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The Outlook — Threading A Needle

Note to readers—I must get a final version of book #3 to my editor. I am going to write a little less frequently until I get this manuscript off my desk, unless something blows up.

Understanding investing and geopolitics is like being a bloodhound, you need to pick up the scent. Lately, discerning the scent has been extra hard, at least for me. But I think maybe I’ve finally got it.

The pandemic, stimulus, and massive tightening are behind us. A consensus has formed among the smart money that the existing tightening will soon hit demand, earnings, and stocks, at which point there will be a recession and inflation will finally fall below target. Plus, there are now two wars afoot and maybe a third at some point in Asia. Scary stuff.

By consensus, I mean large banks like JP Morgan, who came out recently and told investors to sell stocks and buy cash and gold. Banks don’t normally say such things. To be sure, there are other CNBC types convinced that we will get a big end-of-year stock rally. They might both be wrong. Instead, we might thread the needle.

Here is what I mean.

a. In terms of geopolitics, what looks like a scary, East-West, global conflict is, if you step back, a self-defeating fool’s errand on the part of China, Russia, and Iran. As Deng Xiaoping is purported to have said, everyone who makes friends with America gets rich. The corollary is also true. Over time, these systems will not prosper.

b. In terms the the economy, the adjustment to weaker growth and lower inflation is going slowly because the private sector has de-levered a lot since 2008 and, in many cases, hedged their remaining debt, meaning only very gradually does tightening money bite in the US. In Europe, where more debt is floating rate, the bite is faster.

c. Inflation has already fallen a lot. US CPI was 9%, now, depending on what measure you use it is a little above or perhaps already below 3%. We thread the needle if inflation falls further allowing interest rates to start to decline before the big debt rolls cause a lot of pain. Those are still a few years out. If bonds stabilize, likely stocks do as well. A big if.

Below I touch on geopolitics, then markets in more detail.

Geopolitically, we are in a long down wave of increasing global conflict. The downave probably began in 2014, when Russia seized Crimea, later followed by Xi abolishing term limits (2018), Russia invading Ukraine writ large, and now Hamas’s attack on Israel. The impact of this is thousands dead and lower productivity for the simple reason that there are a lot of hard-working productive people in each region that could have been integrated into the global workforce and now won’t be largely due to terrible leaders.

Below I show GDP per capita by country. The blue lines are US allies, the red are adversaries. The people running these chaos-creating regions are clinging to a set of practices that destroy wealth.

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