For the moment, it is easiest to view the current macro environment across two distinct time horizons… on the one hand, how will the continued closure of the Strait of Hormuz affect the outlook for cyclical growth and inflation?  And how does war between the U.S. & Israel and Iran layer into the broader, accelerating, destabilizing De-Globalization narrative and affect longer-dated portfolio construction considerations, on the other?

Energy remains the primary transmission mechanism linking geopolitics to macro-influenced investment outcomes.  This is not always the case.  We remain focused on these evolving and devolving pockets of thematic momentum in our research and portfolios, but for the last month and foreseeable future, disruptions at key chokepoints – most notably at Hormuz but also Bab el-Mandeb – extend beyond oil and into a battery of other refined products and industrial inputs. The consequences of which can be seen through reduced agricultural output, via fertilizer availability; increased manufacturing costs, via supply chains; and, logistics constraints, via freight blockade and underwriting limits, among others.  Crucially, these effects are not transient.  While the U.S., via Pakistan, pursues peace through ceasefire and the “permanent” reopening of Hormuz – even if imminent – energy prices are likely to remain elevated for months, not weeks.  The knock-on effects and qualified severity of collateral damage to critical infrastructure have only begun to be tabulated.  Case in point, the impact on fertilizer pricing locks in a seasonally sensitive second-order inflation impulse that will only appear at the consumer level with a lag.  Roughly half of global food production depends on synthetic fertilizer.  If supplies are constrained (or available only at an uneconomic cost) during planting cycles, crop yields are likely to decline.  Couple this with severe water shortages in the Northern Hemisphere, particularly in the Colorado River basin, and the resulting food shock is likely to be more than a marginal adjustment.  At the same time, while we expect continued strength from commodity exporters, fertilizer procurement futures in the Southern Hemisphere (which is in harvest) have already reduced acreage forecasts lower.  Fertilizer pricing should be viewed as a forward indicator of food inflation pressure that is not yet fully reflected in headline data.

The U.S. market remains resilient, even reverting to a leadership profile more reflective of pre-war positioning.  Corporate profits remain supportive; 1Q’26 results have been strong and estimates for 2Q & 3Q’26 have been revised higher.  Despite rumblings about private credit redemptions (of which we are concerned) and modest spread widening, credit has not been a broad concern.  With earnings and interest rates holding up their end of the bargain, it is tough to get too worked up.  At the same time, it is difficult not to acknowledge the impact energy supply shocks pose to global growth, particularly outside the U.S. While fiscal support, like the One Big Beautiful Bill (OBBB), helped sterilize the tariff-related cost pressure and productivity gains helped offset reduced labor shortages domestically, it is more difficult, as Don Rissmiller has noted, to stem the tide of persistent energy shortages.  Don sees the probability of the U.S. economy falling into recession in 2026 as roughly one-in-three.  The global outlook, particularly for energy importing economies, is more worrisome. 

As has been widely discussed in recent months, continued stress in the global economy increases global demand for U.S. Dollars.  The reaction function is rendered more acute when, given events in the Middle East, countries move to secure funding for Dollar-denominated assets, e.g., energy & refined products, and liabilities, e.g., trade settlement and debt service.  This creates a liquidity-driven appreciation in the Greenback, independent of domestic growth conditions.  At the same time, higher energy prices reinforce inflation concerns, pushing back expected policy easing.  The combination supports real yields, the Dollar and USD-denominated assets.  As Dollar liquidity tightens, secondary currencies weaken against both the Dollar and physical commodities.  Reciprocally, as the cost of oil, natural gas, and agricultural inputs rise, or remain restricted, terms of trade shift in producers’ favor.  Commodity exporters benefit from higher export revenues, improved fiscal balances, and strengthening currencies.  This creates internal liquidity, supports domestic investment, and reduces reliance on external financing.  By contrast, Developed Market (DM) commodity importers experience the opposite dynamic.  Higher input costs feed directly into inflation, compress margins, weaken growth, and deteriorate trade balances.  Central banks in these economies face a tighter constraint – managing inflation without destabilizing already fragile growth.  Contrarians Note: This compression of purchasing power may underpin nominal equity gains in weaker currency regimes, e.g., Japan, and may reflect currency debasement rather than real economic strength.

Through this lens, we are reducing 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 Emerging Market equities and a direct exposure to the Agriculture sector within the Alternatives bucket.

For more than five decades the dominant financial framework was simple… capital flowed toward the United States because it offered the deepest markets, the strongest institutions, the most credible monetary anchor, and in compact with our allies across a wide and interconnected consortium of alliances, the implicit guarantee of safety.  Global investors could disagree about personalities, politics or policy, but they agreed on one point, the U.S. could be trusted to honor its obligations and defend property rights.  That system still functions but it is under severe strain.  For non-citizen holders, U.S. assets now carry jurisdictional risk. The structural response has been a gradual diversification away from Dollar-denominated financial assets, particularly U.S. Treasuries and toward physical assets and alternative settlement channels.  Central bank gold accumulation reflects this shift.  Lest we be accused of being overly alarmist or unpatriotic – both on power rotation in our inbox – we will be clear: the result is not the end of the Dollar, but the emergence of competing collateral preferences.  Trust is fragmenting laterally across jurisdictions and instruments. 

Historically, the dominant geopolitical actor has lost the exorbitant privilege of reserve currency status through two mechanisms: one, debt service rises to a level which increasingly hinders, and ultimately prohibits, the level of domestic economic and income growth necessary to keep the general populace happy; and two, the country loses at war. 

How “war” is defined can be debated.  Could it be suggested the new arms race, the more pressing national security priority and the new theatre of conflict is “Artificial Intelligence?”  While we are forever indebted to and supportive of the men and women of the U.S. armed forces, military entanglement with Iran or any other “traditional” military conflict may prove more the battle and less the war.  The axioms of the fifty-year Technology Revolution hold: 1) if the product is free, you are the product; and, 2) the benefits of technology ultimately need to accrue to the consumer and less the purveyor.  An emergent military-technology complex suggests the global defense industry is poised to be, if they are not already, the largest consumer of A.I.  

While we do not believe the demise of the U.S. Dollar is imminent, we would posit that if the probability of USD losing reserve status is anything higher than 0%, the implications for portfolio construction are profound.  The absence (among fiat choices) of a definitive reserve alternative does not sit with us as a closing argument that the odds are zero.  Consider, the case of the British Pound.  Sterling largely ceased to be the global reserve and currency of settlement around the end of the Great War.  Against Cable’s diminished standing, a Triffin-like vacuum emerged.  The system needed liquidity and monetary discipline.  No country could credibly do both.  Monetary disorder amplified the boom (1920s) and bust (1930s) cycle that ensued.  A reality made clear only after the second World War and the conference at Bretton Woods. 

Consider also, that in every currency transition listed on the table above, the only actors were sovereign and a dramatically limited clutch of pseudo-sovereign central bank proxies, e.g., the Medici and the Rothschilds.  All in, this ostensibly provided for great command and control as to one’s fate.  Not so today.  The fungibility of capital in a fractional reserve system, the proliferation of currency agnostic non-state and institutional players and the availability of retail access points via ETPs increases the ability of “alternatives” to disrupt the reserve stack.

In a polyfragile, de-globalizing system where physical resources may matter more than financial efficiency, economies tied to real assets gain relative strength, while those dependent on imported inputs face structural headwinds.  In this way, we remain focused on the longer-term structural implications the breakdown of long-held, long-relied upon geopolitical, economic, and social operating conventions is having on the durability and effectiveness of traditional, i.e., “60/40,” portfolio construction.  In an environment in which multiple, individually manageable vulnerabilities become interdependent and self-reinforcing, amplifying instability and increasing systemic sensitivity, the current macro environment is increasingly defined by the interaction of forces that no longer operate sequentially, but simultaneously.

On one side, the war with Iran is pulling markets back under the Dollar umbrella; relative to other currencies the Dollar looks strong.  On the other side, we believe it can be argued that the fiat Eurodollar/Petrodollar system is weakening.  Gold and other hard assets reflect this crosscurrent.  Its inability to extend higher despite elevated geopolitical risk indicates that demand is not purely additive.  Part of the bid is being recycled. Emerging market central banks and other holders may be liquidating into strength to fund rising energy costs and external balances.  In this context, Gold is functioning not only as a store of value but as a source of liquidity.

Investors are financing sustained fiscal deficits, defense spending, supply chain restructuring, and capital-intensive investment. This arrangement depends on stable inflation expectations.  Energy-driven inflation and supply constraints challenge that stability.  Central banks can influence current inflation, but have limited control over expectations.  When expectations rise, policy becomes constrained.  Easing risks reinforcing inflation; tightening risks accelerating financial stress.  This creates a regime in which both equities and bonds can come under pressure simultaneously.

As stress builds, policy will be forced to respond.  If financial conditions tighten further, central banks will likely be required to provide liquidity support, even in the presence of elevated inflation.  This reflects a fundamental constraint: financial stability and inflation control cannot both be optimized in this regime.  Two potential paths emerge: liquidity shock first – broad asset liquidation occurs, including Gold.  Policy responds after stress becomes acute; or, policy response first – credit stress accelerates and forces earlier easing, supporting hard assets sooner. In both cases, liquidity conditions dominate the short term, while structural factors determine the longer-term trajectory.

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.

As we discussed above, in the Alternative sleeve we believe hard assets function less as tactical hedges and more as structural ballast against the ongoing process of De-Globalization. Selective exposure to Gold and precious metals, energy infrastructure, industrial commodities, and productive land provide diversification against fiscal expansion and settlement pluralization. We view it as prudent for long-term investors to establish a beach head, as we have in our Asset Allocation portfolios, but to remain strategic in building that position over time. Heightened volatility, as evidenced in last week's precious metals session, is a byproduct of polyfragility, though it creates opportunity for disciplined capital. Polyfragility does not imply disorder. It implies that safety, scarcity, liquidity, and sovereignty are being repriced at the same time. For allocators, the task is not to predict crisis. It is to recognize that the system’s center of gravity is shifting – and to position capital accordingly.

Nicholas Bohnsack

Liquidity is the ease with which an asset can be quickly bought or sold for cash without significantly affecting its price

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