Highwire path

Highwire walking requires many skills, one of them is decisive action taking to keep you going safe in balance in a possible unexpected changing environment.  Decisive action taking is part of much training and failures resulting into experience which shall diminish errors but not riks.

One of the main difference between highwire walking and wealth preservation investing is the time horizon of the walk and cable lenght.

In “Fiscal Power unleashed“, SGG points out  that the conditions have gathered for a potential long term shift in market conditions. The lenght of the balancing perch used by the highwire walker is known to him. For investors, it is an unknown variable which could require more difficult decisive action taking since the perch itself is subject to unstable changing conditions.

Here is a glimpse of the current hazy current conditions.

Here is a chart published in 2012 by Bain & Company in ” A world awash in money“.

In its investment approach SGG presents two questions to the readers: We ought to ask ourselves a few questions, one of them being:  In a world awash in money where for each USD 1.00 of GDP we have about USD 10.00 of financial assets (All financial assets of all sectors Includes financial holdings of direct owners, as well as financial assets controlled by and held on the balance sheet of banks and other financial intermediaries) what is the rate of return that financial assets will judge acceptable and for how long?  The second one would be:  Do Central Banks have such unlimited power without unintended consequences?

The second one is already partially answered. The “pseudo” merger between Treasury and Central Bank highlighted in “Fiscal Power Unleashed” provides the settings. Since the GFC, central banks have provided succesfully much support to asset prices with limited leakage to the real economy. Now, the “pseudo merger” has become a political tool too. It means that monetary policy is changing and a potential loss of power from the central banks.

The first one could find answers in financial history. SGG ‘s feeling is that governments will try to reach a difficult equilibrium where real returns will be close to inflation (slightly negative at times).  Japan was able to maintain nominal GDP while asset prices (equity) were tumbling. Such outcome  is not in the mind of our policy makers.

The general loss of income created by COVID 19 is impacting a large majority. Money printing /creation needs to make its way into the real economy since the value of assets is directly linked to future income.  Worldwide, economic policy responses have been quite impressive and will bring results. Will it be enough?  SGG thinks that there will be more since the long term outlook is to bring down the overall Debt/GDP ratios of many economies.

The great majority of investors have surfed a disinflationary wave for the last forty years. China and technology have been important factors behind it.  We are most probably at an inflection point which means that the antagonic forces behind the “flation” debate will still prevail during a certain time. For many, such time will feel like an eternity since daily prices actions tend to discount many possible outcomes. So far it looks like that the astounding performance of the technology sector best expresses the situation.

As an investor, you might be already an experienced  Highwire financial walker. Now the time has come to rethink your approach. Governments might not be good at investing and managing but are good are creating rules and taxing. What looks like a friendly place today could change. A little inflation might feel good but you shall not forget that inflation is a hidden tax too. Wealth preservation and future income will depend on the domicile of your Highwire activities and your decisive action taking.