WHAT TO DO?

With bonds cracking this year...

We wanted to share some thoughts around a question we got from a client the other day. It went something like this:

I’ve got this money sitting with XYZ, and it’s basically in a 60/40 equity-bond split. I’m down a lot but I want to wait till it comes back, and then I’ll sell it and put it into Insider type sectors. What do you think?

This is a common question borne out of a stronger desire to retrieve what is lost as opposed to gain what is still unknown and never guaranteed.

The way we think about this is to always pretend you’ve no position. The reason is simple. It’s like that girlfriend you’re involved with. The crazy one. The sex may be off the wall amazing but the whole stalking thing and the death threats really do make you uncomfortable (as they should). You know what needs to be done. Hanging on for one last wild night is really not worth it.

Back to investing...

Pretend you own nothing. Then consider what you’d do with the capital if it were in cash. Then do that.

Because what if the market doesn’t come back to “get you back to where you were?” How long are you going to wait?

And then let’s say you’ve lost 30% and the market does exactly as you want it to do. Retrace your 30%. But while this is happening the sectors you were going to invest in run 100%. What then?

No. If you're in a bad relationship, get out. Remove yourself from the emotional turmoil of it all. You may hurt yourself in the short term (nobody knows for sure what’s going to happen), but in the long term your portfolio will likely thank you.

  INFLATION: HELL BREAKS LOOSE

Speaking of bonds...

Isn’t it weird how all of a sudden hell breaks loose on the inflationary front?

Zooming out, inflation in Germany is more or less the highest in at least a couple of generations.

While inflation may be at the highest in decades, bond yields are near their lowest. Clearly the bond market thinks that the inflation we are witnessing is “transitory.”

This is being echoed by the ECB and their “neat little forecast.”

If only life was that simple...

Remember back some 18 months, inflation wasn’t such a non-event (and we’ll have more on that in a moment) that the ECB’s focus turned to climate change, inequality, and the like.

Clueless is a word that comes to mind when we think of the ECB (and most central banks). Yes, blame it on the Russian thing, on Covid, or whatever, but it is the risks that you don’t see (or don’t want to see) that are always the driving force behind a change in a macroeconomic trend.

  ALL THINGS TRANSITORY...

Feels like a lifetime ago, when — back in February 2020 — we started warning that lockdowns will bring about inflation and shortages. Fast forward to today, and this pesky stuff is now part of our daily lives. We recently set up a dedicated inflation channel in our Insider private forum, where members can share their own experiences with all things "transitory".

We spilled a lot of digital ink on how soaring fertilizer prices will affect food supplies all over the world. This week, Insider member Willin shared an insightful field report (we couldn’t resist the pun):

A close friend's father-in-law owns and farms a significant corn field in Kansas. He told my friend if he sees 70 bushels an acre as he expects, he will gross 2M. He said he will be giving Monsanto at least 700k of it for fertilizer, four times his lifelong average. Last year he could not source a replacement alternator for his DE tractor. He was forced to buy a new tractor off the yard to harvest his spread.

If you think that it is just energy that is affected by the Ukraine war, then think again. Arguably, fertilizer is even more affected as Russia and Belarus are some of the biggest players in the global fertilizer market.

It’s why we’re holding onto our fertilizer plays, even though they’ve been up on a stick this year and many of you are now sitting on some juicy returns.

  IS THE CENTRAL BANK HUBRIS BUBBLE FINALLY BURSTING?

With (official) inflation hitting a generational highs, it’s worth highlighting just how badly flawed (to put it mildly) the narrative we’d been fed for so long was (courtesy of @RudyHavenstein):

Which begs the question...

Is this the central bank hubris bubble finally bursting? We’re not holding our collective breath (remember the ECB’s forecast we shared earlier?), but time will tell.