Corporate bond yields share a rare property among financial assets, that of being like cruise ships whose trajectories are difficult to change.

Any icebergs in sight?

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.

Inflation, growth, profits, energy supply. So many uncertainties today.

One definite macroeconomic fact is the US monetary policy. The Fed will take a new trajectory on its balance sheet in a few weeks, for months and potentially years: A sustained contraction of a trillion USD per year.

This is a first in world monetary history.


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.

You can only purchase two things in the markets: a contract (for example a 10-year bond), or a title of property (like a share). I draw this observation from our trusted source, Charles Gave.

However, you cannot value both in the same way, simply because the first has a finite duration (here 10 years), and the second is a perpetual.

The consequence is of upmost importance when rates are very low - as is the case today - and when they begin to rise (for example from 1.5% to 2.5%), which could be the case for the United States in 2022.

In this scenario - all other things being equal - the contract loses less than 9%, but the title deed loses 40%.

«Yes, is like credit, no is like cash,» said Cornelius Jacobus Langenhoven a century ago, the writer who composed the South African national anthem.

On one hand, inflation is back this year, globally. That is a fact. Whether it’s temporary or not, no one can say. On the other hand, global liquidity in USD for the first time in eight months is tightening. This is a major macroeconomic event of the month.

A contraction in liquidity in an inflationary context is a harmful configuration for equities, but also for bonds, be they long-term ones with a fixed coupon, or short-term ones with an inflation-indexed coupon.

It is no longer unreasonable to say “no.” And no, is like cash.

Investing in Chinese stocks inexorably provokes a contrasting feeling, a mixture of fascination and anxiety. This is reminiscent of the tempting flowers one wishes to pick at the edge of a cliff, "The Flowers of Evil," by Charles Baudelaire who revolutionized French poetry at the end of the nineteenth century.

Among the various investment strategies, the one proposed by Gavekal-IS mitigates anxiety. Evergrande does not change the case. The conclusion remains the same on the Shanghai Stock Exchange Composite Index: risk on!