Dear friends,
A consistent narrative that I recognize while working with people's money is that we all have, naturally, a clear goal. Clients know their starting point, they know where they want to go and want to end up but are unclear about the journey that will take them there. That’s why in finance and investing there are people like me.
However, a gigantic narrative has changed the journey. We are ending a period of global growth!
Supply and demand in investing had a huge tailwind since 2009. Pushed by repressed bond yields and repressed valuation through a massive liquidity injections done by governments worldwide. For 14 years, world leaders looked at asset classes as alternatives to complex policy reform implementation. It's not just our current leaders, I am talking about darn near a generation of repressed reform and the bastardization of central banking as the sole solution to all social and policy problems.
Before the Ukraine war, we knew our starting points and were in a favorable position to work toward sustained prosperity. Then along came the Ukraine war, which did two things: it moved the starting point backward and made the journey even more uncertain.
There are two ways of thinking about the current situation:
If you're a pessimist, it paralyzes you completely going forward
If you're an optimist, you don't worry, this chaos will resolve itself. Afterall, this has happened in the past.
I want to be somewhere in the middle. I want to talk about what has now been unleashed that complicates longer term goals.
First and foremost, there is a change in the baseline in investing.
A year ago, consensus was the following: high growth, transitory inflation. To the asset markets, that's a wonderful message! It means supportive fundamentals and transitory inflation, so there will be no shock to the liquidity narrative (an unwanted event) .
Towards the end of the year 2021, the baseline changed. High growth but persistently high inflation, again the fundamentals were fine. Fast forward, October, 2022.
We now have stagflation, meaning lower growth and persistently high inflation, creating a fundamentally different baseline.
Part of that new baseline involves the role of central banks. For the first time they have moved away from being a supportive asset to our economy and the globe, instead they are weaponizing their tools to attack inflation. These tools are too blunt for the job required and the current leadership’s lack of understanding around this, is beyond my mental capacity.
In addition to central banks, western governments have also begun to weaponize the global payment system!
Similar to the sanctions placed on the Russian central bank, bringing the 11th largest economy in the world to its knees, people didn't realize that in economics and finance there was a hidden “nuclear weapon” that the United States could use. You can’t put this genie back in the bottle.
This is what economists call multiplier equilibrium:
You move further away from the starting point, but rather than returning to the mean, the dynamics will take you even further away; that means that the short term problems become more acute, and the longer term problems also become more acute, and we find it all very difficult to predict future risk factors.
So how do you navigate that world? Basically, we have to rethink how we invest.
You don't want to be paralyzed and sit on your hands. These global issues, the new world order, are not a turnaround fix.
I'm taking the semi optimistic path!
My first goal was to help those who are retired reduce risk, minimize losses, and find ways to protect and preserve assets.
My second goal is to rethink the new norm. We need to focus on companies and strategies that are reliant on domestic growth and guard from the outside world.
I am working on a list of ideas and companies that I can explain 80% of what would be there outcome. It's impossible to come up with a 100% probability of outcomes, that's a computational impossibility.
It is possible to succeed! I wouldn't be writing this overlong email if it wasn't.
My firm has worked on several ideas and strategies that they are confident will outperform others going forward.
Details are coming All my best
Chris
Christopher R. Lakian
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