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Mr. Harry Melandri: Respice Finem #1: Ground rules and roadmaps


Market Thoughts January 2025

As is true for most of my activities,  I am doing this Substack for me. I wish altruism were part of my motivation, but it simply isn’t true. What I am hoping to achieve is the following -

a)  lay out my high-level “thinking” in such a way that I am forced to be honest with myself

b) to help identify inconsistencies in my thinking. With this in mind, I welcome reader feedback. I would love your thoughts and, particularly, criticisms of my arguments. Don't be shy.


It’s not that I haven't written before. I have, but generally, my work has either been unattributed or without freedom over style or content. Writing in someone else’s voice or style can be cumbersome and quickly becomes a chore. But at its core, there was a sense that I had things I needed to get off my chest and that writing them might help rid me of that feeling. If you have an itch and can scratch it without going against your dermatologist’s advice, why not?


Why the lame title?

Titles are hard. My first thought was to use an AI to look for classical references (who doesn’t like a good classical reference?), but sadly, nothing caught my imagination. That said, I found out that the Iliad does not once mention Trojan Horses, which I am embarrassed to say I had not known. There is a brief description in the Odyssey, but much of that story comes from Virgil's Aeneid.

Then, it occurred to me to consider what I plan to write about. I don’t want to focus too much on matters tactical: I am too old and way too pretentious to focus on whether the S & P can be sold with a 10-tick stop. Not that I don’t do those trades, but rather because I don't have anything very interesting to say about them. Either they have good risk-reward, or they don’t, and the reasons I might like them often have more to do with technical analysis and less with macro analysis. Long experience has taught me that the market usually works things out well before I do and that the reasons will become clear later.

Most trading and investment decisions centre around risk-reward rather than any particular macro view. There are times when it can make sense to countertrade your longer-term view, although there are a lot of very good reasons why this should be done sparingly.

I want to write about macro, geopolitics, and investing (not trading) in roughly the same order. Cliff Asness points out : investing is about knowing what you know and how to use what you

 

know to construct a better portfolio (whatever that means). In an inversion of what most people say about markets, most of what I feel confident that I know is very much about the long or the very long-term. And I am less confident in our precise path to get to those long-term outcomes. 

So, this series of pieces is supposed to set out some high-level macro thinking and then dive deeply into the individual elements that make up those broader macro “scenarios”. And I hope that you, the reader, will be able to follow me in looking beyond the immediate to consider where the logic of the analysis will take us: the ultimate endgame. Hence the pretentious Latin title.


Respice finem – Consider the end.

I’m a slow learner. It’s only really with the benefit of hindsight that I have anything to say. I didn’t work anything out early enough to hit the ball out of the park, and even when I did have great ideas which turned out to be correct, I usually bet too small to make a difference in my life: a life of singles.

But eventually, even slow learners can offer insights into a game they studied. In my case, (to paraphrase Churchill) after I have exhausted every other possibility. The first example that comes to mind is from college. Back in the 90s, Trinity's male/female ratio was something like 2:1. Worse, Trinity was positively “blessed” with good-looking Etonians, who possessed shiny sports cars, enormous self-confidence and prose that positively dripped with disdain. I did “date” at college, but, unsurprisingly, not as much as I might have liked: par for my peer group. But like any 20-something-year-old male, I would have loved to have had a fuller “social calendar”.

Well, in my 3rd year at college and a friend who is now a Greek Treasury official (a thankless job) and I decided to try our luck at a Homerton college disco. Homerton was the teacher training college at Cambridge, and we had just finished our finals and had nothing better to do (well, we could have gone for another kebab and beers but). So off we went to Homerton. Lo and behold, it was as if we had discovered a cheat code on a video game! For one night, we were attractive, charming and almost irresistible to the opposite sex (emphasis on the "almost"). It was a miracle, but sadly, like so many other important discoveries, it was too late for me to take full advantage of the secret.

And that's the point. Sometimes, you only figure out how to “cheat code” quite late in the game.

 

The motto of Homerton College is Respice Finem. It means “look to the end”, a phrase generally considered a “momento mori". It also pops up in a Tolstoy short story called "The Death of Ivan Ilyich" (perfect for the pretentious teenage goth in your life). But in this case, I use it to mean focusing on endgames: where a macro or geopolitical analysis is leading and the long-term implications of that analysis. And if it helps the reader with the opposite sex (it won't), then even better.

So, the lame title is because I hope readers will:

  • Focus on the long-term and consider long-term risk and reward.

  • Think deeply about what they know and why they know it. I am pretty sure I am gonna die, but I am just as sure that the value of fiat money falls over time. Both are valuable insights.

  • Cultivate self-discipline: know what you know and don’t know and ACT on that knowledge.

  • Promote Reflection


Roadmaps?

This piece was meant to explain the rationale for the writing and lay out a rough direction of what I am going to write about and where the analysis is going. So here it is.


Globalization is reversing, and with it, the free movement of capital

Global capital is flowing into US markets, but this is not ideal for the places that are bleeding that capital. Expect efforts to slow or even reverse that flow. This dynamic will have profound implications for global risk premia.


An Age of Chaos

I’m sorry to break it to you, but we live in “interesting times”.

For many people, the coming decade will be disastrous for their families, friends and standard of living. If you are blessed enough to live in a quiet, prosperous part of the world, then lucky you. But we should acknowledge that we (collectively) are facing a bump in the road in the trend towards global progress.

The chaos which is already engulfing us is going to create new risks and new opportunities.

Like all of us, I want to navigate those as well as possible.


Defense spending is going much, much higher, as are the costs associated with climate change.

With all that that means for fiscal sustainability.


Governments face enormous fiscal sustainability challenges, which imply enormous burden-sharing challenges. Monetary policy cannot be independent of the environment.

This roadmap is not meant to be exhaustive. Still, it will give you an idea of where my arguments are heading: steeper curves, wider risk premia, higher real yields, and widespread and significant value destruction. Remember, “creative destruction” creates both winners AND losers. And it never pays to be a loser.

I'm excited to begin a dialogue with you. Let’s keep it insightful and fun—at least as much as possible. 

  

Harry

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