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  • Christian Armbruester


Why markets may not break but the song remains the same.

The last two years essentially never happened. That’s what most European equity markets are telling us, sitting just about where they were before the pandemic took its toll on the world. The US is still hanging on to some fairly hefty gains but that’s mainly due to tech and even then it is really only because of a handful of stocks. The emerging markets are all over the place. India has done really well, whereas China has given back 40% from its peak last year and many Latin American stocks had lost almost all hope of ever going up again, before staging an impressive rally as of late.

The war in Ukraine has literally enflamed what was already a very fragile situation. The global supply chain problems were there a long time before Putin did what few thought he would do. Likewise, energy was already expensive, inflation was uncomfortably high, and the imbalances from excess liquidity were everywhere. Remember meme stocks? Before you say Rivian, the central banks have created the highest number of so-called zombie companies since 2000, which is not good, given what happened next.

Interest rates are on the rise. Nothing wrong with that, unless of course your lifestyle or business are dependent on cheap credit. There is also that $300 trillion of debt the world needs to re-finance. No wonder the ECB is still not going to take us out of negative interest rate nirvana, even though the increase in consumer prices is at its highest since the nineteen seventies. If that wasn’t enough, there is talk of using nuclear weapons, the guy with the questionable hairdo has fired more ballistic missiles, they are still fighting in the Middle East, and the pandemic sure ain’t over.

So why haven’t we crashed? Part of the problem is there are few alternatives to stocks. The fixed income markets are broken, not least of which because governments have found ways to manipulate them and there was a reason Bitcoin was created. Hedge funds are evil, commodities need to be consumed, houses are more correlated to equities than one may think and don’t even get me started on anything private. Taking a view on returns ten years hence in this market environment seems a seriously tall order.

The other thing to bear in mind when trying to make sense of an insane world, is that the market is always right. In time, all of our problems will go away. The man in the Loro Piana jacket will prefer to live out his days on a yacht rather than The Hague, supply and demand will find a balance, while interest rates can be cut again. In twenty years, all of this will look like a blip and that’s what the market has priced into the levels at which it is trading now. The risk is the Tanzanian Shilling. If that were to ever break, then you better Run like Hell (Pink Floyd, 1980).


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