| Areté Quarterly Q2 25 |
Business update
One of the comments that caught my attention the other day was the mention by Brent Donnelly in his Friday Speedrun that the phrase, “US debt is unsustainable,” is “aggravating”. Apparently, the source of his irritation is that “unsustainable” suggests a reckoning is due imminently.
Now, I happen to like Brent’s work because he truly has valuable experience and because I think he is legitimately trying to be helpful. However, Brent is a trader and for most traders, if an insight is not actionable in seconds, minutes, hours, or days, it is usually just not very useful. This is probably why he doesn’t like the phrase, “US debt is unsustainable”; because it is normally not actionable in his abbreviated time horizon.
This is a shame for a large swath of long-term investors, however, because the notion of financial “unsustainability” does have useful information content for them. The reason is the consequences of unsustainability start appearing well within an investment horizon of decades, if not in a trader’s miniaturized horizon.
Those consequences can take many different forms, but the main idea is that they represent constraints on public policy as I wrote in the last market review. The more policymakers get involved in markets, the less markets are likely to look “free” and the more they are likely to serve the needs of policymakers.
The single biggest thing to remember is that when a reckoning finally does come, which is quite likely to happen within the investment horizon of most long-term investors, the eventual bailout will come at the expense of those very same investors. The reason is because they have the money.
This means 1) long-term investors are quite likely to experience a major drawdown within their investment horizon, and 2) the risk of that event keeps increasing.
This seems like useful information to be aware of, not least of which is because there are things that can be done to avoid the brunt of the fallout.
One thing is to reduce/minimize exposure to the most popular and overvalued assets because that is where the greatest downside is likely to come from. In this case, it means US stocks and bonds.
Another thing is to be well diversified. Diversification has become a hackneyed phrase that investors nod their head to but fail to think carefully about. For one, the vast majority of assets that claim to be “diversifying” such as real estate, credit, and private equity really aren’t. When financial trouble strikes, they all go down.
So, diversification deserves fresh attention and that is exactly what Areté’s All-Terrain strategy does. It both seeks exposures that are unrelated or are even inversely correlated and minimizes exposure to US stocks and bonds when they provide unattractive prospects such as at the current time.
Finally, it is true that no one rings a bell at the top. But for long-term investors watching the signs along the way, there is no need for a bell. The existing message of unsustainability provides enough information to set one’s investment course in a way that minimizes the greatest hazards.
One of the comments that caught my attention the other day was the mention by Brent Donnelly in his Friday Speedrun that the phrase, “US debt is unsustainable,” is “aggravating”. Apparently, the source of his irritation is that “unsustainable” suggests a reckoning is due imminently.
Now, I happen to like Brent’s work because he truly has valuable experience and because I think he is legitimately trying to be helpful. However, Brent is a trader and for most traders, if an insight is not actionable in seconds, minutes, hours, or days, it is usually just not very useful. This is probably why he doesn’t like the phrase, “US debt is unsustainable”; because it is normally not actionable in his abbreviated time horizon.
This is a shame for a large swath of long-term investors, however, because the notion of financial “unsustainability” does have useful information content for them. The reason is the consequences of unsustainability start appearing well within an investment horizon of decades, if not in a trader’s miniaturized horizon.
Those consequences can take many different forms, but the main idea is that they represent constraints on public policy as I wrote in the last market review. The more policymakers get involved in markets, the less markets are likely to look “free” and the more they are likely to serve the needs of policymakers.
The single biggest thing to remember is that when a reckoning finally does come, which is quite likely to happen within the investment horizon of most long-term investors, the eventual bailout will come at the expense of those very same investors. The reason is because they have the money.
This means 1) long-term investors are quite likely to experience a major drawdown within their investment horizon, and 2) the risk of that event keeps increasing.
This seems like useful information to be aware of, not least of which is because there are things that can be done to avoid the brunt of the fallout.
One thing is to reduce/minimize exposure to the most popular and overvalued assets because that is where the greatest downside is likely to come from. In this case, it means US stocks and bonds.
Another thing is to be well diversified. Diversification has become a hackneyed phrase that investors nod their head to but fail to think carefully about. For one, the vast majority of assets that claim to be “diversifying” such as real estate, credit, and private equity really aren’t. When financial trouble strikes, they all go down.
So, diversification deserves fresh attention and that is exactly what Areté’s All-Terrain strategy does. It both seeks exposures that are unrelated or are even inversely correlated and minimizes exposure to US stocks and bonds when they provide unattractive prospects such as at the current time.
Finally, it is true that no one rings a bell at the top. But for long-term investors watching the signs along the way, there is no need for a bell. The existing message of unsustainability provides enough information to set one’s investment course in a way that minimizes the greatest hazards.
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