We’ve Reached the Inflection Point
In the forest of North America, the Lodgepole Pine are among the most beautiful and condensed tree lines. They grow tall and are truly impressive.
What’s weird about them is that their seeds prefer the sun. They germinate in the open, sunny ground, and when the forest of Lodgepole Pine matures, it creates such a thick canopy that it provides nearly total shade from the soil below.
When cones spontaneously fall and release their annual seeds, those do not get enough sunlight to grow.
The prosperous and lush canopy is almost too abundant for the greater good; while it might be good for those trees, it is actually damaging to the ecosystem.
Their monopoly over sunlight in that area of the forest prohibits growth and innovation, but these trees do not do this on purpose…
Therefore, nature has adapted, and on top of the annual pines that are helpless against the canopy that took over that part of the woods, the tree has an alternative plan. This tree also sprouts another type of cone called the serotinous cone, which actually only releases seeds and opens up in temperatures over 116 Fahrenheit or 46 Celsius.
The only way to expose them to this heat is by forest fires.
The older, mature canopies need to burn down into ashes and the forest’s ground has to lay barren and get totally destroyed in order for these seeds to receive sunlight and grow into new trees.
The forest fire is inherent in the design of the cosmos; otherwise, there would be no continuity.
The markets do this as well. It might happen organically, but the bulls that are making a fortune aren’t too happy about relinquishing their throne and giving away profits. They remain greedy until the next forest fire gets out of control and accidentally spreads into urban areas and outside of its designated zone.
Therefore, forest rangers are known to deliberately initiate them, intervening in the process.
The Federal Reserve saw excesses in the labor market (11M job openings and 6M applicants) and prices of homes, food, energy, used cars, and imported goods, as well as public markets, and decided to create a forest fire.
While it is beneficial for the sake of seeing the economic expansion go on for longer and blossom, trees must be burned down.
Some choose to completely stay out of the forest during such times while others prefer to be the new seeds, waiting on that sunlight, but no matter what you are, the soil will lay barren at some stage, showing the scorched earth.
Sometimes, the entire forest can be spared and the forest rangers can focus on one area or another, and sometimes you need a total washout.
Irrespective of which of these happens, the opportunity is in these new seeds.
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You must participate in the incredible growth of this new forest, even if you also were part of the fire that destroyed the older trees.
If you’re asking yourself how much longer this forest fire has to go, look at how much financial conditions have tightened, back to the low levels of December 2018, 2016, and 2015:
Courtesy: Zerohedge.com, Bloomberg
Forest fires are easier to spot when forest rangers create them; this is what the Federal Reserve has done with interest rates.
One of the strategies I use when I see a forest fire is to look at all of my holdings and compare their current valuations to deep bear market valuations.
If I’m not comfortable seeing those companies go back to those levels, I trim or sell.
Another bear market strategy is to double down on the highest-quality businesses in the world rather than the fastest-growing, beaten-down dogs.
During 2022, I’ve primarily accumulated shares of the most profitable enterprises in the world.
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