"THE CONSEQUENCES OF MONEY CREATION ARE SPREAD OVER A LONG PERIOD OF TIME. THE BENEFICIARIES ARE APPARENT; THE COSTS ARE OBSCURE."

~ Friedrich Hayek

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On the face of it, equities had another strong quarter, continued to be driven by US large cap tech. Despite numerous red flags, political uncertainty, and persistent inflation alongside a "higher-for-longer" narrative, the market remains pinpoint-focused on the potential productivity benefits from the anticipated Artificial Intelligence boom. The only other boom that matches GPU purchases is spending by Swifties as Taylor Swift attracts crowds in their thousands from around the globe. Her Eras tour is the biggest grossing tour of all time, bringing in over US$ 1bn in ticket sales alone during 2023. This number will likely be matched, if not exceeded, in 2024. Taylor Swift has singlehandedly prevented towns across the United States from slipping into recessions and is surely the only current person more influential than Jensen Huang and Sam Altman. If it wasn’t for their age, all three could perhaps run for U.S. president. I bet their odds wouldn’t be all that bad.

But, back to markets and mega cap tech. Nvidia’s rise has been nothing short of spectacular. Alongside Apple, the two tech behemoths added a further $1.5 trillion USD in the last two months of the quarter. Exhibit 4 below shows the extraordinary rise of Nvidia as it briefly became the biggest company in the world towards the end of June.

Beyond mega-cap tech in the US, India was the only other market making supernormal gains, following election results that many expect will allow India to maintain its current path. As discussed in the performance section below, sentiment generally cooled on international equities towards the end of the last quarter with many major economies posting flat or negative returns in June. Our sense is the most likely driver of recent volatility is the increasing election risks and the consequential uncertainties. Gold remains strong technically, and we believe a new floor have emerged around $2300.

In this article’s section on inflation, we discuss why we believe it is a major concern longer term. More than inflation, the risk is monetary devaluation. And more than a risk, it is an inevitability. A fall in prices if and when the economy weakens, is highly likely. Stable prices – a result of central bankers and policy makers artificially lowering the cost of capital, creating a debt bubble, maintaining inefficient industry structures and keeping employment at super normal levels – is a thing of the past. We are much more likely to see wild swings in prices as we transition between double digit inflation, to outright deflation and back again, in the decade ahead. A stable 2% inflation regime similar to what we experienced in recent history is highly unlikely. This is the key reason for our substantial investment in gold and managed futures.

As for the economy, the world has so far avoided a recession, but downside risks are growing as consensus views and capital flows increasingly ignore market risks. We are navigating an uncertain and unprecedented environment. The US equity market continues making all-time highs despite a significant rise in the cost of capital, whilst consumers are spending like there is no tomorrow, despite prolonged inflation, or perhaps because of inflation?

Whether the economy can continue to surprise positively remains to be seen. But to be sure, strong opposing forces are at play. Productivity boosts from AI are already visible, and consumption has been persistently stronger than expected. However, high prices and cracks emerging in labour markets are concerning. Credit markets, and in particular commercial real estate are struggling with the refinancing cycle just as we hit peak political uncertainty. Nvidia and Taylor Swift have kept risks out of sight and out of mind, but we are not convinced this is sustainable.

That said, long-term investment opportunities which will benefit from secular trends and advances in technology remain in place, which we summarise in our thematic allocation section below. This includes the miracle that is India, the revival of Japan, the convergence of AI and the Life Sciences industry, to name a few. However, maintaining a rigorous valuation discipline and having liquidity ready to deploy when opportunities arise will prove invaluable.

Indeed, when the day of reckoning arrive, the biggest risk to government and policy makers are the lack of ammunition. Fiscal policy is currently injecting liquidity at unsustainable rates, with developed market governments universally maintaining wartime balance sheets during peacetime environments. This is troubling given the dark clouds that are gathering. We have not saved for the rainy day. Sadly, the next generation are likely to suffer most.

Suffice to say, at this juncture we encourage investors to focus on wealth preservation rather than speculation. As the risk-reward balance in capital markets becomes increasingly skewed to the downside, investors should consider the true meaning of risk: the probability of a permanent loss of capital and the erosion of purchasing power due to inflation.

Exhibit 1: Who might win the prize for most influential person in the world?

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