It should already be clear that we are entering a period of low visibility and high uncertainty. How things will play out, in what sequence, length of time, or level of severity, is impossible to say. There are too many unknowns at play. On the one hand, we are dancing on the edge of a debt crisis to the left, a geopolitical disaster to the right, and a socio-cultural war all around us. On the other hand, these big picture shifts present great opportunities for innovation, renewal, and repair. Investing in thiskind of environment requires an agile balance of defense and offense.

This is an excerpt from our May 2023 Special Report, Deeper Into the New Era. Check it out on our Reports page!

The current situation creates a somewhat difficult dilemma for investors. They all have the samefundamental questions: Should I be in the market or out of the market? Should I hold cash in banks that seem unsafe, or invest in stock markets that look unstable? What theory should I follow?

The current situation creates a somewhat difficult dilemma for investors. They all have the samefundamental questions: Should I be in the market or out of the market? Should I hold cash in banks that seem unsafe, or invest in stock markets that look unstable? What theory should I follow?

At one end of the spectrum, we know we need to stay invested. History has shown that owning stocks and staying invested is the best long-term strategy. Not owning stocks, or trying to time the markets in volatile times, often backfires. At the other end of the spectrum, we also know that financial markets, and the global economy, are complex systems. They move in far-from-perfect cycles in search of equilibrium. And periodically, they go through phases of cascading failures, ranging from recessions and market corrections to depressions and market meltdowns.History also tells us that periods of great geopolitical challenge tend to exacerbate economic andfinancial turmoil.

From our standpoint, the basic principle of investing never changes: No matter what the situation is, we follow our investment process and methodology, continuously adjusting our strategic allocation to big picture realities and themes, and continuously fine-tuning and improving our selection of securities through a very systematic, filtering and selection procedure. By using prudent risk management tools and allocations, a good portion of the risk can be mitigated. However, the current situation still requires some adjustments and considerations that we want to share here.

Outlook and Recommendations in Brief

There are periods that are more predictable, with cycles that are more regular. Other periods aremore volatile, with cycles that resemble the more erratic ups, downs, and twists of a roller-coaster. That is the kind of period we are in now. Deflating the current credit-based bubbles will be accompanied by increased volatility and a cocktail of government and central bank interventionism. The imbalances will be removed, one way or the other. We doubt, however, that this will happen in an orderly or predictable fashion.

We have therefore adjusted our strategies to prepare for the terrain that lies ahead. We believe the most probable economic scenario is one of stagflation. In other words, subdued economic growth combined with elevated inflation. This scenario, to some degree, involves what we might describe as “range bound markets”. Range bound markets are markets that move in a limited trading range over a prolonged period, with prices not trending significantly in either direction. Insuch markets, a passive buy-and-hold strategy is unlikely to be successful. Instead, a more agileinvestment approach is required, such as trend investing, and focusing on big themes.

Moreover, considering the big picture risks discussed above, this stagflationary scenario could deteriorate at any point, leading to more severe market corrections. Against this backdrop, we favor defensive sectors and stocks, “safe havens”, income opportunities, and alternatives – particularly non-correlated hedge funds, physically allocated precious metals, and other “real” assets.

We don’t think that the “shotgun approach” of diversification (a bit of every asset class, sector, and geography), or a passive buy-and-hold strategy, or the traditional 60 – 40 equity-bond portfolio, will work in this environment. Additionally, we are adding sufficient downside protection in case the pendulum swings to an extreme negative.

Finally, we are advising our clients to strengthen their structural setup, most urgently by ensuring that their custodial arrangements are solid, but also by implementing a jurisdictionally diversified system that enhances their overall wealth preservation shield, not just against the gyrations of financial markets, but also against the dangers of debt-ridden governments and the financial repression measures they will most probably resort to.

“I have learned that nothing is certain except for the need to have strong risk management, a lot of cash, the willingness to invest even when the future is unclear, and great people.” ~ Jeffrey R. Immelt

Note: while the Report was published in June 2023, we understand that some things have changed, especially in regard to the geo-political situation. However, the points mentioned in thisexcerpt and area of the Report are still very applicable.