Independent Strategy

Learning to live in the gray zone

The world is not at war, but neither is there a new cold war. The world is in a gray zone between the two. That will mean: a weaker dollar as the global reserve currency; more government spending, particularly on arms; lower growth and trade, but higher inflation. It will mean lower equity returns (as profit shares fall) and higher bond yields (given higher inflation). Most emerging markets will not outperform.

We shall all spend the rest of our lives living in the gray zone of mutually hostile alliances and bilateral treaties. This report will focus on the economics of the gray zone and its subliminal warfare. This is geopolitics with a hard edge.

We shall hark back to globalisation as like a childhood dream of a prairie or a steppe wide open and free. But now hedges, walls, barriers and walled cities dot it. They channel, influence, and often determine, every aspect of economics and markets. Nothing is immune. The economics of the state, defense, trade, technology, capital flows, reserve currencies and cultural interchange are all recast. The boiled-down variables of inflation, interest rates and investment all suffer a sea change into something more complex, poor and strange.

This report, hopefully, helps provide a way of thinking about the economics of the gray zone. But it has not the pretension to be a final answer.

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