10 Themes for 2023

The advancement in technology continues every year regardless of stock market movements. This year, I’ve selected two specific areas of technology as the leading themes for the year ahead. There is no better example of this than the progress in artificial intelligence with ChatGPT hitting the mainstream in recent months. This is world-changing technology, and every business and consumer will be exploring its capabilities in 2023. It’s not only what the technology can do, but also all the businesses and applications that can be built to utilise the platform.

Improvements in these technologies will accelerate exponentially, ushering in entirely new ways of doing business. Not only will it be creating and eliminating jobs but creating and eliminating entire industries too. The emergence of AI and machine learning will bring about unprecedented efficiency and productivity for countless businesses. I also think the opportunity in robotics and automation is massive too and that it’s only a matter of time before this area has its ChatGPT moment as well. Watch the latest Boston Dynamics robot video and consider what that type of technology means for the future. So many industries benefit here.

The most difficult part of 2023 for investment markets may simply be trying to answer the inflation question. Financial markets currently anticipate a goldilocks situation where no recessions eventuate, inflation returns to 2% and economic growth and corporate earnings will improve. This is essentially the rationale for the recent rally in stock markets globally. I would not be surprised to see inflation stick around the 5-6% mark for some time. That would force the Federal Reserve in the US to hold rates higher for longer and deliver significant pain across the board. A recession being the likely result. Markets are not pricing in such a situation. Inflation is not easily defeated and doing so usually requires significant financial and economic pain.

As much as the Goldilocks scenario has emerged as the consensus in financial markets over the last month or two, I am still very concerned about recession and expect this to be the reality for the global economy. I would urge caution. I believe there is far more downside risk in 2023 than there is upside. Recession risk is still high in Europe, the US and even here in Australia. It just takes time for all these dynamics to flow through. There are landmines everywhere for markets to navigate. None of these are being factored in by the market currently, and while not all of them will eventuate, some will and that poses a big problem.

Geopolitical tensions are near the top of the list for 2023 and the longer the war in Ukraine festers the more likely something escalates or spreads. It is on the side burner at the moment but I expect this to remerge as a bigger problem in 2023. There is no easy way to resolve a conflict when the aggressor is both a nuclear power and under authoritarian control. Russia’s aggression has the potential to spark other conflicts and test the resolve of all nations going forward. Tensions between China and the US have seemingly cooled off, but I suspect more for strategic reasons than due to any real change in the long-term relationship which is one of rivalry and distrust.

It also leads to entirely new trends that impact the investment landscape. The continuous movement towards reshoring of manufacturing and supply chains across the world is critical to national security whilst also having an inflationary effect. Additionally, the energy shortage in Europe highlights the systemic lack of supply globally. While a moderate winter combined with the China covid lockdown helped Europe navigate their energy shortage for now, energy remains both an issue of concern and a significant investment opportunity in 2023.

As lower consumer spending and weaker corporate earnings in the next 6 months lead to cost-cutting and a potential recession, I expect the second half of the 2023 calendar year to see unemployment well on the rise too. Job security will become an issue as job layoffs start to spread. It’s a pending disaster for home builders and construction that will have a massive flow-on effect over the next 1-2 years as all the related trades and businesses feel it. This could end up being hundreds of thousands or even millions of jobs in the US. There are several separate areas like this across the world where economic spot fires are waiting to emerge.

There is an increasing risk of debt crises emerging too. Higher interest rates are now a reality, and the flow-on effects will start being felt in a range of areas. Businesses of all sizes with borrowings due to be refinanced will face a real wake-up call. But the same also applies to Government at all levels. Suddenly the debt they have will begin costing substantially more. I think there are several areas where disaster could strike from Japan trying to control their yield curve through to the US and their debt ceiling issues remerging. Normally these issues resolve themselves and carry on, however, the game has changed for good, and I would not be surprised to see these situations deteriorate. 

My final point after outlining a variety of macro themes is this: There will always be great businesses to invest in regardless of the macroeconomic situation. If anything, the last few years have forced investors to consider the macroeconomic circumstances more than ever, but more than is ordinarily necessary. Great businesses will continue to thrive and prosper regardless of the geopolitical environment, inflation, interest rates or the global economic outlook. As long-term investors, it’s critical not to overthink this. It’s easy to get caught up in the timing of short-term fluctuations, and while it definitely matters, the individual investments that you own matter more. Invest in great businesses at reasonable prices for the long term.

Themes:

1. Continued Rise of Artificial Intelligence and Machine Learning

2. Robotics and Automation

3. Inflation and Interest rates

4. Energy

5. Geopolitical Tensions - Escalation of the War

6. National Security

7. Corporate Earnings

8. Recession Risk

9. Risk of a Debt Crisis Emerging

10. Post Covid - A Return to Normal

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Review of my 10 Themes for 2022

As I work through my 10 Themes for 2023, I always find it interesting to re-read the prior year’s note. While it’s critical to look ahead, it’s also important to review your forecasts and to hold yourself accountable. You’ll never get everything right but it’s a great exercise to revisit earlier thinking and compare it to how things actually played out.

A lot has happened since I sent the note below out on the 24th of January 2022. This was a month before Russia invaded Ukraine (24th Feb), before the USA started raising interest rates (March) and well before Australia did (May). Energy certainly became one of the biggest stories of the year, while inflation and interest rates would go on to become significant issues for markets and the economy.

Many thanks to everyone for their support and feedback over the course of the year. I really enjoy hearing from you when a particular article resonates or strikes a chord.

I will be on leave from Thursday 22nd December and returning on the 18th January 2023. As always, I am available on mobile and will be in touch if there is anything time critical that requires action from an investment perspective.

I wish you and your family a very merry Christmas and a safe and happy New Year!!

10 Themes of 2022

For all the uncertainty over the last 2 years with the pandemic, investment markets across the world had performed very well. However, 2022 is already shaping up as a more difficult year for investors with the All-Ordinaries index down over 6%, the S&P500 down over 8% and the NASDAQ down 13% all in the last few weeks. Markets are going to continue to be challenging as we move from an environment of low interest rates, low inflation, and significant government stimulus to one of rising inflation, higher interest rates and a wind back of government stimulus.

From an investor’s perspective, I think the pandemic will largely be over by June as the omicron variant continues to spread throughout the world like wildfire over the next couple of months and we move to the endemic phase. Obviously, a more serious variant could emerge, but for investors, I expect we are through the worst. If that’s the case, then all of these issues slowly start to rectify themselves. The disruption to supply chains will work themselves out over the next 12 months and with that inflation will ease too. Interest rates will then stabilise.

To me the most important theme is the continued rise in all facets of technology, not only for 2022, but for the next decade and beyond. It underpins everything. It determines the areas we invest in and those we bypass; it determines the companies we buy and those we avoid. It is central to our investment thesis and generating returns over the long term. Outside of the big tech giants there has already been very significant falls in the prices of pure tech stocks. This is not unreasonable given their high prices and adjusting for rising interest rates. However, as markets retreat exceptional long-term buying opportunities are emerging in this area. Patience is key.

Perhaps the biggest threat to the Australian economy is the slowdown in China on the back of their property and debt issues. China appears to be dealing with this situation so as to protect the country from any major financial catastrophe however, as always, their methods are opaque and do not provide the outside world with great confidence in the overall system. Importantly China’s president, Xi Jinping, needs to ensure the nation’s stability as he locks in his next term later in the year. What is most clear though is that the Chinese economy is slowing, and that Australia’s economy will be directly impacted by this.

While there are always geopolitical concerns and the risk of conflict it appears to me that the USA and the west will have a more challenging time than usual in 2022. Russian troops at the Ukraine border are the latest to add to ongoing threat of China invading Taiwan. I expect China and Russia to coordinate the timing of their provocations as to apply pressure on the USA and its allies, forcing them to either prioritise one potential conflict over the other or spread themselves thin. Either way, rising geopolitical instability is an emerging concern to note.

Energy as a theme is similar to technology in that it encompasses several important sub-themes. Captured here is everything from oil and gas to uranium and renewables. Importantly ESG may be the most influential sub-theme here as energy use, production and sustainable business practices are increasingly prioritised by investors, consumers, and leaders across the world. On the flip side under-investment in traditional energy will create distortions in markets and potentially create opportunities. Demand for energy globally will continue to rise and will likely require a pragmatic approach to avoid dislocation in energy markets in the short term. Big opportunity in multiple areas.

Overall, the inflationary pressures driving interest rate rises are a short-term game changer, even if it’s just for the next 12 months. Higher interest rates not only mark the end of easy money but the end of easy investing across all asset classes. Add to this a slowdown in China, rising geopolitical risks across the world and the now familiar backdrop of pandemic and there is more uncertainty than ever. Looking ahead the investing environment for 2022 appears more challenging than it has in recent years. The key variables that were previously so conducive to growth have turned and a tougher outlook will be the result. Returns on most asset classes will be lower than we have come to expect. As always though there will opportunities that present themselves despite the challenges.

10 themes for 2022

1. Continued rise of technology

2. Rising interest rates

3. Inflation risk

4. Covid variants and vaccine

5. Supply chain disruption and economic impact

6. China economic issues

7. Geopolitical risks

8. Energy

9. Govt debt and spending

10. Bond market concerns

Bucket List

As I start to think about the new year ahead and reflect on the year that was, I’ve started looking at my bucket list. I’m not one for New Year’s resolutions, I think they are short sighted. They tend to reflect our inability to change our habits. We think we can just set a date and fix it, but this inevitably fails.

But a bucket list is something I’ve increasingly found to be beneficial as a long-term tool. I’ve had a list for several years and I pick a few items each year that I want to tick off. Now it’s inherently a very personal list but it’s a great exercise to think deeply about what you want to do in the years you have left on this earth.

I think that’s the key, a bucket list makes you explore your own mortality. It’s the items you would love to do before you kick the bucket. It makes you plan your life a little more than you otherwise might. Not planning in a rigid way but rather in a purposeful way.

I start by thinking about what I would regret not having done by the end of my life. They are the real priorities. That process helps cut through a lot of the ego driven items. The things you don’t really care about as much as you think and are more about how they look or make you feel.

The other way I approach it is to think about what would be awesome to do or challenging to try. I’m a big basketball fan, but I’ve never been to a live NBA game in the US. I really want to do that. I started karate with my kids many years ago, my oldest achieved their black belt, but I stopped going. It’s on my list to return to at some point and get my black belt too. 

But they don’t have to be big ticket items or impressive achievements. They might be deeply personal. One of mine was to write a song and another was to sing at karaoke, I ticked both off in 2022. I’d like to try standup comedy too, no idea why because the thought of it is somewhat terrifying. But I want to see if I can do it. The most important item on my list is to visit Sicily and the 2 small villages of Sant’ Angelo di Brolo and Sinagra where my Nonna and Nonno grew up.

There’s something very powerful in actively writing down what you want to achieve in your life. Very often in the busyness of life, it’s easy to find 10 years go by and if you are not proactive, you’ll get caught in the everyday grind and lose yourself. This simple activity is the antidote.

So, what’s left? Well, one of my first items added as a kid was to build a billion-dollar business, turns out that is quite a bit harder to do than I thought back then. But I love investment markets, and I’ll do what I do until I’m 90 plus so maybe that does one day turn into a billion-dollar business. I want to travel the world and experience other cultures so living in Italy for a year down the track.

But more important than what’s on your bucket list is which ones you do. The ones you will tick off next year and the ones you already did tick off this year. I keep a separate list of the bucket list items I have done, and it reminds me of not only how lucky I’ve been in life but how much fun it has been having some of these adventures along the way. 

The biggest consideration is that we don’t know how long we will live. This year might be your last. And if it was what will you regret not having done? Life is for living. Most of what we worry about is a waste of time. I love coming up with new ideas that pique my interest to add to the list. World sporting events and travel are items I think more about as time goes by. I ask myself this… When you are old and look back on your life, what do you want to have done? What are the top items on your bucket list?

Bucket List – To Do

1. Visit Sicily (Nonno and Nonna villages)

2. Wedding anniversary in Paris 

3. Bench press 100kg 

4. Black belt

5. See NBA game live 

6. Attend event at Madison Square Garden, New York 

7. Try standup comedy

8. Write a book 

9. Publish a book of poetry 

10. Build a billion-dollar company 

11. Live in Italy for a year

12. Live in NY for a year

13. Study at Oxford and/or Harvard 

14. Complete a PhD 

15. Visit Positano, Florence

16. Visit Egypt & Pyramids 

17. Karate tournament (open event)

18. Play organised basketball again

19. Play in a chess tournament 

20. Whiskey in Scotland 

Bucket List - Done

1. Get Married 

2. Have Kids

3. Get my MBA

4. Attend AFL grand final 

5. See Cat Stevens live 

6. Attended Formula 1

7. See Ludovico live 

8. Met John Howard 

9. Drink a bottle of Penfolds Grange

10. Karate tournament (won novice event) 

11. Coached basketball grand final win 

12. Kids all finish school

13. NYE fireworks from the top of Sydney

14. Built a house

15. Start and run a business 

16. Learn chess 

17. Live in Perth

18. Live in Sydney 

19. Sing at karaoke 

20. Kids all adults 

21. Write a song 

22. Took kids to Disneyland and Europe 

23. Attended Lauren Jackson’s last game for Australia

24. Espresso with Dad in Rome 

25. Champagne with Paula in Paris

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Changing the World

I’ve always been fascinated by business and entrepreneurs. From a young age I would read the stories of any successful entrepreneur I could find, from Richard Branson to Steve Jobs overseas to Kerry Packer and Gerry Harvey in Australia. I was always interested in where they came from and how they built their empires. But there is a layer of mythology to these epic success stories that becomes problematic as well which we should also be mindful of. The way the stories of success are told and learned amplifies both the traits that are desirable but also those that are not. We can easily fall for the narratives that would make you believe you must be a relentless megalomaniac to achieve success.

Elon Musk is easily today’s poster child for aspiring entrepreneurs. Without a doubt he is as brilliant an entrepreneur as the world has ever seen along with people such as Steve Jobs and Howard Hughes. His ability to take on seemingly insurmountable problems, prove the naysayers wrong and create multi-billion-dollar businesses along the way is extraordinary. The fact that he can execute his plans across multiple businesses in different industries simultaneously is simply mind blowing. His combination of intellect, vision, and ability to relentlessly execute have made him the wealthiest man on the planet. Yet the biggest mistake aspiring entrepreneurs can make is to try to be like Elon Musk.

One of the reasons I started my podcast was that I still love learning about the journeys of people who have created successful businesses. There have been guests who have made me reflect more deeply on a topic and my recent interview with Kristy Chong had that impact on me. She is almost an accidental entrepreneur. I often hear people say they want to “change the world” or “solve big problems” and I get the sense that in many cases this is ego driven as people find their place in the world and make their mark. Nothing wrong with ego or ambition but it makes me think about what it really means to change the world and what defines a big problem to tackle.

Kristy created a business called Modibodi that has profoundly changed people’s lives. It’s not what you would describe as a traditionally cool or sexy business, in fact it might be the opposite. But what Kristy did was to solve a very real, very difficult problem. As a mum of four, Kristy came up with the concept in 2011 while training for a marathon and experiencing light incontinence. Upon finding there was no product available she spent the next 2 years creating one, patenting leak-proof underwear. From there it became obvious that this was a big problem for a lot of people who were desperate for her solution. Fast forward to 2022 and Kristy sold the business for $140 million. 

It struck me as we spoke about the use cases for her product that this was indeed a life changing product. Kristy soon discovered that post-natal women were not the only ones who struggled with embarrassing leakage issues. Before long there was demand from young girls to people with disabilities through to old men. Suddenly people had a solution that opened the possibilities of life and activities that they had avoided. Her product literally changed people lives overnight. It wasn’t something people felt they were able to talk about, there was no solution, until Kristy created it.

In a world where every entrepreneur seems to aspire to be the next Elon Musk, I would love to see a far greater emphasis on helping more and more people become the next Kristy Chong. 

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Market Ahead in 2023

In recent months, share markets have been relatively resilient and some of the bear market fear has dissipated. So, is the worst of the share market turmoil over and is it time to buy?

The short answer is no.

My view remains that this market has another big move down ahead. How I think the market and economic events unfold over the next 12 months is this. Europe continues to fall into a deep recession for all of 2023. The US goes into a recession too. Ultimately dragging the rest of the world’s economies into a recession. My priority remains protecting investors’ capital. I am prepared to miss out on short-term gains by being under-invested if I am wrong. In my opinion, this remains one of those periods in time where protecting the downside risks is significantly more important than any potential opportunity. It is prudent to be cautious in this environment. We will still have our capital intact and can invest in great opportunities in due course. What I don’t want to do is invest too early when sentiment is overly positive because everyone wanders back outdoors in the eye of the storm. The real economic storm is still ahead.

In 2022 all the talk was about inflation and interest rates. That will continue in the early part of 2023 as central banks around the world are forced to over-tighten and create deeper problems. My view is that in 2023 the key topics will become company earnings, global recession, and unemployment. Unlike any previous downturns in the last 20 years, where constant bail outs and money printing supported markets, government’s hands are tied this time around. Countries around the world will simply need to endure an economic downturn the old-fashioned way, take some pain and come out the other side with a better foundation for future growth. It’s not the worst thing that can happen and frankly, if we’d all faced up to a couple of downturns in an organic way, we’d be far better off right now.

But in any case, if Europe and the US are in recession, and China continues to battle covid then it’s difficult to see how Australia avoids an economic downturn in 2023. I know everything seems pretty good now and it doesn’t seem like we are anywhere near a recession, but a downturn is heading our way. When you look at how the world is positioned, a deteriorating global economy is pretty obvious. The problem for most investors in accepting the impending economic reality is that there is a major difference in what we all see and experience right now in our daily lives versus what we can’t yet see and experience in the near future. Overlay what most investors optimistically want to see and it’s often only when things are undeniably bad that it’s finally accepted.

Over the next 6 months, I think we see corporate earnings deteriorate and consequently real cost-cutting across the board. Then the job losses really start to kick in. First with European companies, then the multinationals with significant exposure to Europe, before flowing through to the rest of the global economy. They have started in tech already but will become mainstream in due course. The tricky part for investors will be when we start to see inflation fall, share markets will start to celebrate the return of low interest rates. That’s going to be a monumental head fake for markets as the dream of a return to lower inflation and lower interest rates becomes an economic nightmare in the form of a global recession. In 2023 the downturn will get real. The real economy will start to suffer. That’s when stock markets will enter the final phase of this bear market and crash back below the lows of 2022. If inflation stays persistently high, it will only make the downturn worse.

That said, there is an important distinction to make here between the share market and the economy. I expect the economic situation across the world to deteriorate for most, if not all of 2023. But while I expect the share market to fall significantly as the economy weakens, by mid-year, investors will be looking ahead to how the global economy will be starting to recover in 2024. Share markets don’t wait for the actual economic recovery, they are looking 6-12 months or more into the future. So, while I expect more share market pain ahead, the real buying opportunities will present themselves around the middle of 2023, as the deteriorating economic situation is still unfolding. Take note of that because the time to be bold and buy stocks is when it feels like the economy is starting to look quite bleak, but before the economy is at its worst.

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Crypto Crash

We all understand that trust is the foundation of any lasting relationship, whether in our personal life or business. But trust is the bedrock for so much more than that. The entire world depends on trust to function. Without it, there is only anarchy. Trust is required for financial markets to function, for governments to govern and for nations to conduct trade. Conversely, when trust breaks down, everything falls apart. During the GFC when institutions were no longer able to trust each other, credit markets froze, and banks collapsed. It brings me to the current crisis in crypto markets.

Billions of dollars have been lost in the latest crypto debacle. The exchange company FTX has been found to have an $8b hole of missing funds after a run-on the platform by investors withdrawing funds exposed the lack of reserves backing the business. The flow-on effects have been swift with more to come in a sector that was already under siege. We hold no crypto in our portfolios as it is impossible to value and justify purchasing. We are unlikely to invest directly in crypto currencies anytime soon. Yet many of the world’s wealthiest and most well-respected investors did and many invested directly into FTX itself, including Sequoia Venture Capital, Tiger Global and SoftBank, all of them losing more than $100m each. It raises questions about the due diligence processes that these funds have in place.

But trust in financial markets matters a lot and the current situation and subsequent contagion with other companies linked to FTX and Alameda Research is a massive setback for the industry. It will be a critical turning point for the industry and the adoption of the technology as new regulations and compliance will now be forced upon it to protect investors and participants in the future. Those that embrace this side of the equation will be best positioned to prosper long term. Where you’ve got companies acting as custodians for an asset on behalf of investors, even crypto currencies, there needs to be trust that those assets are in fact being held. If everyone was doing the right thing, most of these issues would never eventuate. But they don’t, which is exactly why robust governance and regulatory processes matter so much.

That said, it doesn’t mean that this technology is not set for incredible growth that changes the world. I believe that it will. It’s just too difficult to invest in at this early stage. I remember the early phase of the internet and tech stocks back in the 2001 tech bubble. We didn’t go anywhere near it back then simply because not only was there no profit but also no revenue for many of those companies. Fast forward a decade or two and many of the tech companies from that era have grown to become some of the best companies in the world. But many didn’t. This will likely be the case with crypto style companies and assets. In my opinion, it is generally far too difficult to invest in today and most will fail but that doesn’t mean that in 10 years some won’t be great companies, making a profit and operating in the mainstream. In these situations, regulation does not equal bureaucracy but instead is the bedrock of trust on which the industry will grow.

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

An Astronaut Riding a Horse as a Pencil Drawing

Regardless of however bad share markets are, how gloomy the global economic outlook is or how high geopolitical tensions rise, the world will continue to innovate. With all that’s going on in the world it is important to remember just how exciting the future is. New technology of all kinds is being developed by the best minds in the world faster than ever before. Machine learning is one such technology. 

In a recent podcast, I interviewed Jalal Shaik the co-founder of artificial intelligence and machine learning company GAMEFACE.AI. His business, which recently sold for $33 million, is a real time sports analytics company that leverages artificial intelligence and machine learning to provide key insights and analytics from a sporting match. From match video their software is able to provide deep analytical information that will improve performance at a team or individual level. For example, analysis that will help coaches adjust game plans in near real time based on video of player movements and passing patterns.

As our discussion progressed and I asked Jalal where he sees this going in the future, it became even more interesting. Imagine software that can analyse a tennis match and from the way a player’s left leg moves on a particular shot is able to prescribe specific preventative physiotherapy treatment and recommend modifications to the strength program. It will even be able to go further to make modifications to diet and footwear. It opens up better ways to treat injuries in sport (which is where the big money is) but it also filters down over time to every aspect of life including military, work and accident and injury victims, impacting the insurance industry as much as the health industry. We are still at the earliest stages of this type of technology but there are endless use cases that will be found across all aspects of life and work.

One of the most interesting advancements I have seen recently is an artificial intelligence program called DALL-E. The program was developed by OpenAI and revealed in 2021. It creates digital images from text descriptions. Seems simple – you type a description, and it instantly creates a picture. For example, an Astronaut riding a horse as a pencil drawing. But that is just the start. In the future, this will develop further into short videos which will have implications for content creation of all types especially in the advertising industry. Imagine having an advertising brief, but rather than give it to an agency and spend millions of dollars on a campaign, you’ll type it into a system that will produce the ad instantly. Go a few more years out and as the technology advances we are talking about customisable programming through Netflix, Disney, Apple, and Amazon, from movies to tv series. Create your own viewing, tv shows and movies, on demand.

Another great example is Tesla. Each car is a connected computer gathering all types of data from its surroundings. Millions of variables being collected and analysed. Imagine a time where the car detects the patterns that predict when a driver is beginning to grow tired. Or adjust steering or cornering speed of an inexperienced driver on the basis of weather and road conditions. Eventually, it leads to driverless cars and automation. It’s far more than that though. There will be reductions in insurance claims and accidents, lives saved, lower insurance premiums, less stress on trauma wards in hospitals. These are significant advancements.

There are implications for a whole range of industries across the board from health to cybersecurity. Predictive and preventative medicine has implications for hospitals, health providers and insurers. I personally look forward to the day where machine learning algorithms eventually make better real time decisions than central banks. Imagine interest rates being adjusted in real time based on machines understanding exactly what needs to be done in a timely manner to ensure the optimal outcome for the economy.

But we must also be mindful not to assume these technologies will only be used for good or noble purposes. It’s the type of technology that in the wrong hands, could have devastating consequences. As exciting as this area is, there is a desperate need for government regulation at a global level, not unlike that relating to nuclear technology. Even if regulation slows down the advancement and innovation that could be made this is one of those times where we cannot afford to get it wrong.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Property Puzzle

For all the volatility across investment classes globally, the Australian property market has held up ok so far. In an environment where every asset class is being impacted negatively by rising interest rates, Australian property seems to be an obvious next victim. Especially residential property, which is expensive on almost any measure. Residential property has fallen around 5-10% from its highs in most capital cities but with interest rates rising fast, many believe a sharp fall is on the cards. I think this is highly likely as I wrote in May this year, I expect 20% plus fall. But I also think there are some unusual nuances to consider this time around as a legacy of trends stemming from both the GFC and Covid.

The impact of rising interest rates goes far beyond simply property prices. It effects a wide range of subsectors with problems often evolving as new home construction slows and bad debts rise. Concerns around the number of people, especially those under 40, who have borrowed millions and are maxed out already naturally leads to concerns around what happens if they can no longer afford the repayments. What does this mean for the banks and the economy more broadly? There are several aspects to this market that I think we need to be mindful of as this process takes hold and flows through the economy through 2023 and 2024.

Bank strength

Ordinarily rising defaults and bad debts could become a dire financial situation, especially for the banking system. However, since the GFC, the crisis in property markets globally lead to rules that ensured the banks have much higher capital requirements in place. As a result, banks have a significantly stronger capital base and although its likely bad debts will increase with rising interest rates, they will see increasing net interest margins too. For all the problems in the world, the banking system in Australia is well capitalised and in quite good shape.

Housing & construction data

There are lessons for Australia from US data. In the US, new mortgages have fallen dramatically. Mortgage interest rates going up so quickly (from 3% to around 7% in less than 12 months) means not only has this depressed the number of people who want to buy or build, but it has also reduced their borrowing capacity. People can’t afford to buy or build even if they want to. New housing starts in the US have dropped substantially too. We are still in the early stages of this flowing through the industry but from home builders, contractors, mortgage brokers, equipment sales, building supplies – there are a vast array of jobs that are underpinned by the construction industry. We are starting to see this here in Australia too with the recent profit downgrades from James Hardie and others on the front line.

Interest rate impact

When it comes to mortgage interest rates, a key difference between the US and Australia to be mindful of is that in Australia most mortgages are variable rate, so the increases deliver immediate pain to homeowners and consumers. In the US it’s a different story as a significantly higher portion of mortgage holders have fixed rate loans for 15 or 30 years so there is far less immediate overall impact and in turn less concern around repayments. This may mean that lower interest rates are required in Australia compared to the US to have a similar result.

Bank of mum and dad

The rise of the ‘bank of mum and dad’ is a unique phenomenon that I think adds a layer of protection for the banks and the banking system across some of their most ‘at risk’ borrowers. Post GFC, the banks have been willing to lend very high amounts but have protected themselves by ensuring parents either go guarantor or provide additional property as security. We won’t find out until things get bad just how much of a factor this is. However, many families have provided security to banks to fund property purchases that will be in the firing line should their adult children start to struggle under the weight of higher mortgage repayments. The risk of default may well result in that risk being effectively transferred from the banks to the parents. It means less forced selling in such a situation and a more orderly property market than we might have otherwise seen in the event of a substantial correction.

Landlords will start closing down businesses

There are many companies who during covid were unable to meet their rent. In many cases, landlords enabled these businesses to pay what they could but at the same time, the landlords accrued the amount owed. Many businesses are getting closer to that day of reckoning where they have to face the reality that they are not able to repay the back rent owed. Subject to their relationship with the landlords and their landlord’s assessment of their efforts to pay and future prospects, expect this to result in many businesses having their doors locked in 2023.

Working from home

Perhaps the biggest legacy of covid is nothing to do with our health, it is about the way we live. Working from home is another trend that dramatically accelerated during covid. Certainly, it is here to stay and it’s also the future of work in many respects. I see it as the precursor to work in the metaverse in the decades ahead. But I do see this changing in the short to medium term as the power dynamic shifts between employees and employers in the next 12-24 months. Many employees love it, many employers prefer staff back in the office. Some have found a balance. But once unemployment rises during 2023 and jobs become scarcer and promotions more competitive, many employees will find themselves reverting to being back in the office. This will support the ailing CBD office sector.

Summary

Overall, I believe property prices will continue to fall significantly here in Australia in the new year. While at this stage it may not result in the catastrophe of forced selling and loan defaults, the impact of rapidly rising interest rates on property and construction and the associated industries will begin to fully impact the entire economy in 2023 and beyond. There will be numerous opportunities to buy stock in companies in these sectors as markets find a bottom during the year. But before we get to that point, we need to see some of the economic pain flow through to earnings and more companies reflect the downgrades in their 2023 earnings forecasts that are yet to be made.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Geopolitical Disruption

Disruption in business is well understood. The incumbent, a large profitable giant corporation which has built a monopoly over decades becomes complacent, forgets how they got to the top and focuses on maximising profits and protecting its turf at the expense of innovation and real growth. The disruptors change everything. They move fast and break things. They have no respect for the status quo and no regard for ‘how things have always been done’ and certainly no respect or fear of the incumbent. They are hungrier and prepared to do whatever is necessary to prevail. That’s why they win. Relentless pursuit of their objective against a comfortable and disorganised incumbent.

This is also the way disruption of the world order works in geopolitics. It doesn’t happen as often on the geopolitical level, but it is certainly happening now. It’s the way empires rise and fall, and it’s been like this for centuries. The USA, European nations, and much of the West are the country equivalents of giant corporations. Fat, lazy and content. Rightly or wrongly China and Russia are disruptors prepared to use methods, force, and tactics that the comfortable nations are not accustomed to anymore.

There is perhaps no better example of this than the juxtaposition of UK and US politics (in disarray and leaders losing power) vs China and Russia (leaders consolidating power). This is significant as we approach conflict situations of the disorganised vs organised. Unfocused vs focused. Those that can’t act decisively and those that can.

Unless the West adopts a more competitive and strategic mentality and realises it’s in a fight for not only relevance but survival, they risk the same fate as the corporate giants who did not prepare for disruption. It’s critical that Western nations adapt to the changing geopolitical landscape to mitigate their vulnerabilities to the emerging threats from these disruptive nations.

There are some unique parameters with respect to the battle ground for any conflicts that loom ahead. Supply chains and energy supply in a globalised world economy have become weaponised. Other key areas of concern include state sponsored cyber-attacks and even social media. We are all familiar with the power of platforms like Facebook and Twitter to influence people. However more importantly will be Tik Tok. Ownership of the world’s most popular social media app among young people is with China.

People tend to focus on privacy and data issues in relation to Tik Tok and while that is a genuine concern, I would be more concerned with young people getting entertainment and information via what amounts to a modern day trojan horse. At some point Western governments will move to warn people against using the app but if we move into a deeper conflict, it will be banned and cut off. 

Russia’s threats to escalate and use nuclear weapons should not be taken lightly. They have on their side a dangerous precedent of such weapons being used pre-emptively against an adversary when the US bombed Japan in 1945. While a win for Ukraine would be great and just for freedom, the reality is that it would raise the spectre of a massive escalation and retaliation from Russia if they have nothing to lose. A drawn-out war that weakens Russia over years may be a better result for world peace. Regime change is often touted but that is fraught with danger. The last thing the world needs is a younger more aggressive and ambitious version of Putin.

Strides are being made when it comes to restructuring trade and supply chains. These will need to be modernised for the new circumstances emerging in the world. Reshoring manufacturing and services and securing energy supplies need to happen as quickly as possible. This is a huge investment opportunity but also an essential strategic requirement for the West to become as independent as possible in the years ahead of any potential conflict. The sooner the better for nations and businesses.

The reality is that this is an opportunity for the West to reinvent itself. As in business, competition often awakens the slumbering giant to action. The rise of these disruptive nations may well prove to be the catalyst that is needed to refocus the West on what made their nations so great and bring forth a new age of innovation and productivity that is both sustainable and prosperous.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Living on Borrowed Dime

With the price of almost everything rising across the globe over the last 12 months you’d expect consumer spending to slow abruptly at some point. Surprisingly, this hasn’t really happened yet. It’s strange because clearly, the price of key expenses has increased dramatically, from rents and mortgages through to fuel, power, and food. While at the same time, incomes haven’t increased at the same pace. So how is it that spending is being maintained? How is it sustainable?

The answer is simple. It’s not. What we are seeing is a lag effect and consumers failing to adjust their spending to their new reality. You can see it at both the macro and micro level. Consumers are not as resilient as they appear. While they are spending as they have become accustomed to; they are now living beyond their means. To maintain their lifestyle, they are drawing down on their savings and drawing up on their credit cards and mortgages.

They all know they are going backwards and can’t keep it up, so at what point do their spending habits change? After two years of covid restrictions, this year has been about rewards and spending money on holidays and dining out because everyone feels like they deserve some fun. But as financial reality bites and the new year looms I’d expect Christmas to be the last hurrah for the consumer to spend up big. My guess is these changes come in two phases.

Phase one is after the Christmas and New Year break. It may seem simplistic, but consumers and their spending patterns are not a sophisticated collective, they are everyday people trying their best to navigate the pressures of work and raising their family. Sometimes you don’t need to be an expert in finance to see the signs ahead for the economy. Often the drivers come down to basic human emotions, fear, greed, pleasure, and pain. I think this will be how it plays out at the consumer level.

Families are aware of higher costs, they are starting to feel the pinch but not adjusting yet, but the pressure is building. Over Christmas, they will be catching up with family and friends. Topics for discussion will be increased cost of living, fuel prices, food prices, power bills and mortgage interest rates. People previously trying to maintain their lifestyle to ‘keep up with the Joneses’ while slowly sinking will take comfort as they discover that everyone they know is in the same boat. 

Psychologically, being the first to be frugal when things are getting tight makes it look like you aren’t able to keep up with everyone else. But over Christmas, people in their social groups will become comfortable that they are not the only ones, that in fact it’s everyone. People will become more comfortable about cutting back collectively. It’s easier to tighten your belt when everyone else is too.

Just after these family gatherings and social catchup over Christmas comes the one day of the year when people really think about their lives and goals, that’s January 1. New year’s resolutions and a commitment to balance the family budget or at least live within their means will become a key focus. Those that don’t adjust will sink, but either way consumer spending slows.

What does that all mean in practical terms? Consumers spending less directly hits businesses. Sales will fall across the board, though at different rates for different industries of course. Some businesses are better insulated against a slowdown in consumer spending than others. Some businesses are not reliant on households, while other businesses have pricing power.

But you’ve got to keep in mind that the profit equation for businesses has two sides, revenue from consumers buying their goods and services is one part. The other reality is that businesses are getting hit hard with inflation and rising costs too. Power, fuel, and higher interest rates are all hitting the bottom line hard. So, in 2023 businesses will be hit with falling sales as consumers start to dial back spending and higher costs, a double whammy for profit. This leads to phase two of the fall in consumer spending.

Businesses will have no option but to cut costs, ultimately leading to job losses and it will flow on through to a higher unemployment rate which will be a game changer for the economy and the consumer. Rising unemployment will have a dramatic impact on consumer spending not only as people lose jobs and have less money to spend but because it will shake the confidence of consumers even further. They will fear that they may be next to lose their job. That fear around job security will have a very damaging impact on the economy and further consequences for businesses, government and property that will play out over the course of 2023.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

10,000 Steps and 50 Words

Successful investing is not rocket science or about being some mathematical savant as it is often portrayed. It’s far simpler than that. It is really about habits and discipline. But I would go a step further and say that not only is successful investing predicated on good habits and discipline, but success in any field or pursuit in life.

It probably took me until I turned 40 to really understand and appreciate the power of cultivating good habits. When I was younger, I could achieve a level of success through hard work, sheer willpower, and determination. But as I got older, I started to realise that if you aren’t disciplined on the small-ticket items then it flows through to the big-ticket items. Natural ability will only take you so far too and this is as true for sport and business as it is for any aspect of life.

Habits and routines are a really important part of developing a disciplined mindset. Two of the best habits I’ve introduced are walking and writing. I’ve been genuinely surprised by the impact and flow-on effects that introducing these simple tasks into my daily routine have had on my overall performance.

I’ve had a Fitbit for years, but in November 2019 I set myself the target of getting 10,000 steps a day, every day, no excuses, no missed days, no exceptions. I ended up getting to 800 days in a row before I got covid at the start of this year and ended up in bed for a week. I had built a new streak to 250 days in a row before I tore my calf playing basketball 3 weeks ago.

But it does interesting things to your motivation. When you have a streak like this and wake up especially tired or run down you have a decision. Is it worth breaking the streak for that one day of laziness? So far, unless I am physically unable to walk, on every occasion the time invested in accumulating my streak has pushed me on those days to get the steps. It’s helped me lose weight and improve my overall fitness.

When I started writing my weekly insights note to clients in early 2021, I wanted to be sure that I didn’t just start writing it and stop after 4 weeks. My main focus was to make sure I was consistent, so I transferred the lessons from my minimum steps to writing. I set myself 1 article a week and to do that I had to write at least 50 words every day. Most days I write more than that and the finished articles are between 400-800 words. But on those days, I really don’t feel like writing, or I am pushed for time I can dial it down to 50 words and I have maintained the consistency required to build the habit.

What I didn’t expect was how beneficial writing was for me as a tool to help me with my investment process. Writing a note to send out for other people to read makes you challenge the concepts and preconceived ideas you have on a topic. This is particularly useful from an investment perspective. It makes you question your assumptions and your biases. Often when I write I imagine the counterpoint to a view. It’s a great process in identifying if there are any flaws in your rationale. In fact, on more than one occasion I have changed my mind on a topic or view that I held as I held imaginary debates with the people who may query it.

These disciplines are foundational and lend themselves to building additional layers of habits and activities over time. For example, after a while of completing 10,000 steps, I added weight and strength training and then consulted with a dietician to introduce improved eating habits. These days I weigh most of my food. Having consistently produced an article each week I turned my attention to a podcast. Initially monthly, then 2 a month. It’s been just over a year now and we’ve published 22 podcasts so far with a range of great guests. So not only does it matter that you are disciplined on the small things but getting those foundational habits right leads to success in bigger things.

A Bit of Economic Pain Won’t Hurt

I look at young people today and find it interesting to watch them come to grips with what is likely to be their first real taste of the pain that comes with higher inflation and lower standards of living. Many young adults (and not so young) have become so accustomed to an easy life today that there is an air of expectation of a minimum standard that they are entitled to. It’s a little detached from reality and I don’t think a hard wakeup call would hurt. It all depends on what you get used to, but 2023 is going to be a shock for many. But the reality is it is all about perspective.

Growing up in Geraldton, WA my dad always told me I had to work, he’d never give me a cent, but that I’d always have a roof over my head if I needed it. The irony of that was not lost on me when at 18 he told me I was too hard to live with and needed to leave. To be fair I was pretty hard to live with. Fortunately, I had somewhere to go, Dad had a 1-acre industrial block with a couple of sheds on them he rented out to local transport business. At the back of the yard was a 3m x 3m tin shed, about the size of a bedroom. It had a toilet and a sink and dad put down some carpet to make it feel real homey for me. We used Selleys gap filler all around the shed to keep out the spider and snakes. I threw a mattress on the ground and bought an electric fry pan. He charged me $30 a week rent which was probably above market value for a tin shed in a Geraldton industrial complex in 1994. But to be honest I loved living there.

At 18 I’d also started going out with my future wife, Paula who I would marry 2 years later in 1996. We planned to go to Kalbarri for a honeymoon for 3 nights but didn’t because we had less than $10 in our bank account when the time came. We had bought a block of land for $25,000 with the $3,000 cash I had in my top draw from working as a brickie’s labourer in my school holidays. The local Town and Country Building Society Manager was kind enough to defer settlement on the block until Paula turned 18 and was able to sign the forms herself. Then we started building the house, it was a 4x2 and cost $59,000. Paula made about $14,000 a year and I made about the same in our first jobs. It was a big commitment and things were tight, there were a lot of things we chose not to have and couldn’t afford.

Once the house was ‘finished’ we moved in. We had no bed, we slept on a mattress on the ground for our first 2 years. We had no carpet, only concrete. We had no blinds or curtains, only black plastic taped up to the windows. The front yard and back yard were empty. We spent the next several years working hard to save up and one by one we got each of the items ticked off to slowly complete our home. If I tell my kids or their friends that they can’t understand why we did it. I think everyone has become so accustomed to getting everything they need immediately they have not only forgotten how to go without or save for something over time they don’t even entertain the idea as part of the options to consider.

But all of this is just to point out how easy we all have it today. How my wife and I did things when we were married young was no different from many who did the same a generation earlier than us. Back even further, my grandparents came out from Italy before the war and certainly everything they did simply to raise their family was many times harder than anything we went through. It is all about perspective. I don’t think an economic downturn is the worst thing in the world. Many may think that it is and as inflation continues to run above wages growth and the cost-of-living soars many will need to make adjustment to their spending just to make ends meet. But adjustments can always be made and a new perspective and appreciation of frugality for the younger generation coming through may be just what they need to prosper in the years ahead. It doesn’t hurt if you don’t start off with everything. In fact, I would say there are great lessons in having nothing to start with at all.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Feels Like Something Is Going to Break

We are at the point in the downturn where nothing catastrophic has happened yet but there is mounting evidence of dislocations and bubbles forming everywhere. From bond markets to currencies there are crises unfolding around the world and it won’t take much for something, somewhere to break. Right now, global financial markets have a 2007 early phase of the GFC feel, where everything is heading the wrong way, and no one can really stop it. It just needs to run the course.

I wrote earlier this year (15th June 2022) when the US share market (S&P500) was down 21% from its peak, that I expect that figure to end up being in the range of 25-40% down from its peak. In the meantime, we’ve seen markets go up and come back down. But nothing has changed, and I still believe that will be the case. The S&P500 is now down about 23% from its highs but there is a long way to go. The impact of all the negative influences have not yet come home to roost, that’s still ahead. 

Interest rates across the world will go higher still. Corporate earnings are going to fall in the quarters ahead. A European economy in chaos will take its toll on the global economy. Large multinationals with earnings from Europe and China are especially susceptible. Further still, with so much uncertainty in the world, we are seeing the flight of capital to the ultimate safe haven in the US dollar and that is wreaking havoc across the world as it impacts currencies and interest rates for all nations. 

Perhaps the most stunning moves this year has been the dramatic rise in global bond yields and the subsequent collapse in bond values. This has already been a once in a lifetime event, but the consequences are yet to truly filter through and be felt. With countries worldwide needing to fund budget deficits, at higher interest rates, the competition for capital is going to become a problem. It means countries with weaker economies and currencies will need to pay more. Some won’t get funding…then what happens to their budget? That has flow on effects for all markets too.

Yet we haven’t seen investors panic and markets capitulate. Until we get that I don’t think we are near the bottom. That’s the part for markets where there is no floor, no stable ground and everyone starts to panic. I expect that is ahead of us in the coming months where any of the following are possibilities: 

• The spiralling of the energy crisis leading to a severe recession in Europe

• The fragmentation of the EU under the strain of geopolitical and economic turmoil

• Russia escalating the war with Ukraine

• China and Taiwan tensions leading to conflict with the US

• Currency crisis unfolding – from the pound to the euro and the yen

• Bond yields and interest rates soaring

• Social unrest globally as countries struggle to survive

Where to invest in times like this? It’s the same answer I’ve given since the start of the year and late last year. Be overweight in cash. I know it is unpopular especially with inflation high too but as interest rates started rising in the first 6 months of the year and every other asset value fell, cash was the best way to protect your capital. I think rates keep going higher in the short-term creating a similar environment to the Jan-Jun period of this year for share markets where they fell substantially.

What am I avoiding? High growth stocks that don’t make a profit, as well as most property, and fixed rate bonds. Though as interest rates start to peak, the bond area is going to become a lot more attractive. I am also avoiding unlisted private equity and venture capital investments that many investors have fallen in love with. While unlisted investments may not appear volatile because they are not listed on the stock exchange this doesn’t mean the underlying assets won’t fall in value.

Frankly, I am surprised it has taken so long to get to this point. It is the reason I have been talking about being overweight cash since late last year. But the reality is these things simply take a lot longer to flow through the system than you’d think. When I look ahead and think about how things will play out it feels like it should take 6 months but inevitably it takes 18 months. That puts us at the halfway mark.

In my opinion, at this point, you should have the maximum amount of cash you would ever have in your portfolio. I am not necessarily saying increase cash now, I am saying you should have been prepared already. Cash is still king as it has been for all of 2022. Outside of that the most important investment strategy for the next few months is going to be patience, keeping it simple and a focus on high quality investments that you are confident holding for the long term regardless of volatility.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Looking Beyond the Current Turmoil

With the constant barrage of economic and geopolitical worries, it’s easy to become caught up in the short term. Certainly, the next few years are going to be difficult for investors to navigate. But I am mindful that however treacherous conditions become, the storm eventually ends. So, it is critical to keep focused on the long term and ensure that you are positioned and ready for when it does.

The major problems and risks the world faces now are well known.

• Inflation

• A dysfunctional USA

• Russian invasion of Ukraine

• Potential for Chinese invasion of Taiwan

Beyond these we’ve also got the second and third order effects as issues come to a head.

• Energy crisis

• The risk the EU fragments

• The end of globalization and supply chain disruption

• Potential for dislocation in financial markets

Any of these seemingly once in a generation problems are difficult enough to deal with but as they all converge, the global situation is particularly fraught. Throw in a black swan event here or there and it’s anyone guess how things unfold in the short term. But what about the long term? Call it 5 or 10 years. What does it look like as the world grapples with these issues and moves forward?

Firstly, and perhaps most importantly the world in 10 years will have solved the energy issue in terms of continuity of supply. Most nations will have put in place plans to ensure their national security by learning the lessons from the energy crisis unfolding in Europe. No nation will want to have their national security compromised because of vulnerabilities in their energy supply.

The biggest mistake Germany and Europe made was becoming dependent on Russia for their energy supply. It is at the heart of much of turmoil Europe and the world now face. It is an historic strategic blunder that will serve as a warning for decades to come. Yet it may serve a purpose that enables the west to pre-emptively manage a far greater threat, the world’s supply chain reliance on China.

That brings us to the end of globalisation. Beyond securing energy supply countries and their businesses are now thinking much more strategically in terms of their supply chains. Dependency on other countries is a risk and one all nations are now moving to mitigate. This means reshoring supply and aligning with allies. It means that the cheapest provider is not the best, rather it’s the cheapest provider within the context of supply chain continuity and national security.

In other words, the way the western world is rapidly removing its dependency on Russia is happening with other nations who are seen as threats. This means China. Over the next 5–10 years expect to see businesses and nations alike work furiously to remove their dependency on China. While it will certainly have an inflationary impact, it will result in a boom for local industries and allied nations who will be the primary beneficiaries of the reshoring phenomenon that will evolve.

It will ultimately lead to the division of the global economy into one consisting of the west and its allies and another separate economy with China and Russia at its centre. If your country or business is not working to remove its supply chain dependency on China, you face an existential threat when China does ultimately invade Taiwan. Now that might be in 1 year or it might be 10 but the one thing that China has made clear is that it will take Taiwan back in due course and has not ruled out using military force.

So where do you look for safety as you navigate such turbulent times?

Energy is a big one and an obvious one. As well as the infrastructure around securing it. Expect massive investment from almost every country in energy production. In the short term, that means almost any form of energy because of the shortage. But in the long term, it’s going to dramatically accelerate investment in sustainable energy. The UK recently announced energy subsidies and concessions for consumers and businesses that are uncapped but forecast to cost $200b over the next 2 years because of the issue they find themselves in. Imagine if they’d had the foresight to spend that much on sustainable energy over the last decade.

Manufacturing and services are another. Think of any product that is primarily ‘made in China’ and in the future it will be sourced from the best priced western nation or ally. There is a lot of opportunity here. It will increase inflation globally as removing the lowest cost provider from the equation means everything will cost more, but it will be a necessary cost of removing embedded vulnerabilities from the system.

Technology is another. While the sector is broadly out of favour with investors at the moment, technological change is and will continue at a rapid pace. The most obvious area is in the reshoring of computer chips. Everything these days contains them, and the world can’t really operate without them. China currently controls much of this market and the west, especially the US is in a race to ensure they remove their dependency on China in this regard. But beyond computer chips, technology as a broad sector will continue to grow at a rapid pace and in my opinion remains, as it has for decades, the biggest opportunity for investors.

In the long term, we can look past inflation as I anticipate central banks will bring it under control in the next few years. How high rates ultimately go, how high they stay and the damage done to the economy in the short term is another issue. While the world current faces several big issues its worth keeping in mind that these are problems that can and will be fixed. Over the long term I expect there to be significant opportunities evolve as industry moves to protect its businesses and countries move to protect their economies and their national interests.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Reality Check

Last night’s US Consumer Price Index (CPI) figures were the perfect wake up call for markets following Jerome Powell’s Jackson hole speech; dramatically reinforcing the work ahead in taming inflation. Markets fell swiftly and sharply, the S&P500 down 4.3% and the NASDAQ down 5.5% as reality set in. 

Three weeks ago in my weekly note, I outlined what Powell needed to say at that meeting for markets to take him seriously and understand the Federal Reserve’s commitment to reducing inflation. His speech was right on the money, and it was clear that the Fed was going to fight inflation as aggressively as required. Markets reacted as you’d expect initially and retreated, but only momentarily. It didn’t take long for the focus to turn to the CPI figures coming out last night.

The market, again overly optimistic, assumed inflation was going to fall hard. Ironically, when the sentiment becomes negative, commentators and strategists preach caution and the merits of staying data dependent. They insist it is prudent to wait to see what the data says before becoming concerned. The problem is that these same people (most of the market) forget that philosophy when they are expecting good news.

Consequently, the share market quickly talked itself into a scenario where the environment for inflation was rapidly falling. The implication being that interest rate rises would be short lived. Last night as I watched the US premarket open on Bloomberg TV, almost every market strategist who came on the show talked about how a ‘soft landing’ is a reality and that interest rates will be on hold after the next couple of CPI results.

At 10.30pm AEST the mood changed very quickly. The US CPI result was an upside surprise. The inflation figure was 8.3% instead of the 8.1% expected. Core inflation was up from 5.9% to 6.3%. Last night’s data is a game changer. It removes any hope of a dovish Fed that will halt or cut rates anytime soon, so markets need to recalibrate their expectations quickly. The CPI data confirmed that not only is an interest rate hike of 0.75% next week in the US locked in, but it puts a full 1% hike on the table, with more in the months ahead.

The narrative of transitory inflation that was slowly returning vanished. It means in the short-term, interest rates going much higher. Bond markets adjusted quickly as the 2-year US bond yields instantly went from 3.5% to 3.7%. Keep in mind a year ago they were 0.3% so we are talking about once in a generation maybe once in a lifetime moves. It’s quite incredible. 

Share markets reacted as you’d expect and, in my opinion, this was the reality check markets needed. There was a merry-go-round of the share market rallying because firstly it didn’t believe Powell would be tough on inflation. Once it understood post Jackson Hole that he would be tough, it morphed into a market that didn’t believe inflation would be hard to get rid of. Last night everyone realised, perhaps for the first time, that both inflation will be hard to stop, and that Powell will do what is needed to stop it.  

There is so much work to be done by the Fed before rates can pause and a lot more before they come down. After several false starts, the rally has finally stopped. We have persistent inflation that has become broadly embedded in the system. Mortgages, rents, wages, food, and energy bills are all going higher. Stagflation is quickly becoming the base case scenario. A situation globally where we face high inflation but no growth.

Keep in mind the backdrop to all of this is the worst prospects for the global economy since the GFC. To me, it seems obvious and unavoidable that Germany is headed into a deep recession and that it will take the rest of Europe with it. You have a nation at the start of an energy crisis in such a bad position that their manufacturing plants are closing because they can’t afford the energy bills. The German economy is on the brink. I expect the debate in the months ahead will end up being about whether the rest of the world economy is dragged down too.

From a share market perspective, I continue to expect this market to fall and retest the June lows. The key for investors to ride this out is to continue focusing on the long term and to hold only the highest quality companies. We continue to be overweight cash. For those holding cash, this will become a great buying opportunity in due course. We continue to be patient.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The best life I have seen anyone live

This Sunday just gone was the 1 year anniversary of the passing of my incredible nephew Nathan Garcia. I had the privilege of delivering the eulogy at his funeral last year. When I reflect on it, I realise that my worst days are easier than his best days ever were. I am reminded that none of us have any excuse for not getting everything we can out of ourselves and our lives. I’ve included the transcript below because I can’t think of a better insight into a live lived well than Nathans. He lived the best life I have ever seen anyone live. 

Nathan’s life

Born with half a heart and then developing a severe form of scoliosis Nathan was burdened with not 1 but 2 life threatening diseases. He had so many surgeries that he himself lost count. He was in pain and discomfort every day.

But Nathan’s story is a happy one, about a remarkable life, lived under the most difficult of circumstances.

He was a kid with ambition and aspirations. There were things he wanted to do, and he wasn’t scared to have a go. He wasn’t one to sit back and wonder. Nathan took charge and went for it. YouTube creator…done. Basketball at the local league…done. Enroll in a new course…done. Travel and see the world…done. Go to sporting events…done.

When you think of the toughest person you’ve ever met you don’t expect it to be an 18 year old weighing 27kg. 

But for me, that’s what Nathan is.

He was physically tougher than anyone I’ve ever met. But it was his mental toughness that really set him apart. It’s one thing to deal with adversity but quite another to step up time and time again, for your entire life.

It was the German philosopher and poet, Goethe, who said about life: “Enjoy when you can, endure when you must”.

It was the Austrian philosopher and psychiatrist, Victor Frankl, who said: “Everything can be taken from a man but one thing; to choose ones attitude in any given set of circumstances.”

But it was Nathan Garcia who said:

“Hey Uncle Dion, when are we playing NBA2K next? I’m gonna kick your ass”

Nathan was the living breathing example of whatever your favourite quote about life tries to explain. He lived every day to the fullest. He didn’t dwell on his problems. He dealt with his situation as best he could and moved forward. He didn’t let it define him or stop him from doing the things he wanted to do.

Nathan was a combination of juxtapositions, contradictions, and opposites: 

• He suffered but was happy

• Was kind but fierce

• Considerate and generous but super competitive

• He seemed weak but was strong

• Small but larger than life

• A boy who became a man who enjoyed life despite his hardships

• And though now he’s gone he’ll be with us forever

As heartbroken and as sad as we are right now, and as deeply as we will feel his loss, the story of Nathan’s life is a happy one. It is a triumph of his spirit and a celebration of his resilience in the face of insurmountable odds. 

Nathan’s people 

Nathan loved his all family and friends.

He loved his Mum and Dad. He loved Callum and Emma.

He loved his grandparents, uncles, aunties, and cousins.

He loved his best mate Bhodie.

He loved Mary, Jayden, Damien & Nate.

He loved his dog Lannan who I probably should have listed first.

These are the people he would talk about most with me, but I know there are many more.

When I think of Nathan, I think of my sister Monique. Just after he passed, she sent me a message saying, ‘I was his person, and he was mine’. They were a team, and they will be forever. 

Monique, to me your greatest achievement will always be getting Nathan to his 18th Birthday. You raised your child to become an adult. You did that. But I know you will be relentless in continuing building on his legacy. To quote Kobe, “the job’s not finished”. 

Bhodie, you were an incredible friend to Nathan, and I know you haven’t had it easy either. Nathan would have loved that you’re now in the Ballers group chat and I can already see from your quirky posts why you meant so much to Nathan. I want you to know that you haven’t lost a friend, you’ve gained all of us as family. 

Nathan would do anything for any one of his friends or family.

When my sister Angelica got married, we were also stuck in lockdown and unable to attend. It was Nathan who contacted me and said he would hide his phone and quietly facetime me so my family could watch the ceremony. We watched a combination of the ceremony and Nathan’s face as he constantly peered into the camera to make sure we were able to see. 

Nathan also had the most wonderful quirky sense of humour and was very funny and quick witted. He loved to stir people up and be part of prank or a joke.

Knowing he was on his way to dinner with his Nonno I suggested he look at the menu and wonder out loud “hmm what’s the most expensive item on the menu” and watch Nonno’s reaction. He was all in. Soon after I received a message from him. “Nonno’s a tight ass he said to buy my own.”

He thought that was hilarious. They seem like silly little stories, but they are all examples of the fun that you had when you were around Nathan.

Nathan’s passions and achievements

Nathan achieved more in his 18 short years than most could in 100 years.

Nathan was extremely intelligent. His knowledge on any topic he was passionate about was at an expert level. He not only understood strategy, but he also understood the nuance and subtlety of all the topics he was interested.  

Nathan loved sport. He loved NBA basketball and AFL footy. He loved video games. He loved Pokemon. He loved YouTube. 

When I say he loved sport, I mean he was crazy about his favourite teams, especially the Phoenix Suns, the Essendon Footy Club, the Perth Wildcats and West Perth football club. And it went both ways. Every one of those organisations showed him love too. They all went above and beyond in creating some of the greatest moments in his life. For that we will be forever thankful.

He saw all his favourite teams play live, including a trip to the USA in early 2020 to see the Phoenix Suns. He met all his favourite players including Devin Booker from the Suns and Damien Martin from the Perth Wildcats. He met Lazarbeam his favourite YouTuber. All were incredibly generous and kind to Nathan.

But Nathan didn’t just meet people, he got to know them, and they got to know him. The relationships he built with his hero’s was remarkable and I know they were just as much in awe of Nathan as he was with them.

We set up a group chat a few years ago with 5 of us, Nathan, Callum, Mary, Will and I, to talk about all thing’s basketball and NBA2K. Every day the ‘Ballers’ group chat, as it was called, would provide a new meme, a terrible take or hilarious video. Perhaps the most satisfying post came from Nathan on the 2nd of January this year after a Phoenix Suns win when he declared:

“After all this time… I can FINALLY say the Suns are the BEST team in the NBA.”

Nathan was also a YouTube content creator with aspirations to be like his idol Lazarbeam who has over 19m subscribers. We would get occasional updates as Nath hit his own subscriber milestones, 10, 20, 30, 40. He currently has 42 subscribers and I suspect there is nothing that would please Nathan more than for me to give his YouTube page a shout out and get him to 50 subscribers. I can picture him fist pumping and yelling ‘YEAH’ as I speak.    

Goodbye to Nathan

Dear Nathan,

I’ve never seen anyone show the resilience and fight that you and your mum did. You were meant to die at birth but you refused to give in.

Every birthday was meant to be your last. But you kept fighting. For 18 years you fought. You gave it everything until you had nothing left to give.

And what a life you lived. Despite all the pain and all the problems. You lived life, travelled and met people most can only dream of.

I will miss your humour, your questionable basketball takes and your contributions to our “Ballers” group chat.

I will miss playing NBA2K with you online, your cocky trash talk and complete lack of humility when you won. I will miss letting you win.

I will miss the passion with which you followed sport and lived life, your all in attitude and your happy outlook in the face of daily adversity.

You don’t need to suffer anymore. You were brave beyond belief. You can rest in peace, without pain now young man. I am so proud of you.

I will miss you.

We will all miss you. 

I love you little man x

Heroes and Role Models

Legendary investor, Ray Dalio, founder of hedge fund Bridgewater Associates tweeted recently:

“I think it’s a really good thing to have role models and heroes, which our society is lacking and in desperate need of.”

It is a really powerful statement. It captures the underlying problem building for many years and now manifesting in the form of the many crises the world now faces. A world plagued by short-term thinking and transactional relationships across business, politics and even sport.

When I was growing up there was no internet. My kids call this period ‘the olden days’. I call it the 1980’s and 90’s. Back then your role models were your parents, and your heroes were footballers. Choices were simpler. My role models, by default, were my dad and my uncles, hard-working blue-collar men. My heroes were Michael Jordan, the greatest basketballer to ever play the game and John Worsfold, the tough as nails West Coast Eagles premiership captain.

In the age of social media, how and who people chose to be their role models and heroes is a very different process. From B grade celebrities to Instagram influencers through to YouTubers and TikTokers, the choices are almost unlimited. In the fight for clicks and the attention of followers, the world has degenerated into a free for all of the loudest and most controversial. In many cases, there is no real substance to the people we follow and aspire to be like today. The content as fake as the people promoting them. Even sport today has become a place for highlights and showmanship over team and sportsmanship.

All I know is what I learned. From my dad and uncles, I learned about hard work, being a man of your word and having respect for others. From my coaches, I learned to play the game of basketball the right way, as a team. As a kid, I learned so much from my heroes, John Worsfold and Michael Jordan. Both were extremely influential in how my mindset developed as a person. Both were renowned for their determination and resilience, their refusal to ever back down and their sheer will to triumph in spite of any obstacle they faced. I absorbed all I could from my heroes. I wanted to be like them, and I developed a similar mind set because of it.

I believe to this day that hard work, integrity, respect, and mental toughness are the most important attributes you can have. Generally speaking, I think these are underemphasised in today’s society, and it comes back to the Ray Dalio quote at the start of this note. Today, society is not necessarily lacking the exposure to role models and heroes, but rather its lacking exposure to the right role models and heroes.

But I’m not all doom and gloom, I don’t think all is lost as it often feels to anyone remembering the good old days. Instead, I think these things go in cycles. It’s like the old saying ‘when the student is ready, the teacher will appear.’ Or as history has shown, the teacher will appear, and the student will soon adapt.

One of the most ironic benefits of the difficulties we have ahead of us from an economic and geopolitical standpoint, over the rest of this decade, is that it will lead to society refocusing on what really matters. At that point, we will see what the world needs most, real role models and heroes, who were always there quietly setting the example for when we are ready to see it.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

All eyes on Jackson Hole

In the last 6 weeks or so the market has rallied strongly. While this is always welcome and gives everyone time to regroup, it is my opinion that these gains still fall under the category of a relief rally in the middle of a bear market. But before I get into that, let’s take a look back before we look forward.

Back in June, the US Federal Reserve and its chairman, Jerome Powell, provided some commentary following their latest interest rate increase of 0.75%. The market interpreted their language as an indication that they will not increase interest rates as much as the market was thinking. The market is wrong on this point. To make matters worse, the markets started to factor in interest rate cuts in 2023.

This is the same pattern of miscommunication errors the Fed and financial markets have been making ever since inflation became a problem. It’s a complex and flawed relationship but neither side seems to be able to be honest with each other. At best, the Fed continues to sugarcoat the situation and at worst, is incompetent. Share market investors, always happy to misinterpret the absence of bad news as good news, continue to be enthusiastically led down the garden path by the ambiguous and sloppy communication of the Fed. 

So, from that point in mid-June, in the absence of bad news resulted in a bigger rally to the point of becoming a mini bull run in early August. To be clear, there was no fundamental reason for this to happen. But once it got a little momentum it was always going to continue…until told otherwise. By told otherwise I mean by the Fed being clear and deliberate in their communication about raising interest rates or economic data doing their job for them.

Unfortunately, reality catches up at some point. I think we are at that point now.

Everyone knows the rally has pushed the share market up too high, too quickly. Chairman Powell has been forced into a corner and will need to set the record (and markets) straight. As luck would have it, this week is the Jackson Hole Symposium, the annual meeting of central bankers from across the world. This is the perfect (and much needed) opportunity for Chairman Powell to unequivocally state that when push comes to shove, they will choose to raise interest rates to kill off high inflation.

What he needs to say is this:

“The US economy is well positioned. The US consumers have solid balance sheets. Both have proven resilient in the face of difficult times. We expect there to be more uncertainty in the months ahead and it is possible that the economy and economic growth will slow. However, the biggest threat to our economy and our standard of living is inflation. So as long as inflation is above the range of 2-3% we will continue to raise interest rates. That is our top priority.”

If he says that share markets will fall significantly. Bond values will fall too as yields increase.

But it is necessary to say it.

If left unsaid, then he only creates a more severe disconnect between markets and reality. Powell and the Fed will lose even more credibility if they continue with their wishy-washy and ambiguous language. I believe the Fed and Powell should have realised from this latest share market rally that their language is betraying them. They have acted to push rates up and they have been prepared to go up in hikes of 0.75% when only a few months ago it was unthinkable. But their subsequent comments in press conferences have allowed the share market to change the narrative to suit their short-term agenda.

So, I expect Powell and other central bankers, such as the UK’s Andrew Bailey, to emphasise the threat that inflation poses to the global economy. At Jackson Hole, there will be other central bankers speaking too and the inflation situation in other western nations is even more dire. The UK for example now sits at 10.1% inflation (as of July 2022) and with the energy crisis taking hold the most recent forecast from major institutions such as the Bank of England and Citi have inflation in the range of 13%-18% by early 2023. If the Fed address their language correctly it will turn the mood of the share market back into bear territory, and in my opinion, we will retest the share market lows of June, but it will ensure that the appropriate line in the sand is drawn for the battle ahead.

If they leave any room for doubt or ambiguity in their message, then it tells us that Powell and the US Fed have their head in the sand and are quietly hoping that inflation magically disappears. Now it is possible that supply chain woes unwind and all inflationary pressures on the supply side do ease. But this cannot be the base case. If they get that wrong, they are setting up the global economy for the worst of all scenarios and risk many years of stagflation across the world. That situation would be far worse for both share markets and the global economy in the long term than putting up rates too high in the short term. Markets will sort themselves out in the end regardless, but the path can be made significantly simpler by taking the medicine required sooner rather than later. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Selling your business? What happens next?

Somewhat surprisingly following covid, the lockdowns and recent downturn in sentiment, there has been a significant increase in corporate activity resulting in family or founder led businesses being acquired by larger listed local and overseas organisations. Many of these deals have materialised this year but are really the result of negotiations over the past 1-2 years, before any downturn.

Imagine you are a founder selling a business for $10m or $100m. Once you sell there are two very different challenges you are faced with next. The first is the business transition and the next phase of your life. The second phase is dealing with what is often newly acquired generational wealth and setting up structures and investments for your family for years and decades to come. This can be daunting and stressful.

When you’ve been running a business for the past 10, 20 years or more, once you’ve sold it is a significant transition to manage. The way the sale is structured will provide a transition framework by default, often with a 1-3 year earn out. This is effectively a bonus component which is in place to incentivise the founder to stay on, stay engaged and make the transition work for all stakeholders. But importantly this also facilitates the founder’s psychological transition into the next phase of their life too.

Despite all the due diligence you might do, it is rare to find that perfect partner to buy your business. It is ultimately a sale, and you will need to become comfortable that you are exiting the business over the next couple of years. I have found that despite the best of intentions from all sides that once you move from being the founder, making all the decisions, to the manager of that business there is a culture clash with the new ownership. It makes it difficult for any founder to stay involved beyond their ‘earn out’ transition period. 

So, think about how long you want that earn out transition to last. One year will pass quickly but three years can become a grind for entrepreneurial founders who quickly feel trapped by the lack of autonomy and increased bureaucracy that inevitably follows. But life keeps moving forward. The earn out will take care of itself as will the shares component the owner is paid by the acquiring company. Typically, the largest component of the sale is in cash. Once the sale is completed and you’ve got the cash in your bank account – what then?

When you run a successful business with good cash flow there’s enough money to do all the things you want. Lifestyle is funded by an ever-growing business, so money isn’t much of a concern. But that mentality changes once the business is sold and it is confronting. Suddenly you have a quantifiable amount of money – this is what you have for the rest of your life, for you and your family. Big or small, that is the figure you have to work with now. It can be daunting. 

For most people, it is much more stressful than you would think. It seems surprising but it’s a very common and reasonable reaction. In most cases that cash represents most of your life’s work and most of your net wealth. The next thing that hits you is that you realise that while you are excellent at running your business, you don’t really know much about managing investments or generational wealth.

So, what do you do next? Here’s my advice. Do nothing. Settle. Leave the money in the bank for 3-6 months. Do not rush. Take a breath and compose yourself. Take a holiday. Some people are better at this than others. Take that time to decompress. 

Only after that phase of processing a lifetime’s work and the pending change should you start thinking about the next steps. Good decisions are not made quickly. So, it’s important to have a clear mind and remove the emotion from the equation before you think about the future. Only then are you really ready to plan your next steps with regards to the big picture, structures, and investments.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Why High Inflation Is a Big Deal

In Australia, our inflation rate has been moving up fast, hitting 6.1% in figures released today. In the US, UK, and Europe inflation is even worse, in the range of 8% to 10%. At that level, it can start to become quite entrenched and destructive.

This is why Central Banks across the world are in a mad scramble to raise interest rates. Once inflation gets out of the 2%-3% range it’s time to nip it in the bud. Central banks got the inflation call wrong initially, they sat on their hands for too long and inflation got away from them.

The only real way to get inflation under control is to raise interest rates. Otherwise, inflation becomes so high that demand is destroyed because no one can afford to buy any goods or services anymore. That’s a far more precarious position for an economy to be in. Prevention is far better than the cure.

But first, why does high inflation matter so much?

From an individual’s perspective, inflation reduces your buying power, your standard of living and your wealth in real terms. If you earn $100,000 a year and inflation is 6% you need a pay rise of 6% and an income of $106,000 just to stay in the same position. If you get a pay rise of 4% you actually went backwards by 2%. If your income doesn’t keep up with rising prices your standard of living falls because you can’t afford what you could before.

From a business perspective, inflation means rising costs and unless you can pass them all on to the customer then it means your profit margins are going to be squeezed. Even if a company can pass price increases on it may result in less sales as you raise prices and so profits reduce anyway. If profits fall so do company valuations.

From a national economy perspective, if inflation becomes embedded it can destabilise the currency and if left unchecked lead to hyperinflation and economic collapse. While that’s something more often associated with developing nations, these are the types of risks that can occur if inflation runs rampant for an extended period. As living standards fall, all sort of economic and social unrest comes into play.

The bottom line is high inflation must be dealt with – whatever the cost. Getting inflation down to 5% to 7% range in the US and Europe will be a big improvement, but that’s still way too high. Inflation also tends to roar back to life quite quickly if you don’t extinguish it properly the first time. Inflation must be brought under control properly to create price stability in the global economy.

It has taken far too long for Central Banks across the world to understand that. It does appear that finally the penny has dropped. Central banks have now collectively realised they need to choose whether they tackle inflation or assist financial markets and economic growth. They can either raise interest rates and kill inflation or they can keep them low to support the economy.

But you can’t do both.

The usual situation, historically, would be raising rates in a strong economy to slow it. Often the result is a recession. The balancing act is raising rates while trying not to pull the hand brake on too fast, damaging the economy in the process. That’s easier said than done. Usually, central banks tend to raise rates too high and leave them high for too long. Usually, it is because they’ve been too slow to act initially.

The current situation is far more difficult. We’ve not seen a situation where central banks have had to raise interest rates going into a weakening global economy. The real risk, especially in Europe and even in the US is that the level of rates needed to tame inflation is higher than the economy can cope with. The potential result being that the choice to raise rates to stop inflation will have dire economic consequences.

So, the reality is this process will still take many months to play out. For some reason markets still talk about Central Banks to engineering a perfect soft landing. Great if it happens, but I’m not sure you can expect the same people who were unable to identify the problem and address it in a timely manner to suddenly thread the needle when it matters most. I am hopeful for a shallow recession but preparing for worse. 

Regardless, I would rather they eliminate the threat of inflation. It will make for a more difficult downturn, but the world economy will eventually recover. If you let the inflation genie out of the bottle, then you risk all sorts of potential unintended consequences evolving and ultimately a far worse economic situation later. Unlike the past 15 years, I would hope central banks have learnt their lesson and will take their medicine sooner rather than later. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.