Stepping on a Rake

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Dear fellow investors,

The year 2008 and the subsequent Global Financial Crisis (GFC) stand as a watershed moment in the annals of our capitalist society. It was a bailout prompted by poor capital allocation, deficient risk management, and unchecked greed. More significantly, it marked a seismic shift, both financially and psychologically. Financially, it represented a substantial transfer of debt from corporate and private balance sheets to the balance sheet of the US Government. Psychologically, it sent a clear message to investors: if you are deemed systemically important, the degree of risk mitigation employed matters little in terms of being held accountable.

Fast forward to the present day. We've experienced over 13 years of artificially low or negative real interest rates, several rounds of quantitative easing (QE) and Operation Twist (essentially QE by another name). This all culminated in helicopter money to address the COVID pandemic, regional bank liquidity injections and the ironically named Inflation Reduction Act. It's hardly surprising, except perhaps to the academics at the Fed, that we are witnessing an uptick in inflation.

So the question is, have we seen peak inflation and has the Fed found the magic formula to stem spending while not significantly impacting employment? If so, the Magnificent 7 can continue their linear assent ad infimum as artificial intelligence (AI) becomes the next future generational revenue driver for the bulls to chase. However, if the past is any indication, the answer is no. We have mentioned before that this macro environment is very similar to the previous inflationary period of the 1970s, which had three peaks before being tempered. Instead of baby boomers with Johnson administration guns and butter, we have millennials, ESG, and a pandemic. As the chart below shows, it’s not unheard of for inflation to come in waves.

 U.S. Inflationary Periods 1910, 1939, 1972, 2021

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