Our Thinking (not advice)
- Events rarely unfold in a predictable, linear fashion. While we often look for simple cause-and-effect explanations, the world operates through complex systems where outcomes emerge from interactions, feedback loops, and delays. A single action – like imposing a tariff – can trigger multiple, sometimes contradictory effects across time and sectors. Initial reactions (market drops, trade rerouting) may fade or reverse as actors adapt. Meanwhile, second- and third-order consequences (supply chain shifts, inflationary pressures, geopolitical realignments) may take months or years to fully materialize. Moreover, human behavior, political incentives, and institutional responses all introduce nonlinearity. Investors adjust expectations. Companies hedge risks. Policymakers backtrack or double down. This means the path from policy to impact often resembles a web or a spiral and not a straight line.
- We expect the economy to slow during the next two quarters and likely pick up during the first half of next year due to the fiscal stimulus from the OBBBA, and thereafter, the economy will likely slow down again. Inflation is expected to move higher, but this will not be sustained since it is reflecting more a one-time price adjustment. This suggests a price reset upward for imported goods in the next 9 months and thus bumps up the inflation rate. Thereafter, inflation will settle down (base effect takes over). We see a yoyoing effect, which makes the ride a bit uncomfortable. Nonetheless, the voters (especially the lower 50% income group will feel the most pain for the price adjustment and loss of some entitlement benefits.
- As we have stated in last quarter’s commentary, the way we think about portfolio construction and management is:
- 1) Review and affirm investment objectives and time horizon,
- 2) Separate short term (1- to 3-year) asset for liquidity needs from long-term assets (4 years+),
- 3) Upgrade each holding within its asset class to the highest quality where possible,
- 4) Park assets in safe and liquid assets for short-term liquidity needs, and
- 5) Diversify away from a super concentration in U.S. (home bias) assets and U.S. dollar dominance as well as styles, sectors, and asset classes, including hard assets.
Click here for the full commentary.