Election Uncertainty? Inflation Isn’t—Here’s Your Edge!

For the past year, I’ve been documenting how, based on the strategy I’ve developed alongside the former managing director of Goldman Sachs, it's possible to outperform the market. 

While it’s great to focus on the macroeconomic environment, as this is what drives everything, the best part about the strategy is that keeping things high-level, as we do with macro, makes it possible for busy professionals to follow along.

All we must do is understand the macro environment, create exposure to what has been proven to work historically in this environment and avoid what has been proven to underperform.

The Current Macro Data

So, what does the current macro data indicate?
We are in an environment in the US of slowing growth yet accelerating inflation.

In the following chart, you can see that inflation is expected to rise. Investors become less willing to lend money at fixed interest rates. This is because they anticipate that higher prices will erode the purchasing power of their future returns. Investors demand higher interest rates (yields) on bonds to compensate for this risk. 

Gold is signaling more of the same as it indicates the actual value of the USD. All time highs for the price of gold means all time lows for the actual worth of the US Dollar.

Unsurprisingly, the US Deficit Spending & the US Debt has reached an all-time high.

The chart above shows that US debt-to-GDP ranged between 23% and 48% from the 1960s to 2008. When the Global Financial Crisis hit, then-Federal Reserve Chairman Ben Bernanke took unprecedented action to stabilize the U.S. economy. Facing a collapse in the financial system and a severe recession, Bernanke implemented a policy known as quantitative easing (QE), which involved large-scale purchases of government securities and mortgage-backed assets.

Positioning

So, how do we position ourselves for this?

While the elections are receiving much attention, both candidates will have significant inflation, so make sure you are positioned for that. On the other hand, slowing the growth of the US economy requires some defensive positions.

On top of the watchlist, I’m looking to enter Uranium, Gold Miners (we have been long gold for a long time, as discussed above), Bitcoin, and Copper to deal with inflation and a flight to safety.

Much capital flows towards China, Singapore, and Japan to build further on the flight to safety and manage some election volatility. This short-term election dynamic aside, these are great places to have exposure from a macro perspective.

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Thank you,
Philippe