Imagine you are making yourself a lemonade. You add one spoon of sugar to sweeten your drink, then add another one, and then one more...if you keep going like this, the sugar will stop dissolving in the water. This phenomenon is called the saturation point in chemistry. In the economy, the sugar that has stopped dissolving in the lemonade is…

Governments injected unprecedented levels of liquidity into the economy to help businesses stay afloat and preserve employment. Now that economies have restarted, central banks begin to remove the crutches of policy support, markets are feeling nervous and shaky before they start to walk on their own feet. Will the global economy be able to walk without the crutches of policy support?

To specialise and build scale, supply chains have lengthened and have become extremely complex. It is very difficult for a single company to produce all components of a final product by itself.

Modern supply chains are built on the foundations of efficiency and specialisation which has proven to be a fragile model as exposed by the Covid-19 pandemic.

A rise in both inflation and interest rate expectations was the key reason for the rotation from growth to value during the last few months. This trend has been reversed recently, following reassurance from the Fed on containing inflation. We have seen the momentum swinging between growth and value stocks in the past few months.

According to butterfly effect theory, when a butterfly flaps its wings in the Amazonian jungle, a storm ravages half of Europe. It is that small change in the initial conditions that lead to far reaching results. In essence, financial markets are complex systems that are influenced by small changes which makes it incredibly difficult to predict the future and as such, the success and failures of companies may seem completely random.

Since the advent of modern portfolio theory, the 60/40 allocation between equities and bonds have helped investors to achieve benchmark like returns with 40% lower volatility. As the interest rates globally flirt with Zero, the value proposition of 60/40 portfolio is challenged.

Japan and United States are prime examples that countries with strong institutions can get away with much higher debt than the rest. Specifically, United States enjoys the privilege of a world reserve currency which is hard to replace. Since the initial formation of the US government in 1776, the US Treasury has never failed to pay back its lenders and it is deemed as the safest of any major sovereign.

For now, the world seems comfortable with the high levels of debt backed by the assumption that the economy of the future will be more prosperous than the economy of today.

The global economy is healing but not out of trouble. The situation is bad but getting better at the same time. It is more important to ensure survival during periods of extreme uncertainty than to guarantee maximum returns. The traditional business cycle playbook is not applicable under current conditions.

The coronavirus hangover will be unique and possibly last longer than the pandemic itself. Actions taken by the global economy to battle the virus in the form of social distancing, digitisation, change in consumer behaviour and monetary & fiscal stimulus will likely evolve into a new economic reality for investors in the next decade.

In radically unknown times, the unknowns far outstrip the knowns. This is where we currently stand. We cannot simply project the future cash flows and claim this as an intelligent effort. Many sectors and companies are struggling to see a clear path forward.