There Is No Investment Playbook for This War
Markets turn around on the TACO social media posting… will it last?
Key Takeaways
Cracks Emerge Across All Asset Classes: I realized several weeks ago that I had emphasized that nobody should change their investment strategy based on geopolitics. But maybe it’s time to dust off the famous quote from Keynes that goes “when the facts change, I change my mind. What do you do, sir?” All that said, after going back and forth with Walter Murphy these past few days, it has become clear to me that what has changed the most is the technical picture for virtually every asset class — having become ruptured on a near-term, and quite possibly, an intermediate-term basis.
No Place to Hide in Traditional Safe Havens: Ergo, we have taken some money off the table in our bond, gold, and a variety of our equity and sector exposures. You know this is a market that has become totally unhinged when the areas of the market with the highest correlations to global uncertainty are peeling off, like gold and the miners. Or when sectors that should directly benefit from a wartime economy, like Aerospace & Defense, are off by -11% so far in March, and Health Care, which has nothing at all to do with what is happening in this conflict, is also down -9% just over the course of the past three weeks. Nowhere to hide except for barrels of oil and Treasury bills priced in greenbacks.
Weak Labor Market Caps Inflation Risk: The front ends of the U.S. and Canadian bond curves now look very appealing, with the markets now pricing in the prospect of rate hikes that we strongly feel will not be forthcoming. While inflation will go up in the coming months, there is no doubt that this is going to hit the wall in the weakening labor market, where workers have minimal bargaining power. This is not 2022 or 2023, when there were 50% more job openings out there than there were people unemployed — that has now flipped to where there are 6% more people unemployed than there are job postings. We will be left with a contraction in real incomes and spending, and that doesn’t even include the knock-on effects from the credit contraction coming out of private debt and equity, which is now only in its infancy stage.
