Q3 2022 Update

"Behavior is more variable than the dance of photons, and its explanation involves multiple layers, from the physiological to the mental. We cannot afford to look through a single pair of glasses; we need lots of different glasses to see reality. Theories do assist in this effort, by guiding our attention and making large amounts of data graspable, but they also induce selective blindness".

- Frans de Waal, primatologist

"Inflation is like toothpaste, once it is out you can hardly get it in again"
- Karl Otto Pohl, Central banker

Dear Friends and Interested Parties, 

It's nobody's fault; it's in our genes

Recently I have been reading up on what primatologists have to say studying primate apes' behavior and see if we can learn anything from them that explains our behavior as humans today. The great thing about studying primate apes, with which we share 96% of our DNA, is that you can only study their behavior. They don't sit on the couch telling stories, don't fill out questionnaires, and cannot skew the narrative towards a forlorn conclusion like most of us. Neither can they eloquently talk about why they feel or do the things they do, let alone make expert predictions of the future. It seems what they do is either ingrained or copied from their peers. Nature has a significant impact, and nurture has done the rest.

The primate displays the same three components to gain social dominance as we see in our world today: fighting ability, formal rank, and power. Anyone who has worked in an office or grew up with multiple siblings recognizes these three components all too well. There is constant jockeying for dominance through forming alliances, plotting coups, and practicing divide-and-rule strategies. If you want to see people's true colors, look at what they do, not what they say they do.

Russia's war in Ukraine, and the intimidating behavior over Taiwan from China, which has all the hallmarks of escalating into an altercation at one point, are all the result of men's drive to gain dominance and to establish hierarchy, which is deeply ingrained in our genes through millions of years of evolution. We do know from studying the primates’ wars that most wars will likely end by the removal of the leader that started the conflict. Like all hierarchies, the most aggressive leader will probably be overthrown and removed from power, often by his closest allies and "friends."

We remain optimistic and realistic about current events. The humanitarian and economic impact of war is enormous. We don't know how everything will play out in the near future. There are simply too many variables in play. What we know is that altercations are inevitable and that our core values as human beings are the same as our primates; in the end, empathy and cooperation, characteristics of both the primate apes and human beings, will win over aggression every time. Otherwise, we would not be here.

Inflation and the impact on valuations

Central banks aim for strong economic growth, low unemployment, and a desired inflation of around 2%. Currently, we are faced with much higher inflation numbers, and central banks have sprung into action to try to curb this by increasing the interest rates sharply. By raising the interest rates, central banks aim to decrease the amount of money and credit circulating in the economy and hope to effectuate a slowdown in demand, which will put negative pressure on prices for goods and services.

The effect of much higher interest rates cannot be ignored. All asset prices will have to come down. Valuations of future cash flows will have to be adjusted downwards because of lower future expected earnings. Hence the stock market's current downturn. We also know from past data that the stock markets will likely overshoot on the downside, which has more to do with our collective behavior of acting out of fear of losing and the pain associated with that.

There is not much we can do about the cycle we are in. We don't have control over the actions of the Central Bank, nor do we control the collective behavior of investors and consumers. We explained in previous updates there is no hiding; all assets, including cash, will be negatively impacted by inflation and higher interest rates.

What we do have control over is having patience and being optimistic despite all the adverse developments we read about in the daily news. There have always been market downturns, there have always been periods of high inflation, and there have always been wars and economic downturns.

Our optimistic stance has its foundation in undisputable data that productivity will increase over time, and downturns are always followed by growth and increased prosperity. Therefore, we position ourselves in the best way possible to preserve our capital and set ourselves up for the sunny days that will undoubtedly return.

As always, we thank you for your trust in us. It is a great responsibility, and we will try our best not to disappoint you. Be safe, be patient, salute our heroes, read good books, and be optimistic: it pays!

Thank you for your trust