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Insight - Making Sense of the Narrative


The real legacy of Covid is not so much inflation per se as the fact that it ended the follies of QE and, in Japan, Zero Interest Rate Policies. Not only did these policies achieve almost the very opposite of what they set out to do, but they also caused huge distortions in capital markets. Now that they are unwinding they are causing aftershocks across markets, particularly in US long bonds and we suspect that as Japan awakes from a three decade self induced coma, that the necessary reboot of the Japanese financial sector is going to continue to cause a lot of pain.

We were honoured to be invited to speak at the Sohn event in Hong Kong back in May, where I addressed the topic of investing in the new New Normal as part of our short presentation (video featured) of our 'stock pick' for the conference. We chose one of the themes in our new fund (European Banks) and from that one of the favoured stocks from our colleagues at ToscaFund in the UK where they have run a very successful long short financials fund for over 20 years. Two months in an we are pleased to say that our pick is currently third in the 'competition'. Not that we are competitive.....

As we move further to the new New Normal, investors need to embrace the concept of DEI, not Diversity, Equity and Inclusion, but Diversification, Equities and Income. The good news is that Asset classes are going back to their proper purpose, fixed income (and high yield equity) for income and Equity to offer growth and real returns in an era where inflation will be in the 2-4% rather than the 0-2% range. Cash will trend to a zero real rather than a zero nominal rate and regain its role as a risk management tool.

A note recently published on livewire about how AI rather than the Fed will bring down the cost of education and healthcare - and thus inflation.

As Twain observed, “It is easier to fool people than convince them they have been fooled”, and thus the best route for investors is to acknowledge that the modelers will continue to assume a precision they do not have with a conviction that we should not share, but that precisely because policymakers fail to learn from history or the fact that it rhymes, they will continue to do ‘the wrong thing’. This is the background against which we have to make our own decisions.