“I think we’re in a massive race between inflation and innovation, and part of the reason the Fed did the zero interest rate and the free-money policy, their view was if we throw enough cash at it, the innovators will get going and they will build the next Apple and the next Microsoft, and that will begin to pull the economy into the future. And I remember being very skeptical about that at the time because I’m a little bit more hardcore on inflation. But I am now looking at it, and I’m not sure it was wrong. And we have had such extraordinary innovation.
“Interestingly, once you start getting into strategic-security conflict, then the defense community becomes a provider of dollars. And I’ve gone so far as to say that defense spending is the new quantitative easing because you can spend an unlimited amount of money. Nobody ever asks any questions. If you tried to do it through the Fed, everyone would be having a heart attack. But if it comes through this strategic-security fiscal angle, nobody can complain, especially because the risk of conflict is real and it’s a clear and present danger.
“One reason you see the private equity firms aligning with the defense community is because that’s where the dollars are, and it is where the innovation occurs. War and conflict spur innovation. No question about it.
“So the question is, can we get through this period without actually having the war, or can we remain in the invisible war that’s very real? Can we get to a resolution without the public really registering what the real dangers are? And I think the chances are yes, because everybody does want to cut a deal on Ukraine, which implies also a deal over Gaza, Israel, because Russia and China and Iran would back off supporting Hamas and the Houthis if there was an agreement on Ukraine—or rather, China and Russia would stop giving them so much support if there’s an agreement on Ukraine…
“And if we get that—and here’s maybe my key takeaway from today, because I’ve given you a lot of dark stuff about the realities of geopolitics, so it makes everybody nervous and scared. But here’s the thing: A peace dividend is rare and valuable. How many of us missed the fall of the Berlin Wall and the end of the Soviet Union, and the extraordinary peace dividend that ensued? I would say most people did not anticipate that that was going to happen.
“This is another shot at that, and I would say in addition to whatever time you spend worrying about the downside, I want you to really think about, what is your strategy for the day that we get the headline in the Washington Post, ‘There’s a deal on Ukraine?’
“Because that is the day the peace dividend will begin again, and markets will go up and all this innovation will go crazy, and suddenly inflation will be an issue again. And there’ll be a question about how to solve that. But I would bet that in the race between inflation and innovation, in a peace dividend, innovation wins. So I just want to leave you with, I think there’s a real upside that most of the market isn’t even thinking possible.”
That was a curveball I didn’t expect, but an important one. We are often quick to assume the worst, but good outcomes are possible. The Cold War had one. While the various smaller conflicts brought tremendous pain and suffering, we avoided nuclear war.
It’s hard to imagine all today’s conflicts working out so peacefully. Yet it’s possible, and Pippa is right to say we should consider that scenario in our investment planning.
No comments:
Post a Comment