Special Report: Wind of Change

Klaus Meine and The Scorpions sing one of my favorite rock tracks, Wind of Change. The band recorded the song in 1990 as an anthem for the fall of the Berlin Wall (Nov. 9, 1989).  Today they sing it in support of the Ukrainian people and the fight against communism.

Some 15 months ago, Patriot Asset Advisors penned our “Special Report”, How will ESG Impact Your Investments?  We believe, wholeheartedly, that this war on fossil fuels by the ruling class was a root cause of the disastrous investment year that was 2022.  I will not take the time to go into the details, but you can find our ESG article on our website: patadvisors.com.

Well, the wind has certainly shifted.  We are not ready to put the stake into ESG yet.  However, there are some encouraging signs.  Vanguard, once a proud participant in the ESG movement, walked away from the “Net Zero Asset Manager initiative.”  This group has over 300 financial firms as signatories with a Commitment to reduce investment in fossil fuels.  A complete list is attached to this letter.  You likely do business with companies on this list.

Again, we are all in favor of clean air and water.  I don’t believe the standard of living for all Americans should be in jeopardy over these policies.  In case the global elites have forgotten, China and India are building Coal-Fired power plants at the rate of 1 per week.

Over the past 80 years, we have witnessed countless examples of the dangerous power of groupthink, with examples from Hitler to Jonestown.  Of course, these representations are of the evil extremes, but groupthink can evolve in the investing world too as remarkable belief systems emerge – en masse – think ESG.

In the autumn of 1975, as the cooling night began to usher in turning leaves, things were stirring in Washington’s Mariner S. Eccles Building.  The building, housing the Federal Reserve, had quite the buzz as the Fed was preparing to report that the Money Supply (M2) had kissed $1T for the first time.

45 years later – on the doorstep of the Covid-19 Pandemic, M2 surpassed $15T.  It exploded to nearly $22T by March of 2022, earmarked for the war on climate.

Three years and an extra $7T comes with a price, it’s NOT Free.

In the 1970’s, our pal Warren Buffett would contrast killing inflation was like losing 20lbs.  The first ten come off like a massage, the last 10 --- feel more like a root canal.”  This may well be our new world.  While we celebrate the first stage of this inflation battle, we must realize this will be a LONG fight.  The M2 money supply didn’t reach these levels overnight and will take a concerted effort to reign in the excess.

While things have moved quickly here in the states, there is a GREAT big world beyond our borders.  Global interest rates are becoming increasingly correlated at the fastest rate in over a decade.  The U.S. bond market is NO longer the only game in town.  Significant changes have happened in Japan.  For two-decades global economies have seen expansion at the expense of the Japanese.  An entirely new global bond market regime is forming; and it will have significant implications for nearly all investment markets.

During the disinflation era 2010-2020, on the global stage - the best-looking girl in school has been U.S. equities (stocks).  For over a decade, all of the sweethearts of the U.S. stock market (Tech/Growth Stock) had the wind at the backs and attracted boat loads of investment capital.  In recent years, U.S. equities were rewarded by a near 5-1 advantage.  Global equities looked like a rounding error (after-thought).  On an earnings per share (PE Ratio) some U.S. stocks were 50-100% more expensive than companies in other Developed Markets.

The deflation premium the U.S. stocks have enjoyed is evaporating.  With the new era of inflation and higher bond yields, everything has changed.  We believe a significant migration out of the USA is in the early innings.  Stateside, the U.S. stock market will have increased competition from the U.S. bond (High-Yield bonds are offering equity-like returns).

Over analysis can lead to investing paralysis.  You will not want to be on the sidelines as the paradigm begins to shift.  As for the U.S. growth (tech) stocks, TINA (There Is No Alternative) has left the building.   Yesterday, there were compelling reasons to over-owned U.S. assets, NOW comes the great global rebalancing.  Winds are changing, don’t waste capital running against the wind.

In 2022 we witnessed the S & P 500 dropping 19.4% and the Morningstar U.S Core Bond Index lost 12.9% (according to Morningstar). We at Patriot are not following the herd as we seek opportunities. The Patriot Revere Opportunity Portfolio was created to take advantage of opportunities in any market cycle. 

We believe investment selection will be incredibility important in 2023.  The model of follow the index and forget it will go into hibernation.  Those living in the last decade may well fall further behind.  We would welcome the opportunity to provide insight and guidance for your investments.  You can reach us at 614-944-5225 to schedule your free review.

*Past results are not predictive of future results.  Investors should carefully consider investment objectives, risks, charges and expenses.