The global economy is moving through a structural transition.  This has been true for some time.  Recent events have catalyzed an acceleration of this trend.  Increasingly, the long-held, long-relied upon geopolitical, economic, and social operating conventions of the past fifty and eighty years – anchored on cheap labor, stable energy flows, low interest rates, and a fractional reserve currency structure that recycles global surpluses into U.S. financial assets in exchange for security guarantees – are becoming unstable, unreliable, and obsolete.  A world optimized for efficiency is lurching, with increased uncertainty, toward one defined by resilience.

No modern analogue holds.  Pieces, perhaps.  Debt-related concerns draw parallels to the GFC of 2008-09; equity extremes invite comparison to the Internet bubble – bulls believe it’s 1995, bears 1999…. Look back further and though the complexity of the global financial system is more complex than it was in the 1970s, the physical realities of the universe are again beginning to put the unbound aspiration of technological and industrial advancement through its paces.

Modern economies are heavily dependent on the just-in-time availability of raw materials, industrial metals, energy and its refined products, and semiconductors, among other things.  When this system functions smoothly, vulnerabilities are largely invisible; when fragilities are exposed, particularly at the same time, the economy rediscovers that physical inputs ultimately govern financial outcomes.  Even if current geopolitical disruptions end quickly – which seems unlikely – the underlying damage has been done.  As we have felt throughout, the resulting inflation impulses are going to persist far longer than political headlines suggest, or the market is willing to acknowledge.

Energy supply shocks, in particular, do not remain confined to the energy patch very long.  They spread mechanically through transportation, manufacturing, agriculture, and ultimately household spending.  The system does not fail uniformly; it fragments unevenly.  Case in point, agriculture is especially vulnerable because modern food production is inseparable from synthetic fertilizer usage.  Disruptions in fertilizer availability rapidly translate into lower yields and higher food prices.  Farmers faced with higher input costs and drought conditions, like those prevalent in the Colorado River basin, respond by reducing acreage, shifting crops, or abandoning marginal production.  Planted acreage and yield forecasts in the recently planted northern hemisphere, are lower.  Fertilizer futures do not portend well for the just harvested southern hemisphere’s next planting season.  Neither are supportive of price stability in the market.  In April, we initiated direct exposure to Agricultural commodities. 

Food inflation carries broader economic consequences.  Higher food costs eventually reduce spending elsewhere in the economy while simultaneously increasing political dissatisfaction. As Strategas policy analyst Dan Clifton reminds us, U.S. voters have turned out the party in power in 9 of the last 10 elections.  An early read on the upcoming U.S. mid-terms does not suggest they will buck the trend. 

At the same time, the global economy is entering this supply-constrained environment with historically elevated levels of debt.  Debt service is rising at the same moment governments are increasing defense spending, re-shoring production, cementing resource reserves, navigating energy transitions, and implementing large-scale infrastructure programs.  This creates the conditions for fiscal dominance.  Central banks are increasingly constrained, not simply by inflation, but by heavily levered sovereign, corporate, bank, and household balance sheets.  But allowing inflation expectations to rise threatens currency stability and long-duration financial assets.  Not an easy environment for our friends at the Treasury and the Fed. 

This tension is beginning to appear in sovereign bond markets globally. Yield pressure is no longer isolated to one region. Long-duration bonds across the U.S., UK, Japan, and parts of Europe are repricing together. Markets are beginning to question whether developed economies can sustain structurally larger deficits without either persistent financial repression or some form of monetary debasement. 

The traditional 60/40 portfolio was constructed during a forty-year disinflationary period where falling rates supported both equities and bonds simultaneously. That relationship becomes unstable in a structurally inflationary environment. Equities and bonds can decline together when inflation pressures keep yields elevated while simultaneously compressing growth expectations.  The problem becomes more severe when investors attempt to increase yield through corporate credit exposure. This was visible during recent drawdowns where the performance profile of credit-heavy portfolios was little different from equity-heavy portfolios despite materially lower expected returns.

The investment implications of this regime shift are substantial.  The general effectiveness of traditional, i.e., “60/40,” portfolio construction must be examined.  Long-duration sovereign debt becomes structurally less attractive.  Commodity exporters gain relative strength over commodity importers.  Real assets become increasingly important.  Gold and silver operate not merely as commodities but as monetary assets without counterparty risk.  Agriculture, industrial metals, energy infrastructure, and productive land benefit from persistent supply constraints and underinvestment.   (Volatility in the Alternatives sleeve is to be handled with care; a large part of our practice involves working with Advisors transitioning client exposures through this process.)  Equity exposure also becomes more selective.  Following the GFC, investors in long-duration growth assets and flow-driven passive allocations were rewarded.  The next phase is likely to be less kind, rewarding pricing power, resource ownership, domestic industrial capacity, energy access, and balance-sheet resilience.  Perhaps part of the portfolio strategy response to our concerns raised by “polyfragility” is a version of Taleb’s “antifragility.”

The central investment question of the coming decade is therefore not simply which assets grow fastest. It is which assets remain indispensable when the assumptions underlying the previous regime no longer hold.  Last month (Apr’26) we reduced our broad Equities allocation to slightly Underweight from Neutral – relative to both a traditional 60/40 benchmark and our preferred 60/30/10 baseline which includes an Alternative sleeve.  Within Equities we maintain a slight Overweight to U.S. shares, achieving a gross Underweight by reducing exposure to Developed Markets.  We have reallocated the reduced DM exposure between commodity exporting Emerging Market equities and a direct exposure to the agriculture sector within the Alternatives bucket, as discussed above. 

While we have harbored concern in these pages for some months and have adjusted portfolio exposures with some of these longer-dated considerations in mind, most investors have remained decidedly optimistic on the prospects for the economy and the markets before last week’s geopolitical whiff and stingy inflation prints put a damper on the markets.  We’ll leave the near-term temperature check to others, but we’re struck by the level of importance the balance of the 1Q’26 earnings season has just risen too.  Earnings in 1Q – largely unaffected by military action against Iran – have been good.  Estimates for 2Q and the balance of the year continue to be revised higher.  It’s tough to get into too much trouble when earnings are strong and credit is behaving.  Stay tuned.

The geopolitical competition between the U.S. and China intensifies this further.  The rivalry is often framed around semiconductors and artificial intelligence, but the deeper competition concerns industrial capacity and energy infrastructure.  The physical limitations of the “AI ecosystem” are beginning to reveal themselves.  China has aggressively expanded power generation capacity over the last three plus decades.  The country may also be more easily able to adapt their economy given: a) their political system; and, b) the fact that they are outsiders-looking-in on the operating systems that have governed the global economy since Bretton Woods.  Whereas the U.S. defines those operating conventions and faces tighter domestic energy constraints, e.g., NIMBY, environmental considerations, and a growing resistance to large-scale infrastructure development.  How the U.S. navigates this, matters.  AI requires sustained capital deployment into energy systems, data centers, the grid, and industrial metals.  The technology itself may prove transformational while simultaneously destroying large amounts of invested capital at current valuations, much like railroads did.

The defining feature of the current regime is the interaction of opposing forces.  Portfolio construction must reflect this structure, balancing short-term liquidity risk with long-term structural repricing.  The objective is not to predict a single outcome, but to remain positioned for a system where multiple pressures emerge simultaneously and reinforce one another.  Investing in the Era of Polyfragility requires a new – and evolving – playbook.

Nicholas Bohnsack