Where Things Stand
Inflation
Inflation is here and it's staying. Food, materials, construction, housing, the whole shebang. Energy costs remain elevated and the labour market has not softened in the way central banks need it to.
I made it clear that we're not going below 3% until 2027. In fact I'm starting to take the view that we're not going under 4% until 2027.
The change in the rate environment matters more than the level now, the long end is taking off and everything, credit, equity duration, property yields, must be repriced.
Fat Tails
I'll say it again.
You don't see black swans often. They only show up when the conditions are right.
The conditions are ripe.
Trapped central banks, persistently elevated energy prices, geopolitical instability across multiple theatres, and a tech cycle that is simultaneously creating and destroying value. The range of outcomes is wider than it has been in recent memory.
The swan doesn't even need to arrive for this to matter. The shift in the inflationary and rate environment alone is reason enough to reassess positioning. Stress-test it against a world where rates stay higher and inflation stays stickier. You might conclude you're comfortable where you are which is totally fine! The discipline is in doing the work.
Inaction after deliberation is a decision. Inaction from not bothering is what you get killed.
The Horseshoe
Strange convergence happening in energy policy. The climate left wants energy independence because fossil fuel dependency is an existential environmental risk. The nuclear right wants it because reliance on foreign energy is a national security vulnerability. Same conclusion, opposite directions.
Energy independence will surely become rare bipartisan consensus. Achieving it requires enormous investment though, nuclear, renewables, grid infra, LNG capacity, everything.
Meanwhile AI is butting up against an energy constraint. Data centres need power too.
We need so much more power. The investment required to get there creates opportunities.
Opportunities
Short-term disruption creates entry points. Geopolitical events, rate repricing, and sentiment shifts will create dislocations across asset classes.
Some will reflect genuine fundamental deterioration and others will be the market overshooting because retail panics and institutions herd into the same trades. ("Sell your private credit. Go underweight on tech.")
The work is distinguishing between the two.
Themes worth watching:
- Private credit - listed vehicles selling off against NAV marks. The Aus LIT market went through this in 2022. Opportunists were rewarded.
- Tech - AAGMM trading at or below the S&P 500 on forward PE with structurally better leverage to AI (cost-out).
- Structural long-term exposures - uranium, defence, energy infrastructure. May sell off in a broad risk-off environment. If they do, the thesis hasn't changed and perhaps gets stronger over time.
- Credit markets during stress -- rate hikes or even the threat of them combined with retail panic in listed credits could create exactly the environment to earn outsized returns. (I'm going to say something disgusting, I don't mind CCC at these spreads)
None of this requires immediate action. It requires preparation. The opportunities will present themselves. The question is whether you've done the work to act when they do.