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We are coming out of a period in which both the supply and demand for alternatives received a big boost. Demand was being pushed towards alternatives with suppressed returns, high liquidity valuations, and by regulators who were looking at asset classes in alternatives without really understanding what they were looking at.
It was also a big time for supply, which showed massive proliferation. It will be a different period coming up; it will be a period with many more questions. Don't forget to subscribe to our channel. I'll raise this point and explain why it's like this. It's because of the neighborhood. I want you to think of a simple image that I'm going to use again and again: you think you know your starting point, you think you know where you want to end up, but you have no idea of the journey that will take you there.
Climate change was about the resilience of supply chains; it was about inequality, and we knew our starting points were favorable. We knew we wanted to improve a little, but we didn't really know how we were going to do that. And then came the war in Ukraine. The war in Ukraine did two things: it moved the starting point backward and it has made the The journey is even more uncertain.
Now there are two ways to think about this: if you're pessimistic, it completely paralyzes you in terms of even moving forward; if you're super optimistic, you think you shouldn't worry since it will resolve itself after everything that has happened in the past. But being somewhere in between, and I want to talk a little bit about what has been unleashed now that complicates the long-term problems.
The first and most important thing is the shift. A year ago, the consensus was high growth and transitory inflation. Of course, in asset markets, it's a wonderful message to hear that you're supported by fundamentals and inflation is transitory, so there won't be an impact on the liquidity regime. So, at the end of the year, the baseline shifted to high growth but persistently high inflation, and again, the fundamentals were fine.
The liquidity regime stopped worrying about that. Now, stagflation has become the baseline: lower growth and persistently high inflation, which is a fundamentally different baseline for the global economy. For the markets, the settlement used to be the risk scenario; now, recession is a risk scenario.
So, the first thing that helped make the War of Ukraine is entirely the distribution of potential outcomes for the global economy and therefore the implications for both public and private markets. Of course, there is the changing role of central banks: low inflation, a transitory high-growth inflation, and a world of high inflation.
That changing role can no longer be played by central banks, so there is a fundamental change taking place in the way central banks react to financial markets. There is also a fundamental social change taking place in inequality in this country. It is about the cost-of-living crisis that hits the most vulnerable segments of the population particularly hard.
In parts of Africa, it is about inequalities, about famine, and considerations that will become much more important in the way policies are made in the future. The problems will become more important, especially in the world. I have this image of small fires everywhere. If you are in a commodity-importing country right now, food will increase in price, as will the price of energy, and there will be slow global growth of the dollar, and that is not a great world to pay its debt.
The sanctions they put on the bank... Bringing the world's eleventh largest economy to its knees was something the national security apparatus hadn't considered. They didn't realize that in economics and finance there is basically a nuclear weapon. But now that we've turned sanctions into international payments into such a powerful weapon, there's a real question: What does that mean for this system as a whole?
These three things speak directly to the three things that people in the room invest in carefully: the volatility of expected returns and correlations. And they wreak havoc on all three. Why do they wreak havoc on all three? Because in a world left to its own devices, these elements become more unstable.
It's what economists call multiple equilibria. You move further away from a starting point, but instead of returning to the mean, the dynamics will take you even further. Which means that short-term problems become more acute as long-term problems become more acute. And we find it all very difficult to predict, particularly interest rates, liquidity risk, credit risk, market functioning, and regulatory risk.
So that's the world we're all operating in. That's the world the markets Public entities haven't been able to manage well, and it's a world to which alternatives won't be immune. It's a world where alternatives must be thought about more intelligently. How do we navigate that world? We need to have a view of neighborhood effects.
Whether you're investing in private equity or bitcoins, you have a view of neighborhood effects, and you have to make four distinct judgments about neighborhood effects that are highly complex. You do n't want to be paralyzed by this. You want to think about a handful of factors that can explain 70 to 80% of the results—not 100%, but 70 to 80%.
What would those effects be on the neighborhood? You'll gain insight into leadership—national leadership and corporate leadership. You'll gain insight into the cognitive diversity of the people you 're betting on. Are they cognitively diverse enough to think in terms of different frameworks? Are they willing to review their backgrounds because the world around them is changing so rapidly?
Are they able to keep an open mind? You'll gain insight into inflation— not just whether inflation will come down, but what will come next, to what level? How much disruption will there be in the process? How much institutional credibility will be lost? And how big is the policy mistake we make? Will we have a policy mistake because central banks are late?
The question is, how big is it? And finally, you'll gain insight not only into the war in Ukraine, but also into what the war has done to the world order. Taking those four views will allow you to answer questions about the process of restoring value to public markets, and it will be key to the alternatives.
Whether we end up on the bond side or the stock side is because at some point, value will be restored to the public markets. In the port, the construction of the folio that I wanted to come to this... The world was very tough. I wanted to be with safe assets and I wanted it to be an alternative, and I basically wanted to override the public markets as it resets.
And finally, what are the apps for you to invest money and organize your businesses? And how do you communicate with your clients? Successful businesses are going to have to have three characteristics. First, resilience. You will make mistakes in the world we live in right now. The world has become so uncertain.
The question for you is whether they are recoverable mistakes. Most mistakes are recoverable in the investment world, but we need a frank discussion about what recoverable mistakes are and how our clients see them. So resilience will be very important. Optionality will be critical for you if you want to maintain as much optionality as possible until things become clearer.
Think about how quickly you give up liquidity, at what price you give up liquidity, and how much confidence you have in your private credit. It will be absolutely critical. And the final issue that will differentiate you from others is agility. Because if you look at the world, it's a world that has many risks, but it also has great opportunities, as we are basically resetting things at the business level.
At the national and global levels. Don't forget to leave your comments and subscribe to our channel.
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