Some background.

Notwithstanding our rhythms being regulated by the circuit of our planet around its star…  

It has been a little over fifteen years since societies began to accept that win–win equilibria are not always attainable, and that reality more often resembles a constant-sum game. Four decades of credit-fuelled, leveraged growth came to an abrupt end in 2008. What followed was a shift in priorities: a quest for efficiency gave way to a quest for resilience.
Despite unprecedented monetary easing, real economic growth remained subdued while asset values surged. The resulting divergence intensified inequality, breeding dissatisfaction and resentment, and creating fertile ground for populism. Today’s malaise, therefore, is neither sudden nor novel but has roots extending back more than a decade. Quantitative easing, it seems, carries long-range and long-term consequences that its architects did not fully anticipate at the time of implementation.

Monetary policy alone, however, is not inherently inflationary; if anything, it can be wage-disinflationary. The COVID years forced governments to deploy large-scale fiscal expansion and, in doing so, revealed that the short-term side effects were less severe than previously theorized. The consequence has been a growing reliance on fiscal policy, with national debt levels expanding to historically alarming magnitudes. When monetary and fiscal policy are engaged simultaneously, they form a powerful engine for growth, with the costs merely deferred, not eliminated.

Addressing the accumulation of national debt will require a multi-pronged approach. First, debt burdens can be moderated through inflation. Provided inflation does not become unanchored or provoke a political backlash, inflating debt away remains an effective tool. Second, interest rates must be contained. Short-term rates lie largely within the control of central banks through repo and deposit facilities, but excessively loose policy risks reigniting inflation and increasing the term premium. Longer-term financing of fiscal deficits may therefore require central bank support.
The side effects of such strategies are likely to appear in the form of weakened purchasing power, either domestically or externally. The external impact (the exchange rate), in particular, will depend not on any single nation’s choices, but on how those choices compare with the strategies adopted by others.

Macroeconomics and Asset Allocation

For an investor whose objective is to smooth volatility in order to provide a stable funding source, and whose portfolio emphasises skill-based, idiosyncratic, non-market risk strategies, it is reasonable to ask why the macroeconomic environment should matter at all.

The answer lies in the practical realities of investing. Asset allocation remains the single most important determinant of long-term investment outcomes. One may identify the next Nvidia, but how much capital can prudently be allocated to a single name. History offers a sobering reminder: in the year 2000, that same argument might have been made for Nokia or Ericsson. Responsible diversification requires reasonable single name exposure limits, and even sector-level concentration needs constraints.

Thus the decisions that matter most are not individual security selections but allocations across broad asset classes: equities, credit, real estate, infrastructure and digital assets. Asset allocation, in turn, requires an explicit or implicit view on the evolution of the global economy, social dynamics, and geopolitics.

Countries and Regions

It is easy to fall back on crude generalisations: that the US leads in technology, that Europe is stifled by regulation, that China is constrained by central planning, and that emerging markets are profligate serial defaulters. Look closer and discover that China, for example, is advancing rapidly—and in some areas arguably leading—in applied AI, robotics, nanotechnology, biotechnology, and green industrial technologies. At the same time, emerging-market sovereign balance sheets have improved meaningfully over the past decade, while debt levels in many developed economies have risen sharply.

Country allocation therefore demands a broader analytical framework, incorporating innovation capacity, policy and regulatory direction, credit conditions, and critically, exchange rates. For the asset allocator, interest rates and foreign exchange dynamics carry particular weight.

Since the Bretton Woods system was established, and even after the suspension of the gold standard, the US dollar has functioned as the world’s anchor fiat currency. The creation of the euro and the rise of the renminbi have eroded some of this exorbitant privilege, but the USD remains the dominant reserve and trading currency globally. Current US political dynamics pose a potential threat to this status and may accelerate its relative decline. Yet decline in what sense? As US exceptionalism weakens, the dollar may not necessarily depreciate outright; rather, it may become more responsive to underlying economic conditions, arguably making it more analytically tractable.

The outlook for interest rates is similarly unsettled. The current global framework departs from traditional theory under the combined pressures of prolonged quantitative easing and the increasing politicisation of central banking.

Why Macro Still Matters

It is tempting to believe that a sufficiently clever, idiosyncratic investment approach can insulate portfolios from macroeconomic forces. In practice, bottom-up or fundamentally driven strategies that ignore the macro environment risk accumulating unintended factor exposures. Awareness of macro risk is therefore indispensable, even when forecasts are uncertain and noisy.

Macro forces frequently exert influence at the micro level. Political pressure on the Federal Reserve can raise term premia and funding costs; higher discount rates compress asset values; slower growth introduces redistributive effects that distort relative-value relationships. Policy decisions matter as well: the effective dilution of the Inflation Reduction Act has reduced the attractiveness of renewable energy investment in the US; relaxed bank capital requirements can lift equity valuations independently of net interest margins; FTC and CFIUS interventions can derail otherwise sound mergers; and leadership changes at the FHFA can materially affect the mortgage-bond market.

Macroeconomics may not dictate individual outcomes, but it shapes the environment in which all investment decisions are made. Ignoring it does not eliminate its influence—it merely obscures the risks it introduces. Thus… 

Ten Seconds Into the Future

Most countries are likely to continue running significant budget deficits. As long as few break from this approach, the relative pricing of sovereign risk should remain broadly stationary. Central banks will likely be required to help contain sovereign borrowing costs by purchasing their own governments’ bonds. This remains feasible provided inflation does not spiral out of control. Moderate inflation above target is likely not only tolerable but may be desirable, as it reduces the real debt burden. Together, accommodative fiscal and monetary policy support output and liquidity. Depending on economic slack and the pace of security issuance, they may also be inflationary across goods, services and assets. With labour supply constrained by demographics and immigration policy, wage pressures are likely to build and absent a meaningful improvement in productivity, inflationary forces will intensify.

Geopolitical considerations further complicate the outlook. Over the past decade, governments and corporations have reshored supply chains along political alignments, prioritising robustness over efficiency. This carries commercial costs, likely social costs, and potentially geopolitical ones as well. These dynamics create a loose but reinforcing feedback loop, shaping policy, investment and trade decisions.

Artificial intelligence may offer a partial offset by lifting productivity and alleviating cost pressures. To date, much investment has focused on achieving increasingly advanced forms of intelligence, whereas substantial productivity gains could be realised by deploying existing capabilities across industrial and commercial applications. Manufacturing has already experienced steady efficiency gains and disinflation through offshoring, automation and robotics, while services have remained relatively untouched. AI has the potential to bring similar efficiency improvements to services, expanding economic capacity and creating slack. Such slack would ease inflation constraints and extend the runway for accommodative fiscal and monetary policy.

Asset valuations reflect successive waves of monetary and fiscal accommodation and remain elevated. Even with strong nominal growth potential, high starting valuations compress expected returns. Low interest rates, especially if they rise from current levels, pose a further risk to valuations. The return per unit of market risk is therefore likely to be lower than in the past.

For investors, this implies that maintaining or increasing returns will require assuming alternative sources of risk.

Hedge funds offer one avenue. Equity dispersion has increased and can be exploited by equity long short strategies, with similar opportunities in credit. Capital structure arbitrage is driven primarily by idiosyncratic factors and is less sensitive to macro conditions. Convertible arbitrage spans a range of risks, including equity volatility, capital structure dynamics, credit beta and special situations. Merger arbitrage appears to embed long equity exposure but depends heavily on deal flow, which may be constrained by higher interest rates. Macro strategies are more challenging, as short term policy and economic developments are difficult to forecast and can produce unpredictable outcomes. Complexity premia may also be harvested, though complexity risk often overlaps with market and liquidity risk and is difficult to identify and manage. Liquidity premia, particularly in private markets, are hard to quantify, complicating assessments of whether compensation is adequate. The growth of evergreen and semi liquid private market vehicles appears more a source of risk than opportunity, effectively placing illiquid assets within liquid structures.

Flexibility therefore has value. When uncertainty is low, committing capital to long gestation strategies is less costly. At points of inflection, when uncertainty is elevated, the ability to adjust course becomes critical. Investors should maintain sufficient liquidity, whether through ownership of liquid assets, access to committed credit lines, or reliable cash flows from operating businesses or income generating assets.

Chance, or nature itself, scattered the planet’s gifts with casual generosity. Rivers, minerals, fertile soils and shifting climates were spread unevenly, inviting humanity to share and trade. Yet fear often drove communities to seek safety in self-sufficiency, and strength through expansion, and cooperation gave way to conquest. An unscripted experiment evolved according to human anxieties and ambition.

This brings us to a familiar question. What is the purpose of human life? Many now search for meaning, perhaps because the pressures of survival have eased. For most creatures, survival itself is purpose. Only when basic needs are met does the mind begin to wonder why it exists.

The purpose of our species may be as hidden from us as the function of a computer is to one of its transistors. A single component cannot grasp the design of the whole. Likewise, humans may be part of a larger pattern that no individual can fully perceive.

Perhaps our real purpose is simpler. Survival and happiness, while respecting the same pursuit in others. Where aims collide, societies create norms and agreements to facilitate coexistence.

This way, humanity becomes a vast network of individuals following their own local purposes, producing a collective direction that emerges on its own. Our task may not be to understand the entire design but to play our part with humility and curiosity.

Artificial intelligence will greatly enhance efficiency. It operates with speed and scale beyond human capacity, applying computational brute force to problems that would otherwise take eons to resolve. By running trillions of simulations and mapping vast outcome spaces, AI can assign probabilities and correlations with an objectivity and endurance that human cognition cannot match. From this capacity will emerge new materials, processes, business models, and solutions, not through inspiration, but through exhaustive exploration.

Yet one must not underestimate brute force. Though AI may accelerate discovery, it may also diminish diversity. By organizing and filtering information, it reduces informational entropy. In the short term, this produces clarity and coherence; over time, it risks narrowing the range of perspectives upon which collective intelligence depends.

History shows that concentration of information and resources often precedes systemic failure. The Soviet experiment in central planning collapsed because it could not allocate resources efficiently to meet basic needs. In contrast, contemporary capitalism skews in the opposite direction: inequality channels capital toward luxuries and passion projects while neglecting accessible necessities such as education, healthcare, eldercare, and environmental stability. Even when bias is unintentional, inequality degrades informational efficiency, the economy’s ability to use distributed knowledge to allocate resources optimally.

Before the internet, information transmission was slow and search costs were high. The internet improved access and speed; search engines improved precision. But each advance introduced a trade-off. As search efficiency increased, systems favoured convenience and speed over diversity and depth. Artificial intelligence represents a further acceleration of this substitution.

A large language model, such as a GPT, is a statistical system trained on immense corpora of human language to generate plausible, coherent responses. It excels at synthesis, but its very strength lies in averaging, producing the most likely continuation of thought. As AI systems become embedded in decision-making, their outputs become inputs for other agents, reinforcing consensus and compressing variance. The informational field becomes more ordered, but less exploratory.

This leads to an intriguing question: what is the entropy of an AI system?

Entropy analysis depends on how one defines the system’s boundaries. If we consider only the informational domain, excluding the physical infrastructure, AI appears to reduce entropy. It organizes data, filters noise, and imposes order. Yet, when viewed as a complete system, including data centers, networks, and power grids, the Second Law of Thermodynamics still applies: the total entropy of a closed system cannot decrease.

If information is inseparable from its physical substrate, if computation is physical, then reductions in informational entropy must be offset by increases in physical entropy. In other words, every increment of informational order produced by a GPT requires a corresponding increase in heat, energy consumption, and material disorder elsewhere. More order in information implies more chaos in energy.

This realization reframes the energy problem of AI as not merely technical, but thermodynamic. Solutions lie not only in renewable energy or cooling systems, but also in informational design — in how models compress, store, and recall data within their context windows. Efficient representation of knowledge directly reduces the physical entropy generated in maintaining it.

When quantum computing integrates with AI, these relationships will deepen. Concepts such as physical–informational equivalence and quantum thermodynamic entropy will shift from theory to engineering. Yet even quantum systems cannot transcend the fundamental constraints of energy, entropy, and information. The same principles that govern stars will govern algorithms.

There will be limits to what quantum-accelerated AI can achieve, limits that investors and engineers alike should acknowledge before the next wave of over-optimism.

The global investment industry has between US$200-300 trillion in assets. Impact investment has about US$1.5 trillion in assets, some 0.75% of total market. This is consistent with estimates of philanthropic capital of some US$ 1-2 trillion. Family offices have about 1-3% of the global market and about 4% of the impact market.

Most of our problems stem from a failure of economics. One of the most insidious effects is where the benefits of an action accrue to the few, or the one, while its costs accrue to the many. A fair and just distribution of wealth and income, a sustainable environment, these are all public goods that we know a market economy will undersupply. Absent regulation and policy, the private sector will never adequately supply them.

Asking a subset of the investment world to fund investments in public goods may work at a local scale but is bound to be inadequate at a global scale. Impact investing is unlikely to work unless public policy is also brough to bear. Blended finance can help but consider the dynamics of a CLO with a 0.75% equity tranche. The focused benefits distributed costs phenomenon is responsible for most of our failures, in providing a habitable and flourishing environment, and in creating an equitable economy. Asking impact capital to fund these public goods is asking them to fail at the aggregate level. There may be profitable opportunities at the micro level but if an impact investor were to diversify over all opportunities, they must almost surely fail.

What is required of us is a systemic change. This can come from policy and from cultural change. The two are often correlated. The 60:40 equity bond portfolio is a case in point. It has little theoretical basis, yet it is widely accepted and practiced. Why? Because it tends to work albeit inefficiently, but it is simple and intuitive and is backed by a narrative of plausibility and expert opinion.

Impact investment needs such a totem. We need to identify a theme that is practical, simple, that works, and that expert opinion and public policy can get behind. Blended finance is a strong candidate. The mechanics of it are fairly workable, it can generate higher returns for the equity and mezz investors but relies on equity investors being less demanding. What it needs is to be seen to work in practice for academia, experts, and public policy to support.

Family offices are tiny in the scheme of things. Yet they can be helpful in animating investment themes, such as private markets, and we hope, impact investing. However, from the numbers above, the task is daunting. We need to demonstrate success. We need to obtain impact and generate reasonable returns even if they are not optimal returns. Our example will be something others can build on who do not have the luxury of flexibility and the spirit of adventure. But it means we must be very selective. Recall that total diversification leads almost surely to bad outcomes when you are funding public goods.

We need public policy and academia behind us to develop our brand and concept. I would like to see more grants in this direction, to universities and to think tanks.

I give us a 1 in 5 chance of success in the next 10 years. We cannot let futility get in the way of our efforts. Without us, the chances are zero.

A hundred years of capitalism has brought us here. What is here?

• High income and wealth inequality.
• Ageing populations. High dependency ratios.
• Disenchantment with governments. Perception that capitalism and liberal democracy have failed to increase standards of living.
• High and rising public debt.
• Slow economic growth.
• High asset growth.
• Falling interest rates.
• Rising global temperatures and climate volatility.

What capitalism and liberal democracy were supposed to do for us.

• Capitalism encourages economic efficiency and growth.
• Growth leads to the embracing of liberal democracy.

Side effects.

• Capitalism leads to wealth accumulation and concentration.
• Suppliers of labour lag owners of capital as the economy becomes increasingly driven by knowledge.
• Inequality results and accumulates.
• Inequality

  • Results in over saving and insufficient velocity of circulation of money.
  • Is disinflationary and leads to sub-par growth.
  • Results in inefficient allocation of resources.

• Over-saving leads to lower interest rates which encourages over-borrowing.

Fragilities

Inequality can be tolerated until or unless:

• Inflation rises.
• Cost of living rises.
• States fail to provide public goods as promised.
• Social media enables and encourages comparisons.
• Populists leverage inequality to instigate political and social change.

Interest rates can remain low until or unless:

• Public debt levels rise above certain thresholds.
• Inflation rises and holds above certain thresholds.
• Central banks are unable to monetize public debt.
• Savings rates fall.
• There is a loss of confidence in the state.

Sovereign bond markets can remain well behaved until and unless:

• There is a loss of confidence in a government.
• Hyperinflation occurs, which is often a consequence of a loss of confidence.
• Inflation rises due to a supply shock.
• A small subset of countries’ national debt surges out of control. If large numbers of countries grow their national debt it may not trigger a run on their markets.

Where do we go from here?

1. Stagnation and drift.

• Economy: Growth remains low, productivity improvements are incremental, and debt ratios rise gradually. Asset prices stay elevated but fragile.
• Society: Inequality persists; social tensions simmer but don’t break the system. Governments provide just enough support (subsidies, transfers) to prevent collapse but not enough to renew prosperity.
• Politics: Populism and polarization remain chronic but contained, with alternating swings in policy but no systemic overhaul.
• Risk: The system doesn’t “fail” outright, but the long malaise breeds cynicism and erodes confidence in institutions over decades.
• This environment is not sustainable and is more of a transitory phase.

2. Populist disruption

• Economy: Protectionism, trade wars, and industrial policy dominate. This raises costs and inflation but creates short-term jobs in “reshored” sectors.
• Society: Populist leaders exploit inequality and cultural divides. Redistribution schemes or national projects (infrastructure, military) become more common.
• Politics: Liberal democracy weakens as strongmen centralize power, claiming to represent “the people.”
• Risk: Institutions erode, capital flees, sovereign debt markets destabilize. Long-term prosperity suffers, though some groups may feel temporarily empowered.
• This state of the world is unlikely to be sustainable and likely deteriorates into anarchy as populist governments become another failed promise.

3. Crisis-Driven Reset

• Trigger: A major event—climate disaster, financial crash, sovereign debt crisis, or prolonged inflation shock.
• Response: The crisis forces radical policy shifts: debt restructuring, aggressive wealth taxes, universal basic income, or large-scale climate transition spending.
• Economy: Painful adjustment initially, but if reform is well-designed, could lay foundations for a more balanced system.
• Politics: Higher risk of instability in the short run; potential renewal of democratic legitimacy if reforms succeed.
• Risk: Poorly managed resets can spiral into authoritarianism or depression.
• This stage usually precedes a more stable equilibrium. It can, however, be protracted, but in the optimistic case, the acute hardship experienced during this phase seeds the beginnings of a new and sustainable system.

4. Technological and Green Renewal

• Economy: AI, biotech, clean energy, and climate adaptation spark a new productivity wave, lowering costs and creating new industries.
• Society: If gains are shared broadly (through taxation, public investment, or stronger labor bargaining), inequality narrows and living standards improve.
• Politics: Liberal democracy regains legitimacy as it demonstrates the ability to deliver rising prosperity and tackle climate risks.
• Risk: If gains concentrate (as with past tech waves), this path collapses back into scenario 1 or 2.

5. Systemic Breakdown

• Economy: Debt crises, runaway inflation, or climate collapse overwhelm existing institutions.
• Society: Mass unrest, migration crises, and breakdown of social order in vulnerable regions.
• Politics: Liberal democracy retreats sharply, replaced by authoritarianism, fragmented blocs, or even failed states.
• Risk: Global cooperation collapses, amplifying climate and security risks. This is the darkest path, but history shows it cannot be ruled out.
• This stage usually precedes a more stable equilibrium. It can, however, be protracted, but in the optimistic case, the acute hardship experienced during this phase seeds the beginnings of a new and sustainable system.

Prescriptions:

1. Immediate policy actions:

• Inflation and cost of living are major pain points and deserve vigilance.

  • Maintain the independence of central banks.
  • Improve policy models to address efficacy of rates or FX policy tools.
  • Go beyond inflation targeting to managing cost of living; this requires central banks not only to manage price rates of change but price levels as well.
  • Social welfare programs to mitigate the rising costs of living. This will likely be expensive.

• Public debt has far-reaching implications and deserves active management.

  • Re-specify the mandate of treasuries to include not just funding government but managing lifetime funding costs. This is the easy bit.
  • Maintain a realistic and practical budget. This is wide ranging and includes defence, social security and welfare, education, and healthcare. The provision of public goods needs redefinition and reform as the basis of reviewing funding systems and levels.

• The financial system is a source for policy transmission as well as contagion and needs careful management.

  • Bolster bank capital rules and not roll them back.
  • Extend regulation beyond banks to include all systemic financial intermediaries (and possibly principals) such as private equity and private credit, securitisation markets, structured credit markets and the insurance industry.

• Politics.

  • This is possibly the most intractable of all the pillars that need reform. How does a country remain true to the ideals of liberal democracy as the far right gains the popular vote?
  • Balance between freedom and control. Without appropriate controls, the agents of freedom such as the press, the courts, and social media can be co-opted by interest groups to the detriment of freedom. Freedom needs tending to. Freedom, ironically, requires some control.
  • Back to basics. Foundational principles of morality and justice need to be upheld.
  • Good governance. This requires: no concentration of power, checks and balances, term limits, accountability, transparency and rule of law.

2. Reforming the Economy and Society

• Changing mindsets: Self interest is ingrained in human instinct. To balance instinct, humans need to be guided by a set of principles to harness those instincts and to manage them when they are unleashed.

  • Education. Changing mindsets has to happen at an early age as part of the early education curriculum.
  • Diversity, Inclusion and Tolerance.
  • Analysis likes diversity of data, information, interpretations and opinions.
  • Scientific method, logic and rationality. Superstition impedes rational thought, development and progress. Rationality and scientific method help with analysis, information processing and decision making in the resource allocation process.
  • Can and should morality be taught? Unsure.

• Policy principles:

• General liberty clause

All acts are permitted unless they wrongfully impair another’s equal authority or impose significant, non-consensual risk thereof. Restrictions must be necessary and least-restrictive.

• Risk threshold clause

Regulators shall set and publish domain-specific thresholds T for expected harm or credible worst-case; under deep uncertainty, choose conservative T, review at fixed intervals.

• Aggregation clause

Otherwise-harmless acts may be limited when a predictable aggregation breaches T; interventions shall target the aggregate (caps, prices) rather than prescribe individual behaviour, where feasible.

• Consent quality clause

Consent is valid only if informed, uncoerced, and reasonably avoidable; where asymmetries preclude this, processors owe fiduciary duties and purpose limits.

• Scarcity allocation clause

Scarce commons shall be allocated by auction/lottery with equal per-capita distribution of proceeds; targeted, time-bounded rectification applies where prior violations are identified.

• Sunset & audit clause

Any rule that restricts baseline authority expires after N years unless re-justified against T with a published necessity review and independent audit.

• Politics

The government systems most compatible with the above system of principles is, in order of compatibility:

• Constitutional parliamentary democracy.
• Constitutional federal democracy.
• Constitutional presidential majoritarian.

Other systems such as Technocracy, Theocracy, Monarchy, and Command Economies do not fit the above principles well.

Government shall provide public goods, of which the system above is an example. This principle will guide the scope of government authority.