For a while, it seemed as if all you had to do to make money was to throw a dart at any fast-growing technology company. But times have changed.

Today, more than any other time in recent memory, investment success requires understanding and factoring in geopolitics and being ready to quickly adjust portfolios in response to fast-moving events, as starkly illustrated by Ukraine and Taiwan.

Two Competing Parts

The key geopolitical reality today is that the world has coalesced into two competing parts: North West (NW) – largely North America and Europe – and South East (SE). Competition between the two parts is intensifying across the board. Eventually, I expect a more cooperative approach will emerge, made necessary by resource scarcities in conjunction with the global need for sustainable energies. This will compel the NW to be more willing to cooperate with the SE, which has the lion’s share of resources.

Over the shorter term, however, the growing NW/SE divide is affecting the U.S. in ways with clear investment implications. For starters, it means we’ll go to almost any lengths to avoid a major economic downturn. In the current geopolitically fraught environment, a severe downturn would put us at a competitive disadvantage.

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For the U.S., I think it’s essential to generate growth along with increased productivity, which means that inflation will have to be tolerated as a secondary concern. Whatever the Fed might be saying, growth will be pursued even with inflation well above targets.

Second, there will be an even larger effort to separate the NW from the SE, which means that companies in the U.S. and in allied countries that rely heavily on China should be monitored even more closely than before for vulnerabilities.

A Historical Precedent

If you’re looking for historical parallels, no historical period provides us with a perfect investment roadmap. Parts of the Cold War come closest, especially the years 1977-81, when real interest rates were persistently, and at times deeply, negative. And like today, the world was divided into competing camps.

The major difference is that as commodities, especially gold and oil, were rising, Fed Chair Volcker didn’t face the same thorny geopolitical difficulties Powell faces today. Back then, the U.S. was the world’s unquestioned hegemon. Our rivals’ economies were just a fraction of ours and those of our allies. For practical purposes we had all the commodities we needed, with no need to impose sanctions to slow down Russia’s technologies. We were strong enough that even a major recession didn’t risk affecting our position in the world in any meaningful way.

What to Expect

With those differences in mind, don’t get too excited when you look at the table above and see the large gains made by some assets during that past period of high inflation. The annualized gains in gold, oil, and especially small-cap stocks all easily topped 20%, and even after subtracting inflation were still well into double digits. (The outlier was the big-cap stocks making up the S&P 500, where after inflation returns were in the red.) While these are the right groups to emphasize now, we don’t expect quite the same heady level of gains.

The lessons from history combined with the differences between that history and today point to the investment template I have been following. It has served us well so far. Current events suggest we should up the ante on continuing to refine our portfolios for these times. This means we should aim to further reduce the average capitalization of the stocks we invest in while continuing to focus on commodities.

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Editor’s Note: Don’t ignore cryptocurrency, either! As central banks move markets via monetary policy decisions, investors have sought refuge in decentralized assets such as Bitcoin (BTC) and Ethereum (ETH), which are perceived as immune to government manipulation and control.

Additionally, advancements in blockchain technology and decentralized finance (DeFi) have expanded the utility and functionality of cryptocurrencies, attracting a broader audience of investors and users.

Every portfolio should have exposure to crypto. But you need to be informed, to make the right choices. The experts at Investing Daily have done the homework for you.

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