RIP the Fed Put
Inflation has unwound the 60/40 portfolio to levels not seen since 2008. Pretty much every portfolio is down 15-20%. The spread in performance between conservative and aggressive portfolios leaves many scratching their heads. How does this make sense? Putting into perspective the huge drawdown fixed income has experienced shows the answer. This occurred at the same time as the 20-year stretch of negative correlation between stocks and bonds reverses in the face of volatility and inflation. The reset in bond yields may have given the bond market another 5-10 years before the true development of the global bond market meltdown.
The wave of global monetary and fiscal policy unleashed in 2020 has highlighted the wealth gap dislocations caused by this 50-year, debt-fueled bubble. The populist movement focused on the wealth gap, coupled with inflation, has officially killed the Federal Reserve Put (1992-2022), at least for now.
Geopolitical risks remain heightened with Russia & Ukraine, and the risk of conflict involving Taiwan is slowly growing, as Xi Jinping secures a historic third term as leader of China. Geopolitical risks put the dollar’s long-term dominance into concern, while short-term liquidity squeezes around the world have caused the dollar to soar to 20-year record levels.