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The world is at a crossroads between war and peace. The Ukrainian crisis could strongly accentuate the inflationary shock. The current situation requires an allocation based on strict risk management and a great ability to analyze scenarios.
Chronicle of a Foretold War
The Ukrainian crisis that we are going through can have a profound impact on the distribution of global wealth. It would result in a major energy shock. Germany depends very heavily on Russian gas since Merkel has chosen to give up nuclear power. An interruption of Russian exports, which represent 50% of German gas imports, can have a profound impact on the competitiveness of our largest economic partner.
For an investor, this is therefore a major challenge: how to structure his portfolio to get through the various possible crisis scenarios, when in essence, it is impossible for the uninitiated to understand what is going on in the major world chancelleries?
The answer to these existential questions for the very sustainability of financial assets is based on mathematical risk management and allocation based either on extremely fine analytical power or on artificial intelligence.
What impact of the monetary creation of the COVID crisis on the distribution of wealth?
Keynes thought a lot about the links between the history of money and political history. He was thus able to prove that many of the great turning points in history are linked to major changes in the money supply.
The great reconstruction of the 1950s is linked to the creation by Keynes of the Bretton Woods system. It is based on a stabilization of the money supply and therefore of real growth according to potential growth. The great economic stagnation of the past 10 years can thus be explained by an under-creation of money reflected by the liquidity trap of zero rates.
Does the great monetary reset of the COVID crisis pave the way for a new Golden Age and the end of the “great downgrade” denounced by some? Some anticipate it. In fact, the return of monetary creation and therefore of inflation and nominal growth will enable the middle classes to benefit from renewed economic growth thanks to the dehoarding of unproductive savings blocked in investments at negative rates.
Wars or Peace? Butterfly Effect
For other analysts, the paths of history are not straight. There are major inflection points particularly via political crises and wars.
We are no doubt at such a turning point in history where a simple butterfly can trigger a sudden and definitive shift in an unstable system between two radically different balances.
What end for Fight Club? The movie or Tencent?
Fight Club is a mythical film for many hedge fund managers. They see it as a parable of the “great experiment” of the past 20 years. The Chinese recently announced that they have changed the ending of this film. Tencent, a sort of Chinese Netflix, has thus replaced the final great explosion which sees the destruction of capitalism by blasting its financial system.
The proposed new ending for the Chinese is more politically correct: the authorities arrest the crazed conspirators who tried to stage the final explosion at the last moment. But Tencent finally announced to return to the initial scenario…
Towards a Munich crisis or a Fultonian crisis?
Are we marching towards the great confrontation between Russia and the United States around Ukraine, remake of the “Drang nach Osten” (the march to the East), founding myth and destroyer of Nazism and Schachtism until disaster of Stalingrad in 1942?
Or will we see democracies return to Churchill in his seminal speech at Fulton in 1946. He then warned the United States that any confrontation with Russia posed the risk of destroying the founding forces of our democracies: their middle classes, breeding grounds for their economic and social rotation and their collective intelligence.
To choose between these two Schachtian or Churchillian scenarios, there are two possible paths: either a major foresight capability, or the use of artificial intelligence systems. The first is based on a fundamental analysis of the market. The second is based on mathematical analysis. These two approaches are complementary.
Performance of a dynamic Evariste allocation since 12/2010 compared to an allocation of 60% world equities 40% world bonds. We note that an active allocation makes it possible to limit the fall in the COVID crisis of March 2020 and the Ukrainian crisis of January 2022.
Source: Evariste Quant Research, Bloomberg LLP. Model portfolio performance at no cost. Bloomberg is not responsible for this analysis. Past performance does not guarantee future performance.
How to structure your portfolio?
The current rate structure still anticipates a rapid but limited rise in FED and ECB rates. In the event of a greater inflationary shock due to a war in Ukraine, for example, inflation could rise much more sharply, thus forcing the Fed and then the ECB to raise their rates well above the levels currently expected.
For all these reasons, we recommend the following strategies:
1. Block variable rate borrowings by converting them to a fixed rate over the longest possible maturity
2. Reduce its allocation to funds in euros in favor of units of account.
3. Sell euro bond fund allocations, including high yield and emerging market bonds.
4. Possibly keep international bonds to protect against a fall in the euro against the dollar and the yen.
5. Also keep funds indexed to short-term inflation to protect against an inflationary shock, particularly energy, while limiting exposure to a renormalization of real rates. In all the bubbles that have followed, real goods have been the least impacted by the monetary creation accumulated over the past 20 years.
6. Lock in TME rates by opening capitalization contracts. These contracts make it possible to smooth the capital gains of a life insurance contract from the initial TME for companies.
7. Take refuge in equities, in particular global equities. Take advantage of the great rotation between bonds and equities after 10 years of economic stagnation of the euro.
Evariste Monde Dynamique allocation: positions in bonds have been reduced to a minimum. Positions are currently long in equities despite tensions in Ukraine
Source: Evariste Quant Research.
Conclusion: buy at the sound of the cannon?
“Buy to the sound of the cannon and sell to the sound of the violin” is a well-known Rothschild adage. We adhere to this adage of the largest family of French financiers.
The Ukrainian crisis, the great reset of inflation and interest rates are all scenes of a great world theater play whose actors come and go depending on political vagaries. We see a new world appear through the veil of the great Schumpeterian cycle of creative destruction.
No one can yet perfectly distinguish the structure of this world in the making. For the supporters of the great civilizational collapse, it will see the end of the Civilization of the Enlightenment for a return to an ecological decline more respectful of the planet via the great downgrading.
For others, the current crisis will see the emergence of a new capitalism refounded and regenerated by the great technological and monetary revolution, like an eternal phoenix rising from the ashes through the mutation of its economic, social and political structures rebuilt by the collective intelligence of its peoples.
Buying shares despite the rumors of war means believing and not just hoping for the advent of such a better future.
This article is for informational purposes only and does not constitute an offer for products or services, nor an offer, recommendation or solicitation of an offer to provide investment advice or services to buy/sell instruments. financial.