A New Brave World
Rising geopolitical tensions render reliance solely on diversification ineffective.It is the nimble and the adaptable who emerge victorious.
In a multipolar world, flexibility eclipses diversification as a pivotal risk management tool. Rising geopolitical tensions render reliance solely on diversification ineffective, as conflicts unveil concurrent losses in assets like treasures and stocks, puncturing diversification's protective facade. Conflict emerges as the decisive factor separating winners from losers, where adaptability and control over strategic technologies and raw materials emerge as national security cornerstones. Consequently, traditionally secure assets such as government debt become increasingly vulnerable, eroding investor trust amidst geopolitical uncertainty.
In the intricate web of global finance, the subtle dance between flexibility and diversification emerges as a delicate waltz, each step imbued with the weight of geopolitical uncertainty. As tensions simmer and conflicts loom on the horizon, the conventional wisdom of diversification falters, its once sturdy foundation eroded by the relentless churn of market volatility. Indeed, treasures and stocks alike find themselves ensnared in the throes of simultaneous losses, exposing the frailty of diversification's protective embrace.
Black SPY (S&P500 ETF) Vs Red TLT (20 year US treasuries).
In this tumultuous tableau, conflict becomes the crucible through which fortunes are forged and fates sealed, where the adaptable and the resourceful emerge as the unlikely heroes of the hour. It is they who wield the keys to national security, their mastery over strategic technologies and raw materials serving as the bulwarks against the encroaching tide of uncertainty.
The Predicament of US Treasuries
Yet, amidst the chaos, a singular quandary emerges—the enigmatic conundrum of US Treasuries. A veritable behemoth of financial complexity, the impending maturity of $8.9 trillion in government debt casts a long shadow over the fiscal landscape. With the Congressional Budget Office forecasting a staggering $1.4 trillion government deficit by 2024 and the Federal Reserve methodically paring down its balance sheet by $60 billion monthly, the stage is set for a financial reckoning of unprecedented proportions.
And so, the question echoes through the hallowed halls of global finance—who will bear the weight of over $10 trillion in US government bonds in the coming year? A sum exceeding a third of total government debt and a staggering 33% of the nation's GDP, its implications reverberate far beyond the confines of the financial realm. Compounding this uncertainty is the exodus of major US Treasury bond holders, predominantly foreign, leaving interest rate-sensitive entities—households, pension funds, and insurance companies—teetering on the precipice of uncertainty.
In this "New Brave World," as foreseen by the sage Aldous Huxley, the imperative for flexible portfolios capable of weathering the storm of macroeconomic volatility has never been more pressing. Drawing inspiration from the sagacious strategies of Napoleon, we are reminded of the timeless wisdom of flexibility over rigid control. For just as Napoleon deftly navigated the capricious currents of war, so too must we navigate the ever-shifting sands of global asset allocation.
It is the nimble and the adaptable who emerge victorious, their ability to pivot and maneuver amidst uncertainty standing as a testament to the indomitable spirit of human resilience.
Thanks for reading,
Guillermo Valencia A
Co-Founder of Macrowise
Miami, February 8th 2024