Mazars’ Lagarias: “It is an uncomfortable message that we end the year with, yet a necessary one”

by | Dec 27, 2022

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George Lagarias

George Lagarias, Chief Economist at Mazars, shares his 2023 outlook with IFA Magazine.

He comments: “It is an uncomfortable message that we end the year with, yet a necessary one. Stability should never be seen as the ‘normal’ state of things. And that’s well and truly better for truly long-term investors.

“Stability is a small and short-term harbour in a sea of uncertainty. The Second Law of Thermodynamics, entropy, is enshrined in our very nature, down to a sub-molecular level. No system can stay stable forever. Those of us lucky to be born in the later stages of the previous century have known economic stability, mostly low inflation and unprecedented technologic growth. With major wars consigned to the pre-Atomic era, at least in the west, disruption for developed economies has only been a term used for innovation, not backpedalling.

“Yet history teaches us that this is not the norm. Else history books would not be written. Forward movement is not inexorable. It is possible for empires to decay and fall. It is possible for others to make a leap, only to fall short. Knowledge can be forgotten – never to be retrieved again. Civilisation can slumber for a millennium. It is possible for the earth to change its very climate. ‘Everything is in flux’, the philosopher Heraclitus warned us. Determinism is our feeble human attempt to explain what has already emerged from the chaos.


“The point is that stability can’t be taken as a given, and instability to be seen as a surprise. Quite the opposite. We should be grateful for stability when it is found, but always prepare for instability as the natural state of play.

After the pandemic, this is true of most things. Office work globalisation and supply chains have been interrupted, and the global economy, unavoidably, disrupted. Plagues will do that.

“The most painful adjustment comes for portfolio holders. Since 2008, the US Federal Reserve has been the ‘only game in town’. Its will and whims, expressed by Quantitative Easing, a method to print money without incurring consumer inflation, have moved markets up and down almost singularly. On the surface, it was all really positive. Since the demise of Lehman Brothers, global stocks and bonds gave investors a healthy 12% and 4% per annum respectively, higher than their long term averages and at lower volatility. However, the short-term strategy turned long-term solution came at a cost and could not possibly last ad infinitum.


“Good short-term returns at low volatility don’t come for free. Global debt soared to pay for lowering that volatility. Yield curves flattened, with risk-free rates kept at zero, imperilling not only pension funds and transition from defined benefit to defined contribution but the flow of money itself. Further arresting healthy credit flows, central banks dominating bond markets crowded out traders and specialist bond investors, leaving a gaping hole as they abruptly retreated. Meanwhile, low volatility / high returns lured investors away from the real economy (with all its risks) to the financial economy, resulting in gross capital misallocation across the world. Consequently, good jobs became scarcer and wages stagnated. This did not sit well with the electorates, who set about to change the paradigm.

The pandemic beat them to it. High supply-side inflation caused the system to reboot itself. It’s a brave new world before us. New ways to work, new global alliances, new supply chains, new dynamics altogether. Quantitative Easing may yet again come back, but then it may not.

“Yet this is good. Meme tech stocks descended from their mythic origins narrative towards fairer valuations, allowing their real competitors to also find funding and move the world forward. This is positive for discerning investors as well. A QE-turbo-charged financial market was too quick to stop and think of fundamentals. It’s not just the limitations of current tech industry models, which can always be overcome with cash and acquisitions. The reckoning is coming for the management models themselves. Already Wall Street scrapped the guru-style-led WeWork before private investors had had a chance to poor money into a disastrous business model. Already investors are taking a closer look at dual-class shares, which allow founders (and presumably their offspring) to control the fates of the very influential and highly valued tech behemoths. A model that ascribed lower valuations for Europe’s family-oriented businesses could well do the same to today’s unassailable Silicon Valley legends, fight back as they may. It happened to the Vanderbilts, the Rockefellers and the Morgan’s, it happened to steel and the auto industry, it happened to banks, it is happening to tech. Nothing bad about a spot of creative destruction.


“Meanwhile, yield has returned, and with it the benefits of a diversified portfolio. If the yield curves steepen (and remain thus) the next paradigm will be founded on a more ‘normal’ and stable basis. With it, credit could begin to flow again not just to stocks and bonds, but the real economy as well, ending an era dismally called ‘Secular Stagnation’.

“Rebooting means volatility and uncertainty, but investors should remember that value lost during these episodes may not necessarily remain lost. It remains in arrears. Returns after ‘rebooting episodes’ tend to be higher. On average, thus, investors with the patience and liquidity to increase their exposure in the downturn tend to win out.”

So, the lesson is simple.

  • A changing of paradigm is unavoidable and usually necessary.
  • It may be painful, even very painful for some time (one year to three if history is anything to go by), but
  • the returns over the longer term tend to balance out the short-term losses.

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