The decade of living dangerously?
Macro pivot points and serious implications for investors
These are dark days. Noam Chomsky, the well-known intellectual and nonagenarian, warns the world that we are “approaching the most dangerous point in human history.” A never-ending vista of dystopian images haunts the public consciousness: terror in the suburbs of Kyiv, Ukrainians preparing for an Eastern attack by piling sandbags along the beaches of Odesa, and – bringing back memories of the early 2020 Wuhan lockdown – surreal photos now show Shanghai, the world’s third most populous city and largest port, at a standstill. None of us can be completely impervious to all this.
Meanwhile, financial markets have darkened too. Consumer prices in America are rising at their fastest clip since 1981. The Bank of Canada, evidently no longer tiptoeing but moving in leaps, just blasted the market with their first super-sized 50 basis point rate hike in 22 years. Across the Western world, yield curves are threatening full inversion. By many measures, this economic expansion seems to be galloping toward its own expiration.
Sentiment is gloomy too. Bank of America’s widely followed fund manager survey breathlessly tells us that global growth expectations plunged to an all-time low of net -71%. That is as bearish as it gets. A recent Bloomberg headline captures the mood best: “There’s a bull market in macro doom.”
The first impulse for many investors may be to run for the hills. Yet there is a big problem with that strategy today. With inflation and volatility all at elevated levels, price signals become less reliable. The usual economic dashboard is blurry and distorted. If lockdowns did not break the rhythm of clear thinking, this will. That means humans start to make bad decisions.
Discipline is difficult to sustain under these conditions. And so a certain haste to toll the bell – to run for cover too soon – becomes a key risk. That may yet be proved right. But we are struck by the quantifiable data that suggest otherwise. The reality is that real interest rates across the Western world remain deeply negative. The US 10-year Treasury bond yield is currently burrowed at the subterranean level of -5.9%. That makes a conservative posture in cash or government bonds a risky proposition (in the words of our new and erudite member of our investment team, Terry Shaunessy, “Holding cash is a short position.”).
Looking ahead, humans will continue to be fascinated with the question of “what could go wrong?” Those headlines get more clicks and prophets of doom get more media exposure (they also make for lively guests at dinner parties, even though they rarely get invited back). This is not to dismiss the seriousness of today’s key risks. The atrocities committed in Ukrainian communities mark a ghastly breach of international law. Yet a macro outlook is not complete without also asking “what could go right?” or, more importantly, where can we position portfolios to benefit from shifting trends? This is a central part of Forstrong’s scenario analysis process and has served clients well in the last two decades.
The end of globalization?
Globalization was once sold as a bridge to peace and higher profits for all. Instead, it has become a new battleground. On the surface, the Russian invasion appears to be the end of the era of unfettered globalization – three decades of fitful progress thrown into reverse. The new type of warfare, a financial “shock and awe,” amounts to the most aggressive unplugging of a financial and commercial system as one can imagine. Countries other than Russia could be next. And, perhaps most hazardous of all is Putin being seduced by his own messianic view of restoring Russia’s “historic destiny,” looking less like a master chess player and more like a maniac desperately throwing the dice. Nuclear options can no longer be ruled out. All this makes nations far more reluctant to engage outside their borders.
Where to next? As German Chancellor Olaf Scholz has declared, we are indeed at a zeitenwende: a pivot point. But consider that Putin has unintentionally created a most rare thing in today’s polarized world: a consensus. The invasion of Ukraine has done what nothing else, not even a global pandemic, could do: show the difference between right and wrong with such clarity that nearly everyone is in agreement. This has galvanized support right across the world. A divided America is now uniting. A fractured EU is fostering greater cohesion. The West is more unified and determined than it has been for decades. Putin has effectively delivered a shock to the democratic world that restored its heartbeat.
Clearly a variety of scenarios could yet unfold. But the economic battle lines have already been drawn. Energy and food independence, enlarged military budgets, and a quickening pace of decarbonization are now firmly entrenched as top global policies. Heavier government spending is winning the day. In fact, the war extends and catalyzes several investment themes that had been building prior to the invasion.
Next time: Interest rates, China, and the fork in the road for investors.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2022 Super Trends: World in Transition” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at email@example.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.