For years “De-Globalization” had struck us as an academic abstract through which to summarize a battery of seemingly disparate geo-political threads evolving out of – among many other things… the collapse of the Soviet communist bloc; the mixed (mixed constituency and mixed results) of Europe’s economic and political union(s); the admission of China to the WTO; the escalation of non-state terrorism; the asymptotic[1] leveraging of fractional reserve-based monetary policies in service to, and ultimate defense of, the fiscal profligacy of Western economies (and their citizen spenders); and, the emergence of a new multi-directional progressive era (evolving concurrently on both the political left and right) which preceded the Covid pandemic but was exacerbated by the emergent decision to mandate the global economy to a near-subsistence crawl.  A lot of chalk on that board.  Then Russia invaded Ukraine...   

The singularity of Russia’s action – however drawn-out and ongoing the ensuing conflict has proved to be – crystalized the interdependence of a number of disparate threads – at least to our thinking – by framing “De-Globalization” not just as a synthesis for discussion of ‘the decay and fracture of long-held and long-relied upon geopolitical, economic and social operating conventions,’ but as the thematic lens with which to identify the concomitant investment opportunities and reconsider traditional portfolio construction during a period of heightened global uncertainty leading – at some point – to the establishment of a new global operating paradigm.  As we reviewed in our regular mid-month asset allocation note last November[2], we have positioned a portion of our Macro Thematic Opportunities ETF (SAMT) around the emerging plot lines ever since.  Our current exposure to the “De-Globalization” theme considers five threads: 1) Trade Relations & Supply Chains; 2) Natural Resource Procurement & Security; 3) Defense Alliances & Re-Arming; 4) Technology Alignment & IP Sharing; and 5) Populism.

We do not believe the experiences of the first and second World Wars to be too severe to draw historical analogues.  Inasmuch, we suspect, with reflection, history will look back and point to the freezing of Russia currency reserves as the “Franz Ferdinand” moment that China, its allies and a long list of U.S. trading partners – including, frustratingly, some of the same G7 and EU allies that participated in the confiscation of Russian reserves – decided to tactically “de-dollarize” their economies.  That is, reduce their dependency on the U.S. Dollar.  As we have noted, many have argued (with us and publicly) – either from a purported understanding the labyrinthian mechanical complexities of the Eurodollar system or from simple patriotic nostalgia – the sheer impossibility of that exercise.  We know we’re not expert enough to argue every nuance of the argument for or against; rather, as investors, we are trying to gauge the market’s reaction to the range of potential outcomes stemming from their initiative and determine whether (and how) to shift portfolio exposures to address them.  In addition to the active exposures we have made in our Macro Thematic Opportunities and Global Policy Opportunities portfolios, we have steadily built positions in Gold and industrial Commodities, namely Copper, Silver, Natural Gas, etc., in our Tactical Allocation portfolios in response.

Regardless of one’s fervent denial of or increased concern for weakening Dollar hegemony, the implications for “traditional” 60/40 portfolios are tangible.  By our lights, the diversification and hedging merits no longer present as reliable.  In response, we began to shift exposures last year around an evolving allocation benchmark, reducing gross exposure to Equities and Fixed Income and increasing exposure to Alternatives, that is “real assets.”  Setting the baseline at 60/30/10, results in risk-adjusted allocations ranging from 17% in our Aggressive Growth sleeve down to 3% in the Capital Preservation sleeve.  For clients at the more conservative end of the risk range, the adoption rate of Alts is likely to be slower.  Anecdotally, it is worth noting that we have had numerous conversations with private bankers and wealth advisors about “normalizing” the use of Alts across the risk categories used in their practice, e.g., 17% in aggressive growth and capital preservation.  Other firms have made similar structural changes in recent months.  We believe these benchmarks will adjust over time, likely with reductions to both the Equity and Debt stack, as the process of and effects from De-Globalization play out.

While careful to not minimize his death, even a century after his assassination, the arrest on the weekend of Venezuelan president Nicolas Maduro and his wife, like the freezing of Russian reserves and Franz Ferdinand’s murder before it, presents a ‘marker of no return,’ larger than the singularity of the event itself.  In this instance, Maduro appears to flag a permanent disconnect from the “trust in the system,” and the certainty that prevailed around a definite – if not wholly agreeable – range of outcomes that have existed from the end of the second World War, i.e., global actors have operated with the confidence that sovereignty, space and time could be trusted.  Alliances were holistic, shipments would arrive, markets would clear, credit was available, debt could be deferred and risk could be transferred; geopolitical volatility, resource nationalism, exorbitant leverage and the tectonic shift in the application of ‘historically defensive policies, offensively’ and ‘historically offensive policies, defensively’ will erode, if it has not already rendered obsolete, this trust.

History has shown recurring periods, particularly amidst heightened geopolitical uncertainty (war), in which “internal” stressors (debt, liquidity, inflation) catalyze a loss in confidence.  Without being alarmingly cavalier, we’re probably in such a period.

This is not the end of sovereignty, capitalism, democracy, or markets.  What is ending is the illusion the trust – that they operate uniformly across space and time.  De-Globalization reveals what was always true: some countries, companies, people, etc. operate in the favor of superior powers who harbor the ability to distribute and defend that favor; others do not.  The decay and fracture of those long-relied upon geopolitical, economic and social operating conventions both reveals this reality and will re-map it.  Corporate operators and investors who continue to allocate capital as if “traditional” geopolitical alliances, cheap energy, unconstrained resource availability, and unlimited liquidity remain intact are likely to misprice risk.  Those who adapt to a world of fragmentation, constraint, and spatial power will likely fare better.  What comes next will not be orderly or necessarily happen immediately, the inertia of the old systemic norms are entrenched…

…Convention is tough to break but an outcome of current developments does seem more localized, more controlled.  Through a simpler lens, consider the evolution of economic measurement.  In the 1930s and ’40s the concept of national income was developed and evolved into gross nation product (GNP), i.e., our gross value creation no matter where it was occurring.  Globalization, particularly the export of variable production and the emergence of significant nominal levels of foreign direct investment, lessened the statistical utility of GNP.  By the late-’70s and early-’80s (and officially in the U.S. from 1991) we began to rely on gross domestic product (GDP), i.e., gross value creation occurring here no matter whose it is.  After the fall of the communist bloc, the U.S, was the top dog on the global stage and the associated arrogance allowed general indifference to how economic statistics were aggregated, ‘it was all ours by a matter of degree.’  Official statistics aside, the illustration argues what and how we monitor gross product may be changing again and splintering, this time along two lines, the “isms,” nationalism and mercantilism, our gross value creation there, on the one hand, and local availability, on the other, i.e., what can be settled at the point or time of sale via physical delivery.  In effect, gross local product, our gross value creation here, now.

An inability to manage heightened geopolitical uncertainty (war) in a period of internal dislocation (debt, liquidity, inflation) has toppled empires.  Countries that have enjoyed the “exorbitant privilege” of being the global reserve currency in their day have seen this status erode because they lost at war, were over their skis fiscally and unable to service their debt while maintaining real economic growth at levels sufficient to keep the populace appeased.  As a country loses its reserve currency status, the effects are broad, slow moving, and structural. Those that deign to suggest it even possible will caveat by saying, ‘it does not happen overnight,’ and it doesn’t, but the consequences are very real…

1. Higher borrowing costs
2. Currency Depreciation
3. Inflation & Higher Cost of Living
4. Loss of Geopolitical Influence
5. Domestic Standard of Living Falls
6. Capital Outflows & Reduced Investment
7. Fiscal Dominance & Austerity

That’s pretty dire.  ‘It couldn’t happen to us…’ 

From its mainframe and computational foundations, inconspicuously laid on university campus and in industrial park research labs in the 1950s & ’60s, the Technology Revolution began to gather steam with the introduction of Commercial Computing in the 1970s before shifting to the GUI & Personal Computing era from ~1983-95, Connectivity & Commerce (1995-2001, aka the “Internet Bubble”), and the ubiquity of Mobile (2006-17) before descending into the Content Wars (2013-24).  Throughout, two axioms seem to have propelled one chapter into the next: “if the product is free, you’re the product,” which industry will withstand for a while but individuals are far less willing to accept inasmuch as they feel taken advantage of and, “the benefits of new innovation must ultimately accrue to the consumers, even at a price, and not to the purveyors alone.”  The commercial and consumer applications of Artificial Intelligence are likely to experience this same pressure, ushering in the Agentic Productivity era.  But A.I. was also launched into a theatre of devolving global relations where the U.S. and its allies in the geopolitical west are dug in against China, an axis of emerging economies and non-state economic participants in the geopolitical east, in an “all of the above” tug-of-war for military and economic supremacy.  Therein, China is matching – and in some areas, surpassing – U.S. domestic and foreign direct investment on the A.I battleground.  Cast as a national security imperative, it is a “war” both sides view as “must win” in relative and absolute terms.

But the battles will not be decided by who has the largest data centers, the fastest semiconductor chips, who can generate the most compute capacity, train the smartest large language model, generate the definitive general purpose technology or generate the greatest productivity advantage.  Those are byproducts.  Inelastic demand and the near-asymptotic bid to a broad array of “alternative” assets, industrial commodities in particular, over the past few years signals the intensity with which sovereign states and global operators are keen to exploit every advantage to move into first position and deliver on the potential of agentic productivity to take absolute military and economic share.  Staked as a national security priority, the binding constraint – from policymakers’ perspective – is not capital (for now), it is power.  Commodities have again become the instruments of power – electrons and political.  Since its discovery at Spindletop, Texas in 1901 oil has defined the 20th century.  It is not a stretch to suggest that metals may define the 21st. Copper, for example, is essential for electrification, grids, EVs, and data centers.  Mine supply is constrained by geology, permitting, and time 15+ year times.  Silver is indispensable for solar, electronics, defense, and advanced manufacturing and is itself a byproduct of mining other minerals.  China has been tightening control over strategic metals.  Europe lacks similar depth in native energy sources and raw materials and is structurally vulnerable relative the U.S. and China. Commodities are no longer just an industrial input.  They are geopolitical weapons.  With the trust that underpinned globalization eroding, the dynamics have shifted. De-Globalization represents fragmentation.  Supply chains shorten and regionalize; inventory levels rise and capital efficiency falls.  Redundancy replaces optimization and, in turn, costs rise, the volatility of inflation expectations increase and the economy rewards control.  The countries and companies that depend on a frictionless global system and the financial assets that grease the skids through high leverage, long duration, narrow spreads are structurally disadvantaged.  Real assets, energy, strategic commodities, and balance-sheet resilience gain primacy.  Enter Venezuela…

For investors reorienting to accommodate an increasingly polarized geopolitical, economic, and social world view we suggest two points of focus:

The first is to appreciate the destabilizing effects of financial repression and fiscal dominance.  Events over the weekend (1/9/2026-1/11/2026) related to Venezuela notwithstanding, the intensity of media focus on Ukraine and speculation around China’s intensions in Taiwan, it would seem the most dangerous condition facing the markets in 2026 is the potential for leverage to leave the system.  Since the Global Financial Crisis, the new (and most important) leg of the Fed’s mandate is ensuring the system simply clears.  Despite repeated shocks – Fed tightening in 2022, the regional bank liability mismatch in 2023, the BoJ rate hikes in 2024 and the Trump Administration’s tariff framework last year, leverage has expanded, not contracted.  Hedge fund gross leverage is near record highs, repo-funded Treasury basis trades exceed US$1trillion, the Yen carry trade is still an anchor tenant in collateralized portfolios.  All-in, volatility is priced for calm.  When systems absorb shocks without deleveraging, the problem compounds exponentially.  When the release trigger comes, the fallout is non-linear.  As we look through 1Q several triggers are worth monitoring.  The most immediate would seem the continued convergence of BoJ (tighter) and Fed (easier) policy.  As rate differentials compress, carry trades become unstable.  The unwinding can be sudden.

The second is to view this less as a call to arms but an invitation to re-examine portfolio construction.  As we noted above, structural exposures to real assets should likely increase.  Gold is not rising because it is speculative or even as an inflation hedge.  We suspect it has been rising because fiat-based[3] systems are fatigued.  Other industrial commodities, particularly those tied to national defense priorities and domestic infrastructure should be given shelf space.  Perspective added by the Derivatives Research & Trading team we added to the Strategas fold last year, in combination with stress points our Fixed Income team has long focused on, reveals an increased sense that volatility is underpriced.  We would be cautious with leverage and duration.  Financial engineering underperforms during regime shifts and liquidity tends to disappear just when it is needed most.  Investors will be wise to watch the current dislocation in price discovery between paper-settled commodity markets in New York (Comex) and London (LBMA), the spot market, particularly in the east, and the inventory pressures created by the material increase in physical settlement globally.  Will a sovereign-backed wealth fund, corporate operator or global bullion bank make a takeout bid for an ETF backed by physical inventory?  It would not shock us.

A monetary reset is no longer fringe speculation.  It is a rational inference.  However low a probability one would ascribe it, the probability is not 0%.  In periods of acute stress, markets are cleared politically before they clear economically.  While the casual observer could be forgiven for remaining bullish some attention should be paid to the skunk works below the surface.  Stay tuned. 

Nicholas Bohnsack