Happy Holidays from The Ignorant Investor

The celebrated Glacier Express traversing a stone arch bridge on a wintery morning [Image ©youpi4.fc/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Best wishes to you and your family for a very Merry Christmas and a Happy New Year! This year we feature the Glacier Express, a beautiful, bright-red train that leisurely traverses the snow-covered hills and valleys of Switzerland. This particular route, from St Moritz to Zermatt in the dead of winter, is spectacular and ranks near the top of The Ignorant Investor's all-time favorite family adventures. 2022 has been a tough year for investors, but regardless of what is happening in financial markets, Christmas and New Year are two holidays The Ignorant Investor always looks forward to. It's a time for family. For friends. A time to pause, kick back, and remember with gratitude the past year's events while planning and preparing for the coming year.

The Year of the Bear: A deep breath before the plunge?

Reviewing 2022 | Market expectations for 2023 | Stories of Note

Investors are weary of riding the bear market and continue to dream of a bull market somewhere in an uncertain future [Original image ©freshidea/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Can you think of any better representation for the stock market near the end of 2022 than the above image? That really is the wonderful thing about abstract art- the viewer can make observations which seem most fitting to their current, transitory worldview. Is the bear swimming in the waters of recession; the bull a distant dream for the investor, who, incidentally, is precariously perched atop the bear for the ride? Is the bear running out of energy and sinking while wishful investors watch the bull rise in the distance? The near-uniform consensus expectation among experts for 2023 is recession. However, before we look ahead, let’s take a few minutes to appreciate what lies behind*. 2022 has upended the growth stories of the last several years, with the declines of post-pandemic kingpins (remember FANG? Facebook’s stock briefly pulled back to 2016 levels just last month, ouch!), paving the way for a rise in value and – dare I say it? – a return to fundamentals. Profitable companies with solid businesses are once again good companies in the eyes of investors! 

Inflation reaching levels last experienced in the 1980s (the Volcker years; surely a spectre that haunts the dreams of the current Fed). An S&P 500 that suffered its worst first-half performance since the 1970s. Recession indicators flashing red across the board. Total unemployment readings at lows last seen in 2000? What a topsy turvy roller coaster of emotions this last year has been! Initially eager to discuss steep market losses at the gym and on the golf course, businesspeople slowly started avoiding the conversations altogether as weeks of downturns turned into months (“Don’t talk to them, they’re stock people- you saw what the market did this week!”). Another major surprise was how the Fed – a dry (if vital!) cog in the machination of the financial markets – became a well-recognized institution among the general population. When a family member (in this case an artist, no less) in casual conversation randomly comments on potential Fed action at the next FOMC meeting, we know something strange is happening in the world.

The stock market’s struggles in 2022 revolve around the wrestling match between two gigantic opponents: collective price increases (inflation) on the one side, and the Federal Reserve on the other. Early in the year, the Fed realized too late that inflation was rapidly rising. And of course, inflation is an amorphous, obtuse thing: covering price increases in everything from rent to gas usage, basic grocery shopping to visiting the barbershop. The market has been largely in a wait-and-see pattern for many months: the Fed hikes rates, then all market participants examine various flavors of inflation reports to try to divine what happens next. The Ignorant Investor’s last post, which can be viewed using this link, effectively summarizes what has been happening over the past year.

The Crystal Ball: Managing 2023 Expectations

2023 fast approaches! [Image © Urupong/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

And what are the expectations for 2023? Inflation is likely to remain obstinate and drive market action, at least during the early months of the year. Global growth will slow, exacerbated by hawkish central bank policies and continued supply chain transformations. Valuation concerns will continue to loom as earnings appear set to deteriorate. Then of course, geopolitical concerns can always flair up. 

Let’s not sugarcoat it: the economic outlook for 2023 isn’t great. In the USA, you have a Fed doing all it can to alter consumer spending habits and reduce employment (i.e. the FOMC hiking Federal funds rate while anxiously perusing inflation readings). And the stock market has already stumbled, with many pandemic darlings down 90%, and in some cases even more, from their all-time highs. 

Banks and big money managers have invariably been pointing to recession next year and predicting downwards and upwards action in the stock market (in that order). These doom and gloom expectations make sense to The Ignorant Investor since the stock market – as a forward-looking instrument – usually bottoms out during a recession as opposed to before. This would indicate that if a recession is indeed imminent, some more pain may be necessary before the next bull market has a chance to begin. 

But hey- who accurately predicted what 2022 was going to be like a year ago (okay, yes, Mr. Burry of subprime mortgage fame made some prescient remarks in November 2021- but besides him)? Stocks have by now sold off severely, and we are seeing considerable areas of frothy speculation implode (a la cryptocurrency space; as Warren Buffet famously observed, “You only find out who has been swimming naked once the tide goes out!”). The strong labor market may also soften the landing for the upcoming economic slowdown inside the United States. 

This very low bar set for stocks in 2023 – in terms of pessimistic economic expectations, consensus negative stock market forecasts, and low stock market participation among money managers – may leave room for some pleasant, positive surprises. If the consensus always seems too far on one side of the boat, the contrarian in The Ignorant Investor is screaming to have some positions which benefit from an opposing occurrence (softer landing vs hard landing, to be clear). 

All these dry details boil down to the same mantra The Ignorant Investor has been repeating throughout 2022: In the face of rampant uncertainty, companies with strong fundamentals and businesses that are relatively impervious to economic uncertainty will remain the gold standard for investment. Profitable corporations with solid balance sheets and compelling stories are, well, compelling! Are you looking for places to put your money to reap gains in 2023, 2024, and beyond? Then you are an investor, and for investors, opportunities abound. Your financial advisor will be able to work with you to compile a quality buy list with desirable entry prices!

Stories of Note

Republicans gain control of the House in Midterm elections

Voters came out in strength on November 8th with several major issues on their minds (from polls, this appeared to largely boil down to high inflation and the recent overturning of Roe v. Wade). Surprisingly to some observers, there was no Republican “Red Wave”, although they did gain control of the House. Political gridlock in Washington is nothing new and is historically beneficial to the stock market. Besides this, the weary expectation that Congress won’t get much done anyway certainly won’t change with this result. USA Today has a summary of how a split Congress tends to affect the stock market in this article here.

Strong legislative support for renewable energy through the August passage of the Inflation Reduction Act

The dramatic reversal by Senator Manchin to suddenly bring life to the bill in late July – after persistently dismissing it over previous months – came as a surprise to observers. Many clean energy companies have seen their shares rise considerably since the bill’s passage, with one big solar beneficiary more than doubling since the bill’s revival. While some particulars concern Europe on a competitive advantage basis, the end result will be more dollars towards the renewable energy industry and (hopefully) their corresponding R&D departments. Reuters has a solid article outlining exactly what is in this bill and how it will benefit renewable energy development; you can read the article using this link.

California regulators seeks to curb compensation for solar power users

Solar power use in California is largely concentrated among the affluent, while disadvantaged families often have no choice but to rely on the regular electrical grid. Under the current system – which has largely driven solar panel growth in the state over the last several decades – solar customers have the option to send excess power to the electrical grid in exchange for compensation. California regulators seek to reduce this compensation (with their most recent November 2022 proposal an improvement on an earlier December 2021 draft, which had experienced massive political pushback). It will be interesting to see how this unfolds in the face of numerous State-backed climate initiatives to reduce carbon emissions (especially since the regulator missed their self-imposed deadline to announce their newest draft proposal; I mean, it’s not like they would purposely wait until after elections to make this change and thus sidestep voters, right?). The New York Times has an excellent summary article about the facts (and without the above speculation) which can be read using this link.

*Yes, the year is not yet finished, but this will likely be The Ignorant Investor’s last post of substance for the year!

Note that our updates have been less frequent this year as volatility has increased. It’s not that things aren’t happening- it’s that the actual commentary about what to do remains relatively consistent: look to quality names in specific business arenas to weather the downturn! 

A Midyear Crisis: The Harrowing Tale of Investors and Investments in the Year 2022

State of the Market | Take Refuge in Fundamentals | Stories of Note

Riding the roller coaster of the stock market in 2022 hasn’t been this much “fun” in fifty years (statistically-speaking, of course!)! Thrilling, scary, and gut-wrenching are good descriptors for this ride. [Image ©artisticco/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

The investment emotions of the last six months have certainly reflected the best and scariest roller coaster rides The Ignorant Investor has ever experienced! And did anyone truly expect that anything could rival the dark months of 2020 (from an investment perspective, that is)? Deep, terrifying selloffs that never seem to end. Breathtaking rallies (a la energy and certain “quality” growth names). Boring yet profitable range-bound trading. And yet more uncertainty ahead.  Or is there? The stock market is usually a forward-looking thing, after all, and while no person alive – whether investor, analyst, or economist –may be able to accurately predict what will happen by next week, let alone next month, the next year is slowly becoming clearer. But before we look ahead, let’s quickly summarize what is behind us.

The damage to the stock market - stemming from a plethora of concerns - has been quite substantial over the last six months. From the beginning of the year to the end of June, the S&P 500 fell almost 21%. The Russell 2000 fell nearly 24%. And the perennial outperformer, that champion of growth, the Nasdaq fell 30%. Peruse the stock market wreckage more closely, and we can find numerous lockdown darlings have been recently trading at 70%, 80%, and even 90% below their 52-week highs. This isn’t to say that other risk assets performed any better- after all, bitcoin is down about 55% over the same period.

Many of The Ignorant Investor’s stalwart indicators flashed buy signals for many months even as the market this time around ignored them and turned every lower. While not something we typically favor, stop-loss orders can be quite helpful in select situations! We now find ourselves in an unfamiliar environment for a large percentage of analysts and investors. After all, inflationary pressures have been almost nonexistent since the so-called dot-com selloff at the turn of the millennium. Anyone under the age of fifty will have limited experience of market volatility and tendencies in a rising interest rate environment like the one we are facing today. Still, as this last week’s market activity has shown, stocks are cheaper than they have been in years and great “diamonds in the rough” opportunities – perhaps even generational opportunities – abound. This doesn’t mean that this whole beaten-down market is a buy; merely that select companies in select industries look quite appealing to The Ignorant Investor. 

Per the usual, some (many?) analysts have been lagging the market quite broadly this year with their company assessments, downward-revising price targets following stock price declines as they adjust their core investment theses [“Oh, hey guys, you know that company that just sold off sixty percent from the level where we issued our buy recommendation? Yeah, we think you should sell that.”]. Perhaps some of those “sell” calls on quality companies may actually be a contrarian buy? Good investment advisors will be able to help identify some of these opportunities.

Inflation is Driving Fed Action: Take Refuge in Fundamentals

Fundamentals are key when uncertainty abounds! [Image ©Funtap/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

Remember in the 2020 and 2021 boom times, The Ignorant Investor continually lauded the wartime level of Fed support as being a big driver of the stock market action? Well in 2022, we are seeing the results of the Fed unwind that same action- steadily hiking interest rates and reducing the balance sheet as it strives to shrink the money supply and slow economic activity. Thankfully, the USA has benefited from an extremely tight labor market – with some estimating that nearly two jobs exist for every unemployed American – which has allowed the Fed to directly tackle rampant inflation through interest rate hikes.

Inflation, then, is the driver of Fed action and the primary culprit behind US market declines. Inflation is a thief that benefits no one. High inflation pressures both consumers and companies: consumers by reducing their spending power and eating away at their savings; companies by forcing prices higher while pressuring margins and hence moving profitability lower. But the driver of inflation here is a combination of changing consumer spending behavior, supply chain pressures as well as high energy/food prices. Supply chains are very slowly sorting themselves out (remember the former chip shortages, anyone?) and high energy prices will eventually move lower should peace return to Europe or production increase meaningfully; these drivers of inflation are indeed transitory. This means that the dirty secret here is that the Fed is in the unhappy position of forcing changes to consumer demand by basically destroying excess consumer demand to better match current beleaguered supply. The Fed’s tightening policy is currently driving investors back down the risk curve (see the recent crypto market collapse, for example), but ultimately, this painful process will at least achieve in the desired effect of taming inflation.

For now, the Fed remains “behind the curve” and some market participants expect the Fed to overcorrect (raise interest rates too fast and too far) in its efforts to dampen inflationary pressures, which could result in recession. This raises questions. Are we in a recession since economic activity, as measured by GDP estimates, may well have fallen for the past two quarters? Is recession coming now that Treasury yields have once again inverted, with the 2-year hovering above the 10-year? How can we possibly be at the cusp of a “real” recession when the employment market remains incredibly tight and neither consumers nor businesses appear to be struggling to meet financial obligations? This is why authors of financial articles are divided: some arguing we are in a recession; some say a recession will come later this year; or others that a recession will arrive in 2023. And what if Putin were to shut off gas supplies to Europe as a byproduct of the Ukraine-Russia conflict? US markets surely would not be immune to contagion effects.

Uncertainty is outside of our control. But as investors in a forward-looking market (ie the stock market), we need to look beyond the uncertainty and try to identify companies that will be more valuable a year from now than they are today. And if our thesis is correct, then the company’s corresponding stock price should also increase in value as the next year approaches. Yes, earnings estimates may be close to peaking, but sectors of the market still appear to hide value relative to historic valuations by various mainstream metrics. Yes, a recession may indeed come. But the entire stock market has sold off, and there surely is value among the rubble. A year from now, when inflation is falling and the Fed is less hawkish, then The Ignorant Investor is willing to posit there may well be strong performance from these beaten-down names.

All this can be summarized by saying that life goes on, and companies with strong balance sheets, solid income, and a compelling story will likely still be around next year and the year after that. Finding quality names that will withstand potential downturns, while perhaps speculating on some of the quality “story” names with slightly shakier fundamentals, will likely pay off quite handsomely, if not in 2022, then in 2023 or 2024. We are investors after all, not traders! 

And again, as always, if you are interested in unlocking this value, be sure to coordinate closely with your financial advisor to come up with a buy list of quality companies that may be on sale today!

Stories of Note

More Acquisitions Ahead

Not so much a story as a potential theme. Elon Musk makes a tentative offer of $44 billion for Twitter before expressing a strong desire to renege on said deal (a messy lawsuit and court ruling will determine what happens next). Merck nears a purported $40 billion agreement to acquire Seattle Genetics- erm, excuse me, I mean Seagen. From way back in January, Microsoft bought up Activision Blizzard for nearly $70 billion. Each of these companies (and in the cases above, one person) are making these acquisitions for a variety of reasons, but at the core, the acquirer sees more value in the company than the stock market does- which is why they pay a premium to own said companies. These disconnects are more common than you might guess, but an acquirer is necessary for an acquisition to take place- cash rich companies are likely on the hunt in the rubble of the current stock market and will likely move quickly once uncertainty around inflation and the economy starts to clear up.

The Buffett Effect

Several years ago, The Ignorant Investor took note (in a previous article on this blog), of the highly favorable terms Warren Buffett received from Occidental Petroleum in return for staving off hostile bidders and shoring up the company’s financial position during crisis. There is no doubt that Berkshire profited handsomely from the deal. Now, since the beginning of 2022 (and even more so since energy pulled back from recent highs), Berkshire has again revisited the energy company. Berkshire this time is operating on the public equity side of things by buying up nearly 20% of the company through the first week of July. Speculation has been growing that as oil and gas producers spew out huge amounts cash – with a potential runway of many months to come – and continue to trade at relatively cheap (ie low) multiples, buyouts may be coming. And perhaps Warren Buffett through Berkshire Hathaway has his eye on Occidental Petroleum. 

A Topsy-Turvy Time in the Markets: Of Selloffs, Geopolitical Tensions, and a Hawkish Fed

2022 Stock Market Themes | Brief Energy Market Review | Implications of Russia-Ukraine Conflict

The twelve members of the Federal Open Market Committee hold incredible power over the stock market’s 2022 performance. They next meet on March 15th and 16th and are expected to modestly raise interest rates and provide a blueprint for reducing the balance sheet. [Image ©bas121/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

What kind of glib entry can we start this post off with today? The world has become a grimmer place with social media images of a Russian tank crushing a civilian car – with the civilians inside, no less – and urban street battles between Russian and Ukrainian armed forces. Then that ominous smoke following an attack near an active Ukrainian nuclear power plant just several days ago. Yes, this is 2022, but the entire outlook of this bright “new normal” has changed, even as mask mandates are being lifted across US cities. Let’s address the elephant in the room (Ukraine) at some later point. For now, let’s focus on the stock market. 

The stock market has suffered from months of weakness starting in December of last year as the darlings of the huge Covid-19 stock market boom (ie growth stocks) sold off (*gasp*) as sky high inflation stoked now-realized Fed “triple threat” fears (more on that below). If you look across an array of Nasdaq-listed companies, you’ll find a boneyard of stocks that are thirty, forty, or fifty percent off their 52-week highs! Of course, this doesn’t mean there aren’t outperformers. The S&P 500 component leader from 2021 has been a shining star, a bright green sector in a sea of red as a Who’s Who of energy companies move ever higher in sympathy with higher oil prices and matching supply fears. The Ignorant Investor has started putting sidelined cash to work in *select* companies (yes, even some quality growth names) on the suspicion that the heavy selloffs are perhaps overdone as may well be evidenced in the second half of the year. 

Let’s look at the broader market conditions that will influence 2022 performance.

2022 Themes: First Half of the Year

“It’s the dollar, stupid!”

Or, in this case, a shrinking supply of many billions of dollars as the Fed’s “triple threat” is realized: supportive stimulus measures cease, interest rates are raised, and the bloated balance sheet is offloaded (note that in talking about the Fed, we are also directly talking about those Treasury yields you keep hearing about on financial talkshows!).  This is likely the primary driver to the stock market selloff, with the Ukrainian conflict initially acting as a smokescreen and excuse for market weakness (this is fluid and has been changing in recent days as commodity/sanction risks resulting from the Ukraine invasion spill over into other markets and the real economy). After all, the spectacular stock market gains of the last two years have been on the back of incredibly strong monetary support coupled with some stimulus spending. The music has now stopped playing and investors face a world with 1) inflation near 40-year highs 2) a Fed aggressively shrinking the money supply to combat that inflation. All those stalwart growth stocks that have been the big winners over the past several years begin to look a whole lot less appealing against that backdrop. A good illustration of this can be seen in recent earnings reports: tech stocks that beat expectations have been flailing and tech stocks that miss have been crushed by steep selloffs a la Snowflake.

“Inflation is taxation without legislation”

These wise words courtesy of Milton Friedman emphasize why high inflation really is problematic. And the guardians of our money supply (ie Fed) work diligently to keep inflation low- although this hasn’t really been a challenge for the past twenty or so years. However, inflation readings hovering stubbornly around the 7% range (annual reading and near 40-year highs) will only be further exasperated by the higher energy prices sparked by the Ukrainian conflict. Of note, those wage gains we’ve been seeing in employment reports have been less than inflation numbers, indicating that the average worker seeing a five percent and change raise because of tight labor market conditions is still losing buying power every year. High inflation readings are also bad news for parts of the stock market as demonstrated by “smart money” fund flows away from growth and into cyclicals in recent months.

“Speak softly and carry a big stick”

Winston Churchill’s advice worked well in WWII and has continued to be the mantra well into 2020. The only difference now is that multiple adversaries now carry big sticks and big chips on their shoulder (Europe will soon be expanding their military capabilities as a result of recent Russian action). This is just another way of saying that geopolitics are here to stay and must be carefully considered by investors allocating their capital across markets. Until more clarity is available, The Ignorant Investor is quite content to stay invested in domestic-facing US companies. Economic data remains quite solid after all. Do keep in mind that cyberwarfare is to be expected- and note that “Russia” briefly compromised even the Nasdaq stock exchange twelve years ago (see one of our earliest posts on the topic here; this has now been mitigated on all major exchanges through air-gapped daily backups of positions of all market participants).

“Be fearful when others are greedy and greedy when others are fearful”

As stated by none other than Warren Buffet (who lives out his advice- he or his lieutenants apparently took a $5 billion position in Occidental Petroleum last week). Following such heavy and indiscriminate selling of recent months, The Ignorant Investor suspects that incredible value can now be found in many areas of the market. Many fears remain, however. For sake of brevity, we will gloss over some of the big ones which include:

• Skyhigh energy prices leading to stagflation and global recession
• Nuclear security degrading in Ukraine through the fog of war
• Contagion of geopolitical conflict should European weapon systems flowing into Ukraine from the West substantially damage Russian military

Volatility feeds off all these potential scenarios, explaining the massive daily – and intraday – swings in US equities. The Ignorant Investor is very careful in even trading positions as the factors driving market actions remain highly fluid. This fear should subside by the second half of 2022 as clarity across the spectrum improves.

A brief look at energy markets

Energy security is suddenly at the forefront of everyone’s mind as Russia, the third largest oil producer and a member of OPEC+ no less, faces increasing sanctions. Should the country decide to taper back fuel supplies to Europe, or should the West decide to sanction Russian energy supplies, then Europe will face a near-impossible situation of trying to find alternative fuel supplies in the waning winter. 

While the broader commodity markets have been upended by the Ukrainian conflict (fossil fuels, the price of foodstuffs like wheat, and even metals like aluminum are moving around), let’s focus on energy producers. The underlying energy company stocks themselves have had a more muted reaction. Part of this is institutional investor wariness- they have been burned again and again by energy companies behaving badly over the past decade (executives demonstrating poor judgment by spending wildly in BOTH the boom-and-bust times which led to widespread bankruptcies and underperformance in the sector). Another part is that if oil prices get too high, demand destruction occurs as some industries are priced out or move on to substitutes. This doesn’t mean that opportunities don’t abound for the discerning investor working in close consultation with their financial advisor, however. Also, some of those quality renewable energy companies that have seen nothing but selling for months now suddenly look darn appealing!

A Deep Dive into the Russia-Ukraine Conflict

The end of a beautiful day as the winter sun sets over the city of Kyiv, the capitol of Ukraine [Image ©slava2271/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com]

This is 2022. Why would a powerful sovereign nation invade a small sovereign nation at its border, unprovoked and without a prior attempt at dialogue to resolve differences? Europe struggled to find a rational answer and many people and nations across the globe are perplexed and appalled by the Russian invasion of Ukraine. Are the Russian actions predictable and understandable? The answer here may well be yes. Does this make it justifiable or right (especially without trying diplomacy first)? The answer is almost certainly no.

In January, The Ignorant Investor fielded numerous queries from various acquaintances and working professionals about whether Russia would invade Ukraine. My answer was invariably “quite likely”; this primarily due to absolute European dependence on Russian gas in the dead of winter (yes, the US has some small imports, but Europe would likely face outright “war level” energy shortages if Russian gas imports were halted), a hesitance from the US to create potential conditions for WWIII, and an aggrieved Russia seeking to make its historic alliances “whole” again. After all, Russia has openly telegraphed its displeasure with a westward expansion of NATO for more than twenty years- even acting militarily on that displeasure on two previous occasions in Georgia and Ukraine (Crimea), respectively.

The response? A united front of global countries unleashed severe sanctions against Russia, including the somewhat controversial move to freeze Russia’s extensive FX reserves. But absent broader conflict stemming from mass killing of civilians by Russia or the West unilaterally sanctioning Russian energy, the Ukrainian war will have little effect on US companies. Russia will of course feel the need to retaliate against the US and Europe as its citizens will lose access to global assets and will struggle to even travel outside its borders (currency exchange and bank and credit activities have been halted for Russian citizens, remember) and this will likely be in the cyber realm. Hacking activities could be used to devastating effect but will likely be limited to reduce the chance for tit-for-tat Western retaliation (in a hail back to the early days of this blog, here is a post about how Russia likely planted a digital bomb capable of taking down the Nasdaq in a proof-of-concept hack; the hack was fully implemented in 2010 but never executed).

A Walk Through Time

The Ignorant Investor is an avid student of history, holding to a strong philosophy that we as humans are not nearly as smart as we think we are (myself included), and that events that have occurred in the past are quickly forgotten and often repeated because of that forgetfulness. With this backdrop, I thoroughly enjoyed “Munich: The Edge of War” in a viewing last year and found the parallels to February 2022’s flurry of diplomatic activity uncanny. Once again, the great powers (in 2022, Russia, United States, European Union; in 1938, primarily Germany and England) sat around a table discussing the fate of another small nation (in 2022 this was Ukraine; in 1938, Czechoslovakia) without any representation from that small nation. The larger aggressor in 1938 ended up swallowing up the smaller nation as the rest of the world watched. All sorts of treaties and agreements in both cases created a web of confusion, but the result this time around will likely be a similar fate for the smaller nations, although unlikely to result in a world war (the actual events around the military buildup, Great Powers negotiations, and invasion appeared to parallel history).