Thursday, August 4, 2022

Morning Note: The Veering Path -- And -- Above All, Stay Patient -- And -- Be Popper's "Rationalist"

You may have noticed that, when I suggest that inflation is coming off the boil, I often make it a point to remind the reader that we are structurally bullish on inflation over the long-term from here. 

I.e., nothing with regard to our thesis has changed since I penned the following back on May 7th of this year:

"...this isn't us responding to inflation concerns/Fed-tightening along the lines of the 2018 debacle, or 1999/2000, or any other stint over the past 40 years. This is us recognizing the structural shifts; the glaring deglobalization (a multi-dimensional phenomenon) occurring the world over, the surge in populism (a trend that occurs after decades of capital-friendliness culminating in severe wealth and income inequality) and its policy impact, the unrelenting push toward renewable energy, the utter corner(s) central banks have backed themselves into, and so on.

We appear to be in the early stages of structural, inflationary (relative to the past 40 years) trends that will play out over many years to come -- although not linearly, mind you... Trends that simply will not allow for what had become a bottomless pit of central bank pump-priming of financial markets... Trends, therefore, that virtually assure that the path to investment success will veer, perhaps widely, from that of the past several decades...

I.e., while we remain forever open to all possibilities, we believe we're staring into a macro environment that demands a re-thinking of how money is to be invested, and how risks are to be managed, well beyond the foreseeable future..."

Credit Suisse's widely followed guru Zoltan Polzar emphasized what is essentially the deglobalization theme in a Bloomberg interview published Monday:

"The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe..."

“Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.” That pattern held “until East-West relations soured, and supply snapped back...”  

"The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic..."

"There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile..."

In other words:

"For decades the Fed always gave the markets more candy, especially when the kids cried out for it. Now, the kids are going to have to do without."
--Peter Boockvar


"...we believe we're staring into a macro environment that demands a re-thinking of how money is to be invested, and how risks are to be managed, well beyond the foreseeable future..."


"...the path to investment success will veer, perhaps widely, from that of the past several decades..."

Stay tuned, stay hedged, and, above all, stay patient! 

Asian equities rallied overnight, with 13 of the 16 markets we track closing higher.

Europe's in the green so far this morning as well, with 15 of the 19 bourses we follow trading up as I type.

US stocks are mixed to start the session: Dow down 75 points (0.23%), SP500 down 0.14%, SP500 Equal Weight down 0.32%, Nasdaq 100 up 0.11%, Nasdaq Comp up 0.15%, Russell 2000 down 0.13

The VIX sits at 22.36, up 1.87%.

Oil futures are down 1.23%, gold's up 0.59%, silver's down 0.44, copper futures are down 1.15% and the ag complex (DBA) is up 0.05%.

The 10-year treasury is up (yield down) and the dollar is down 0.14%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 15 -- led by Albemarle, Brazil equities, AMD, Dutch Bros and emerging market equities -- are in the green so far this morning. The losers are being led lower by energy stocks, uranium miners, base metals miners, defense and tech stocks.

Popper's "rationalist" is what an investor literally has to be to be successful:
A rationalist is simply someone for whom it is more important to learn than to be proved right; someone who is willing to learn from others – not by simply taking over another’s opinions, but by gladly allowing others to criticize his ideas and by gladly criticizing the ideas of others. The emphasis here is on the idea of criticism or, to be more precise, critical discussion.
The genuine rationalist does not think that he or anyone else is in possession of the truth; nor does he think that mere criticism as such helps us to achieve new ideas. But he does think that, in the sphere of ideas, only critical discussion can help us sort the wheat from the chaff. He is well aware that acceptance or rejection of an idea is never a purely rational matter; but he thinks that only critical discussion can give us the necessary maturity to see an idea from more and more sides and to make a correct judgement of it.

--Popper, Karl. All Life is Problem Solving 

Have a great day!