, an Era of Change. Change can be good or bad. And forks can be unpredictable. Paths that seem bad initially can lead to good places. The opposite can also be true.
This is a challenging environment, but I firmly believe companies that are capable and in control of their long-term destinies will emerge from this period with unparalleled dominance.

Disclosures: Of the stocks mentioned, I own shares in NET, PINS, SE, KIND, MRNA, OKTA, U, UBER, SNAP, SDGR, AYX. I have no intention to transact in any shares mentioned in the next 48 hours.