Another Shift in “the New Normal”

The change between “then” and “now” … more signs of deglobalization … finding the silver lining … preparing your portfolio for a new investing climate You’re investing at a historic disadvantage. As we’ve detailed in recent Digests , the economic and investment conditions that helped your parents and grandparents generate wealth are fading. In the days of yesteryear, “buy-and-hold” in quality blue chips was a near certain way to build wealth. That’s because buy-and-hold benefited from four decades of extraordinary bullishness. Yes, there were bear market and recessions along the way, but on the whole, “buy the dip” never failed. Our parents and grandparents – in the right place, at the right time – benefited just by not quitting the market. One famous investor who knows this is the “Bond King” Bill Gross, co-founder of PIMCO. From Gross back in 2013: All of us, even the old guys like [Warren] Buffett, [George] Soros, [Dan] Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of “greatness.” Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch… We are no longer in that epoch. One example of today’s new epoch that we’ve written about at length in recent weeks here in the Digest is the reversal of the 10-year Treasury. After bottoming in 2020 after four decades of declines, the yield has begun a new ascent. Source: Macrotrends.net As I write Tuesday morning, the 10-year yield has surged to 4.83% in the wake of blistering hot retail sales data that came in more than double the Dow Jones estimate (sales rose 0.7% versus the estimate of 0.3%). The two-year Treasury is up to 5.15%. This is an enormous new headwind for stocks as we profiled here in our October 5th Digest . But it’s not just in the Treasury market where we’re seeing evidence of this new epoch There are other massive changes – one has been on the radar of our macro investing expert Eric Fry for two years. Here’s Eric to introduce it: It’s been 40 years since economist Theodore Levitt first used the term “globalization” in a 1983 Harvard Business Review article. He argued that changes in consumer behavior and technology would allow companies to sell the same products around the world. He was right, and in the decades since, the world became one big marketplace. Globalization resulted in cheaper and more convenient goods and raw materials for the world. It also resulted in dangerous overdependence on other nations for critical goods. Well, the days of globalization are fading. In the wake of the pandemic, the Russia/Ukraine war, and growing iciness between Washington and Beijing, we’re now seeing a shift away from a unified world. In the same way that the 10-year Treasury yield has now reversed, so too has this multi-decade tailwind to trade and supply chains. Unfortunately, the shift away from globalization back to deglobalization means less efficiency, greater supply chain costs, reduced sharing of technologies that accelerate breakthroughs, and frankly, less corporate profit. Here RBC Wealth Management : Globalization boosted economic growth, corporate earnings, and stock prices for decades. But in recent years globalization has stalled out. It seems at risk of breaking down into deglobalization as geopolitical tensions persist. Saudi Arabia and other Middle Eastern countries no longer view the U.S. as their principal ally. They have forged close, formal strategic partnerships with China. The U.S.-China relationship has become mired in mistrust, security concerns, and disputes related to Taiwan. Speaking of mistrust, security concerns, and China, let’s jump back to Eric: I identified the beginnings of this (deglobalization) trend over two years ago, when we were living in the heart of the COVID-19 pandemic. As supply chains around the world were disrupted, it became frighteningly clear how dependent the U.S. was on other nations for critical goods and materials – specifically China. And now, to show you a specific manifestation of this growing deglobalization, let’s go to Bloomberg from yesterday: The US plans to tighten sweeping measures to restrict China’s access to advanced […]

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