This was the third consecutive all-virtual conference and while we miss meeting other conference attendees and the thoughtful discussions that arise, it was still great to listen to some of the world’s brightest discuss the global state of affairs, economically and financially.
Building off the 2021 conference, geopolitics, resource security and inflation remained the center of attention.
GEOPOLITICS - WARS & THEIR CONSEQUENCES
Gavekal CEO, Louis Gave, titled his presentation “Wars and Their Consequences” breaking out the current Russia-Ukraine situation into two parts: military conflict and weaponization of currencies. Sandstone has expressed concerns over the weaponizing of the US dollar on several occasions over the years.
Gave discussed the unintended consequences of seizing foreign assets from individuals. David Rubenstein, a renowned private equity investor, echoed Gave. Once viewed as a safe haven, the US dollar and westernized financial institutions have become a risk. The confiscation of Russian assets will serve as a warning to other countries. Mitigate the risk by spreading your assets across various currencies and countries.
Dr. Henry Kissinger weighed in with a measured and diplomatic response on how to end the Russia-Ukraine conflict – a stark contrast to today's divisive rhetoric. There is no winner in war. We should not turn this conflict into a purely technical, economic problem. He emphasized the importance of giving Putin a dignified and safe way out and Russia an opportunity to protect themselves (from NATO).
Finally, General Shirreff noted the world is not as united as it may appear. China, India, Mexico and much of Africa are trying to remain neutral and, in some cases, show sympathy for Russia. Businesses will need to identify who is susceptible to instability and build resilience to insulate future supply chains and revenues.
resource Security and Human BehaviouR
Investing legend Howard Marks talked about his theory of the swinging pendulum. Human thinking doesn’t stay at a happy medium - we swing too much in one direction and then overshoot in the opposite direction. Marks noted that over time, the economic weight shifts to different factors. Not too long ago, it was all about getting things cheaply. Then it was eco-friendliness. Today, we have to consider the safety and security of our supplies by bringing production back onshore.
Other speakers emphasized how access to natural resources is so economically critical. Veteran agricultural trader, Nick Hoyt, discussed current fertilizer and food challenges. Some governments have begun cutting off agricultural exports to shore up domestic supplies. Countries banning exports include Indonesia, the leading exporter of palm oil, and India, the second-largest wheat producer.
Sam Rines summed up the conversation, highlighting the impacts this has had on consumer behaviour. Must-have goods take priority – when the affordability of food and energy becomes stretched, consumer behaviour changes. Netflix, for instance, is a consumer good you can cut very quickly. Given the choice between videos and bread, people will buy bread.
Inflation, inflation, inflation!
Several factors have led to a sharp increase in core goods prices. For starters, raw material costs are up (energy, food, metals, lumber, etc.). Next, tight supply has led to record low inventories (housing, auto, and semiconductors). Lastly, shipping costs are higher since all core goods compete for space on planes, trains, ships or trucks. Head over to any gas station, grocery or home improvement store. You will undoubtedly notice an increase in prices. The cost of living has been going up.
According to Dave Rosenberg, the disinflationary forces we were looking at pre-COVID are still alive and well. He calls them the “Three D’s” – debt, demographics and disruptive technology. He believes that inflation is transitory and will come down sooner than we think. Several other speakers suggested that the securitization of resources, extended supply chains and increased cost of localization will keep prices high.
For the past decade, inflation has been heavily concentrated on the asset side of the economy. A confluence of factors (record stimulus, supply chain constraints, de-globalization) has only fueled the fire. Central banks find themselves well behind the curve and are scrambling to reel in inflation. Double-barreled monetary tightening (raising interest rates and decreasing the Federal Reserve balance sheet) will help drive demand destruction, but at what cost? How far will they go?
BOTTOM LINE
Many of the long-term structural changes aforementioned should come as no surprise. They have been focal points at Sandstone OUTLOOKs in the past. The world is in transition, and we believe that alternative assets, hard assets, inflation-protected securities and dividend growers provide a hedge against ever-increasing market instabilities.