A good way of tracking the cycles of capitalism is to identify the leaders of each cycle, for it is the cultural and economic forces of the time that appoint its leaders into positions of power.

Western capitalism experienced four cycles since World War II:

They all succeeded for a while, then failed.
What’s next?

Equity returns are sensitive to earnings and the price-earnings ratios. Earnings are sensitive to boom bust cycles, i.e., economic growth.

However, pre-empting booms and busts are challenging since GDP figures are published with a lag and are subsequently revised. So, we can be up to six months behind schedule; this is rather late for a portfolio manager.

Here, we propose a real-time bust tracker ranging from 0% to 100%, by country, and at a world level. Bad news: It reaches 95%.

On June 13th, Emmanuel Macron announced that France and the European Union were entering a "war economy,” speaking as the newly re-elected President of France but also, possibly, as President of the European Union. No doubt he chose his words carefully.

But what does a war economy mean? What are its economic and financial consequences?

Let history enlighten us.

On February 24th, 2022, Russia attacked Ukraine. On March 3rd, the United Nations General Assembly adopted a resolution condemning the invasion and asking Russia to withdraw its troops. The vote in favor of the resolution exceeded 73%, an overwhelming majority.

A month later on April 7th, the Assembly voted to suspend Russia from the Human Rights Council. The majority dropped by 20 points to 53%.

Geopolitics had turned into geoeconomics.

The Rentier is busy doing many things but portfolio management. As presented in previous publications, they can allocate once and for all 25% of their savings in four repulsive asset classes: equities, long-term government bonds, gold, and cash. The outcome is a four-body stable system with remarkable statistical properties, successfully riding inflation, disinflation, booms, and busts for 70 years.

The Rentier’s portfolio passed its live stress test last week. However, today, the Rentier still does not sleep well at night given what he sees on TV.

They are searching for a cunning plan.

In February of this year, we published a series of three letters about the Rentier’s portfolio. The Rentier wishes to stay rich (not get rich), to live off the revenues of their capital, and to sleep well at night…

A few days later, the Ukrainian war started and energy prices, rare earth prices, wheat, equities, bonds, and gold massively went up and down by the day, and all over the place. And who bets it’s all over?

Let’s look at a live stress test of the Rentier’s portfolio.

Last week, we covered how to create a synthetic bond out of different asset classes, which we coined the “Bond-Like.” Higher return than inflation, lower risk than bonds.

The Bond-Like exhibits mysterious statistical properties. It’s a stable four-body system.

In September of last year, we argued an investor should accept schizophrenia for his greater good. Accept to split into three characters, not communicating with one another, each with individual objectives, a team of specialists, and investment horizon. We coined these three characters the Speculator, the Moderate Investor, and the Rentier.

The Rentier is neither a speculator nor a tactical asset allocator. They wish to stay rich - not get rich.

Last week, we highlighted an investment solution to the Rentier: The Bond-Like portfolio.

This week and next, we dig deeper into the mystery of Bond-Like.

Negative real rates are touching unseen levels in the US since 1974 and 1950. This is bad news for bond holders and global investors too, who are worried about equity markets and left with no escape room.

Is there any investment alternative to bonds with low drawdown risk and positive real return expectations?

Yes, bond-like portfolios.

La société dite ‘Disciplinaire’, selon le philosophe Gilles Deleuze, s’efforce d’enfermer sa population dans des lieux clos, tels des usines, des écoles, des hôpitaux ou des prisons. Cette société a prévalu en occident de la période post-napoléonienne jusqu’au début de ce siècle.

Depuis quelques années, le monde découvre la ‘Société de Contrôle’ qui simultanément libère ses membres des entraves murées et les contrôle au plus près du quotidien par l’entremise de sociétés privées qui gèrent l’information, telles Google, Apple, Facebook, Amazon et Microsof (les ‘GAFAM’). Les GAFAM, de ce fait, ne peuvent échapper au regard des autorités politiques.

Les deux premières lettres à ce sujet ont été publiées il y a plus d’un an, en juillet 2020. La partie III s’intéresse aujourd’hui à l’excroissance mondiale des GAFAM, à contre-tendance des efforts de démondialisation des activités plus traditionnelles. Un effet qui n’est pas sans conséquence dans la gestion de portefeuille.

The “Disciplinary Society” according to the philosopher Gilles Deleuze, strives to lock up its population in enclosed places, such as factories, schools, hospitals, or prisons. This type of society prevailed in the West from the post-Napoleonic period until the beginning of this century.

In more recent years, the world has discovered the “Society of Control,” which simultaneously frees its members from the walled shackles and controls them as close as possible to everyday life through private companies that process information, including Facebook, Amazon, Apple, Microsoft, and Google (aka the 'FAAMG'). The FAAMG, therefore, cannot escape the gaze of the political authorities.

The first two letters on this subject were published more than a year ago in July 2020. Part III now focuses on the global outgrowth of the FAAMG, which is at odds with efforts to deglobalize more traditional activities – a situation that is not without consequences in portfolio management.

Sometimes the stock market suffers from a divergent strabismus. Its left eye observes economic activity in the present moment, and its right eye the value of likely cash flows in the next ten years. Today the right eye is pointing to the ground as the resurgence of global inflation weighs heavily on stocks’ multiples. However, and since the end of last month, the left eye has been staring into the sky: our leading indicator of international trade announces a strong rebound in the next two months.

Which is the guiding eye for the global vision?