(B) We have moved quickly from a pre-Covid economic world that was characterized by:

• Globalization
• Low and even negative inflation
• Very accommodating monetary policies that lasted over a decade
• Recent and generous fiscal polices to help consumers and businesses during Covid
• China growing between 5% and 7% per year
• The U.S. growing at 3% per year and sometime even at 5%
• Europe not growing by much
• Inflated equity prices due to excessive liquidity (Quantitative Easing) generated by the Central Banks
• Government debts increasing to unsustainable levels – debt as percentage of GDP – Japan: 259%, Italy: 155%, U.S.: 134%, France: 115%
• World wide temperature increase of 1.1 degree Celsius (over pre-industrialized periods)

To a past-Covid economic world characterized by:

• Deglobalization
• High to very high inflation ~ a 41-year high in the U.S. – from 5% to even higher than 10% depending of the country – in particular for energy (oil and gas) and agricultural products (food)
• High interest rates – monetary policies were probably to late to fight inflation
• China growing around 2% per year
• The U.S not growing or in recession
• Europe in recession – U.K. situation alarming (due to recent proposed unorthodox monetary and fiscal policies – e.g. sizable tax cuts and higher government spending)
• Depressed equity prices – no more liquidity to inflate asset prices (Quantitative Tightening) from Central Banks
• Higher interest rates will raise the amount of money that governments have to spend on debt service
• World wide temperature increase of 1.5 degree Celsius, likely to reach over 2 degrees Celsius (over pre-industrialized periods)

To the exception of energy stocks which returns are in the 30% so far for the year, like in 2008 everything is down, both stocks and bonds:

• Bonds are down between 1% and 19%
• Health care is done by 15%
• Value stocks between 16% and 20%
• Growth stocks between 20% and 25%
• International stocks more than 25%

Return for a 60/40 portfolio (S&P 500 – US 10-year treasury) is at least – 20% for the year:

Two not really Black Swans but probably more Gray Swans:

• Emerging markets is the best sector so far for the year among international stocks. Emerging markets are now much more resilient against the US Dollar than the rest of the G1O:

• Inflation hedges such as GOLD and TIPS are not doing well so far- TIPS are 13.45% down for the year!

Political leaders and policy makers are likely to be busy in the next few years to fix the economies, and dealing with on-going social conflicts while putting the agenda to address a burning planet again after this upcoming stagflation period.

Here is more on the risks that I just described, better analyzed by the CIO of Bridgewater, to the exception of global warming since Wall Street is still ignoring the risks of a burning planet:

Note: The picture above is “sous-bois à Fontainebleau” from Paul Cezanne.

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