Mid-Quarter Update

By Nick Fisher, Portfolio Manager

Following up our quarterly newsletter, I thought I would take the opportunity to update you on our investment thoughts in light of recent volatility and a perceived regime change in monetary policy expectations. In our newsletter, we said that:

  1. We expected inflation to become more of a concern given the coordinated global growth we have seen.
  2. Given the “goldilocks scenario” of ideal investment conditions, investors were bound to be surprised by any change in inflation expectations and potentially monetary policy.
  3. All assets are priced from US short-term T-bills (we call this the “risk-free” rate). Rapid rate increases, combined with high valuations, will surely create a headwind for asset prices.

At year-end 2017, we looked at a number of “macro” indicators across global economies (see our past commentary). As a good Bayesian practitioner, we must continue to adjust our probabilistic thinking when new evidence shows. We now have further evidence, through company earnings reports and calls with investors, that labor and other input costs are increasing for their respective goods and services. These higher costs will soon be passed onto the customers of companies that are capable of doing so. Eric Cinnamond recently wrote a great piece describing his recent experience, which corroborates our insights.

To reiterate, our investment strategy has been proactive in anticipating these changes (see our strategy here). In the short-term, we will certainly experience more volatility in the months to come, but we are pleased with our positioning in assets that will do well over the long-term. Times of uncertainty can be stressful, but in the end this creates opportunities for investors who can remain clear headed.