Within the Gavekal 4 Quadrants’ framework there is no discussion today that the world economy has moved up the chart from the disinflationary lower quadrants to the inflationary upper ones.

The next question thus becomes: right or left? In other words, boom or bust? The answer to this question has historically paved the way for reasonable hopes or disasters.

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.

Luxury is like beauty: Rare, immediately perceivable, extremely valuable, and quite difficult to describe.

From an economic standpoint, however, luxury has a very precise meaning.

If you wish to know whether the product you bought or sold is considered luxury, grab a pen, prepare yourself for some basic mathematics, and jot this down.

What might surprise you along the way is how health may be turning into luxury.

The S&P 500 can be danced like a 3-count waltz: 1 (corporate profits), 2 (price of primary energy), and 3 (interest rates).

Last week, we analyzed the market sensitivity to rising interest rates, all other things being equal. However, rarely are all other things equal.

This week, we integrate the three rhythms, with the conclusion being the cost of primary energy is growing too fast.

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?

To hunt game, you must first track it on the trail. The same is true for the offshore dollar.

Since 2014, we lost track of our wild dollar with increasing perplexity. Not by a single dollar, but a trillion dollars. In this letter, we show how wild dollars escaped from the FED trap and are now nesting on the high branches… of the US stock market!

A ‘Giffen good’ is a strangeness. When its price increases, its demand does not fall, it rises. Simply because it is an essential good – not substitutable – which  constitutes a significant part of the buyer’s income.

In times of economic stress, companies that produce Giffen goods are a safe-haven for the stock market investor.

We are now in a time of economic stress; here is an example of the Giffen portfolio, with seven good old essential stocks!

Inflation accelerating? Temporary. Supply chain disruptions? A passing moment. Market nervousness? Transitory.

The US suffered from 30 recessions in the last 150 years, and thus, 30 transitory times between recession and expansion. What can we learn from the past?

 As Usain Bolt once said, “All I have to do is work on transition and technique.”

Ahhh, the simple scientific world of René Descartes! Single cause, single effect. In the economic world however, this unfortunately is not the case. One cause can even bring about two opposite effects.

A devaluation, for example, usually produces a deterioration in the external accounts first and then an improvement second. Economists call this phenomenon the “J-curve.”

However for more than 20 years, the financial policies of developed economies have turned the page upside down. The “J” has become an “η.” Immediate relief and pain for tomorrow.

The tapering in view of the US Federal Reserve now raises the question: Would “tomorrow” be the end of the summer?

Are there laws in economics as well as in physics? We say yes, absolutely. Just like gravitation, classical mechanics, thermodynamics, and even quantum mechanics.

To understand this phenomenon requires a bit of imagination. In particular, a new status of law, which does not find its foundation in an external Platonic world but rather the self-organization of individuals. Here, we state a new scientific law governing a living society: rats in a cage, or «The Law of Diving Rats.”

This example introduces Econophysics.

Two weeks ago, a friend of mine lost his tennis racket on the highway. The racket fell right out of his bag attached to the back of his motorcycle. He quickly took the first exit, returned to the spot, pulled his motorbike into the emergency lane, and spotted his racket lying there on the highway. Did he end up crossing the road to retrieve it?

Managing risk does not mean forecasting.

Will the financial market crash?

This is anyone’s guess; the future is unpredictable. But what about the risk?

Given the inflationary shock on oil developing month after month, the odds of a 50% drawdown on the S&P 500 have been multiplied by a factor of 100.

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