In my view, geopolitical risk is structurally elevated as we begin the second half of the year. The world is entering the third distinct geopolitical era since World War Two, following the Cold War and post-Cold War eras, and is searching for a new equilibrium – but with continued competition and a significant risk of conflict. Despite this more volatile risk environment, the global economy and economic relationships have proven resilient. Likely in part, because key flashpoints – including in Ukraine and the Middle East – have remained contained thus far. In a recent report, Blackrock maintained three geopolitical themes for the year: deeper fragmentation between competing geopolitical and economic blocs; a more volatile and less predictable world order; and the rewiring of accelerating globalization. Elections remain front and center in 2024. Several — including in France, Mexico and India — sparked volatility. Going forward, the lead-up to the U.S. elections and implications of different scenarios in key areas such as taxes, trade, fiscal spending and regulation will be much discussed.

Below is is the Blackrock Dashboard. The dashboard features both data-driven market attention barometers and judgment-based assessments of top risks. They show market attention to each risk, assess the likelihood of it occurring over a six-month horizon and analyze its potential market impact. Unfortunately, the threat of terrorism against U.S. interests is at an extraordinarily high level. U.S. law enforcement and intelligence agencies have cited violent extremists, lone actors and the emergence of new terrorist hotspots as major areas to watch. The U.S. Department of Defense recently issued a rare, heightened alert for U.S. military bases and personnel in Europe, and the FBI has warned Congress of terrorists drawing inspiration from events abroad to attack the U.S. Al Qaida and the Islamic State keep rebuilding their global reach, showing increased motivation and capability to conduct attacks abroad. Blackrock sees a heightened risk of terrorism ahead of the 2024 presidential election. I pray that the Paris Olympics are successful and terror-free.

Most investors approach geopolitics and politics as a risk and tend to tread carefully and tilt their portfolio away from bullish bets. However, empirical evidence is inconclusive. While geopolitical risks can provide a tailwind to safe-haven assets, like bonds and gold, they also have a short half-life. For example, equities often recover much faster than expected following a major geopolitical event. Public markets quickly and efficiently discount geopolitical risk, creating opportunities for investors. Due to informational asymmetry and the high likelihood that both the media and the median investor overstate political and geopolitical risks (due to their novelty and difficulty in quantifying properly), public market investors can often generate significant returns by betting against the worst-case scenario. The conclusion is simple. When something blows up, investors should take a breath, close their eyes, and buy.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Costco Wholesale (COST-US) shares jumped after the wholesale club raised its membership fee for the first time since 2017. The company hiked the cost of its annual membership by $5 in the U.S. and Canada and increased its higher-tier plan by $10. Owned in Core and ESG+ portfolios.

(+) Deckers Brands (DECK-US) announced that its Board has approved a six-for-one forward stock split. The Board also approved a proportionate increase in the number of authorized shares of common stock and preferred stock to accommodate the stock split. "The trading price of our common stock has risen significantly over the past several years as a result of our strong financial performance and the execution of our strategic plan. We believe effecting the forward stock split will make the shares of our common stock more affordable and attractive to a broader group of potential investors, including our employees, and increase the liquidity of the trading of the shares of our common stock," said Dave Powers, President and Chief Executive Officer. The split is expected after market close on September 16, 2024. Owned in US Portfolio.

(-) JPMorgan (JPM-US) reported a top and bottom-line beat: Revenue of $50.99 exceeded estimates of $49.87 billion; adjusted earnings per share (EPS) of $4.26 beat by 7 cents. No change to full-year 2024 expectation of $91 billion net interest income (NII) and $92 billion in adjusted expense. Investment banking (IB) fees top estimates by about $300 million. Equity trading was up 21% and fixed-income trading was up 5%. Jamie Dimon, Chairman and CEO, said, “While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks. These tail risks are the same ones that we have mentioned before. The geopolitical situation remains complex and potentially the most dangerous since World War II — though its outcome and effect on the global economy remain unknown. Next, there has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. Therefore, inflation and interest rates may stay higher than the market expects.” Owned in US Portfolio.

(+) MicroStrategy (MSTR-US) shares rose after the bitcoin development company announced a 10-for-1 stock split. Owned in Opportunity Portfolio.

(+) Taiwan Semiconductor Manufacturing (TSM-US) The chip stock advanced this week following the company’s revenue results. Though the company’s reported T$207.87 billion for the month of June was a 9.5% decrease from last month, it was a 32.9% increase from the year-ago period. For January through June this year, the company reported T$1.27 trillion, which is a 28% increase from the same period last year. Owned in Cash Flow and Opportunity Portfolios.

(-) VanEck Rare Earth and Strategic Metals (REMX-US) Shares of the lithium producer Albemarle took it on the chin this week. Albermarle represents nearly 7.5% weight in this ETF. News that two Wall Street analysts cut their targets for the stock price is responsible. The shares are down more than 70% from the record highs they reached in late 2022. Back then, lithium, which is used in batteries for electric vehicle, was trading for about $85,000 a metric ton. Prices today are about $12,500 a ton. More EVs are using more lithium, but producers of the commodity have also added more capacity. Despite the near-term challenges, we are encouraged by recent data points such as stronger-than-expected EV deliveries and sales data for key geographies. It will take higher lithium prices to get this ETF moving higher and it's taking longer to happen than Wall Street expected. The good news is we only recently entered this trade, and at lows, so we will remain patient for now. Owned in Opportunity Portfolio.

Weekend Reading

 

Good — But Not Good Enough Biden needed a win, but he didn’t get one. We generously give him a B — but a B won’t stop the defections from Democrats, which resumed almost instantly after the press conference ended. GREG VALLIERE

Dodging the Diderot Effect The Diderot Effect states that obtaining a new possession often creates a spiral of consumption which leads you to acquire more new things. As a result, we end up buying things that our previous selves never needed to feel happy or fulfilled. JOSEPH WELLS

The Man In Seat 61 For planning a train trip across Europe (or anywhere), Mark Smith’s website The Man In Seat 61 is an indispensable resource. A comprehensive website for checking the latest timetables, routes and booking instructions for train travel. THE MAN IN SEAT 61

The Life Cycle of Market Champions Every decade has its own set of champions that have dominated the market. Given capitalism and technologies’ penchant for creative destruction, these leaders were eventually dethroned. According to a fascinating look at U.S. market history by Bridgewater Associates, few companies or industries are able to retain their top-dog status in the face of innovators. BRIDGEWATER

Skill of the Week: James Bond’s Tactics for Figuring Out If Someone’s Been Snooping in Your Room When James Bond was out on assignment around the world, he sometimes stayed in nice, swanky hotels. Yet while 007 always got some pleasure out of these stays, he couldn’t afford to relax and drop his guard; when on the job, Bond was in constant danger of being counter-spied on and ambushed. ART OF MANLINESS

100 Years Later, the Caesar Salad Returns to Its Roots A century after its invention in a Tijuana restaurant, the salad that proliferated around the world gets back to what made it legend in the first place. EATER

Peak People According to the United Nation’s biennial World Population Prospects report, global population is projected to peak at around 10.3 billion in the mid-2080s from the current 8.2 billion. It is expected to gradually decline to 10.2 billion by 2100—6% lower than anticipated a decade ago. UNITED NATIONS