As they survey the shattered remnants of the past decade’s bull market, investors are inevitably asking: what happens next? Not next week, and not next month, but what happens for the coming years? Specifically, did this bear market mark the end of an era and, in time, the start of a new one? Or do we still live in a MAGA (Microsoft, Apple, Google, Amazon) era?
In a recent paper, Charles* argued that the Covid-19 outbreak is paving the way for a universal basic income funded by MMT (aka the magic money tree) and that these two profound changes will upend the investment environment. This view leads me back to the most trusty Gavekal framework for linking the macro environment to the investment landscape, namely the Four Quadrants.
For the past 30 years or so, the world has basically alternated between disinflationary booms and busts, which makes inherent sense as the dominant force of capitalism is deflation. Every entrepreneur, everywhere around the world, is always trying to produce more with less. And in a disinflationary world, asset allocation is a breeze: one needs to own government bonds (to hedge the risk of a deflationary bust) and equities (to participate in any deflationary boom). And best yet: in a disinflationary world, not only do bonds and equities both have the wind at their back, but the two main asset classes have in bad times been negatively correlated. So, happiness all around.
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