July 16, 2022

Perfect storm and patience 

Perfect storm

The FED made a major mistake underestimating inflation. Interest rates should have increased earlier. Now it is tightening aggressively. 

We experience the worst inflation in 40 years. 

Covid resurfaced in China. It is the worst pandemic in 100 years 

In addition, have a war in Europe after 75years. 

A painful coincidence!

Have markets priced in the bad news ?

Certainly the markets know about these adverse developments and have already discounted them. New information has to provide positive surprise to drive markets higher. For the moment, we are getting a series of bad news. But the reversal will be very sudden, unpredictable and strong.

Performance Cycles 

All asset classes experience fluctuations in performance. Real estate, business sectors, shipping ….etc. In some cases the length and the severity of corrections might be very pronounced as well as the appreciations. Leverage might render these cycles even  larger.

Liquidity and continuous valuation 

Liquidity is a very attractive a characteristic of listed stocks and bonds . This is a great advantage to investors  enabling partial additions or liquidations. However, constant  monitoring of the performance creates nervousness during periods of crisis and might induce sales.

Benefits of compounding 

The great miracle, the compounding of returns enabling continuous reinvestment of gains, can be achieved only with patience in all investments. 

Not with abrupt sales and hopes of timely repurchases.

Possible resolution

The key issue is for the supply chains to be reinstated.

The increase in supply is more efficient than the decrease in demand  but both will contribute. 

The future inflationary data will be key.

At the same time the aggressive interest rate increases should not create a recession but hopefully only a slowdown.

Conclusion 

This bear market will also pass. Possibly in a year ! Nobody knows the exact timing.  It will not be easy to get inflation out of the system. 

We understand the distress  of investors looking often at the portfolio valuation. 

However, we would like to point out  again that sellers during this period  will not participate in the stronger recovery. As always !

Best wishes, 

N.Ritsonis 

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