Why Did Stock Investors Fail to Anticipate the Inflationary Risk? Because They Had No Plan B.
Most had never been confronted with such inflation.
Since the gradual disappearance of inflation throughout the 1980s and 1990s, generations of investors have come to regard its eventual return as ever less likely.
Globalization, the disinflationary machine, and the central banks, masters of the markets since the financial crisis, seemed to be enough. The fight against deflationary risks and the maintenance of low-interest rates remained the dominant paradigm at the turn of the 2020s.
It was so dominant that the first signs of globalization seizing up, due to Sino-American animosity or the consequences of the pandemic, prompted few investors to change their software. When one has earned fortunes on the bond markets by watching interest rates fall, or on technology stocks, the unstoppable engines of the stock markets, admitting that the party is over is not easy.
It took the Russian aggression in Ukraine to open people's eyes: the Nasdaq has lost 30% since its record high six months ago and bonds have become a death trap. The latest quarterly accounts of major managers bear the painful mark.
They do have some excuses; neither the Federal Reserve nor the ECB have been very perceptive in the face of the inflationary threat, which they only took into account very late. While hedge funds specializing in volatility had a field day with the central bank's return to power, more traditional investors, who have been thirsty for yield for ages in this low-rate universe, suffered a severe blow.
That so few of them had a plan B when the central bankers announced the gradual end of monetary laxity is however somewhat disappointing. This scenario of controlled tightening implies more volatility in the short term; in the longer term, beware of those who will not have developed a plan to rebalance their portfolios if inflation takes hold: those who are late to the party will be the losers of this turnaround because they did not anticipate it well, most often due to a lack of robust investment governance.
Changing the paradigm is indeed difficult: one must assess the nature of inflation, whether sustainable or not, through its various measures, analyze its impact, whether more or less rapid, on asset classes, whether listed or not and their correlation, without giving in to fads as to their possible evolution, which does not always correspond to received ideas; in short, one must construct scenarios and corresponding reallocations, at the end of an investment approach based on one's values and ESG principles, as well as one's constraints.
For such an approach to be successful, however, it is necessary to go further: prioritize these scenarios, and define warning signals that can trigger the implementation of alternative allocations, at the risk of going against the grain of the thinking that is still dominant on the markets. It is a matter of building new consensuses, which requires a strong internal mobilization to avoid denials, overcome confusion and particular interests, and analyze the risks and opportunities of the new situation, capable of stimulating the teams.
Openness to exchanges with shareholders and stakeholders, and independence of mind, which allows us to think through contrarian scenarios from a long-term perspective, are cardinal values in this process. However, few investors are capable of taking a multi-generational approach. Sovereign wealth funds can, as can pension funds and insurers, but they are limited by regulations that make their balance sheets rigid.
Maintaining this long horizon remains a key objective. The proof is that in the first quarter, amid a market rout, a distinguished investor reminded us of the value of patience by resuming, after a long absence, net equity positions of $41 billion. His name? Warren Buffett ...
If Buffett was able to do this, it is precise because he has always followed the same investment philosophy, and in the case of a Bear Market, the Oracle of Omaha always sticks to the same 4 golden rules. This should inspire you in these times of market uncertainty in the minds of investors.
Some reading
Always a Contrarian, Michael Burry Predicts a Bullwhip Effect in the Months to Come. Some of the economic data in America point in his direction.
Here Is Why the G7 Ban on Russian Gold Is a Game-Changer, Even for Bitcoiners. This ban brings us closer to the scenario long anticipated by gold bugs.
Wondering What the Key to Putin War in Ukraine Will Be? The Resilience of the Russian Army Probably. Russia must now resort to outdated Soviet-era arsenals.
5 Reasons Why Selling Your Bitcoin Now Is Pure Nonsense. An important reminder for those who still need it.