We’ll skip the Charlie Munder quotes; it’s broadly apparent that we live in different times:

Nervousness is rational: Normally we don’t see policymakers launch gargantuan, two-pronged stimulus 6 months after a 30% quarterly GDP growth, but election promises are promises, and voters on both sides love to vote themselves money.

We can therefore expect a return of market volatility, more inflation, higher taxes, and higher rates at some point in the coming year(s).

We approach these risks with the market at historic valuation highs:

If we pre-emptively dump stocks, we miss Janet Yellen’s party. Instead, think about managing the risk.

It’s time to clean up portfolios:

• Give lower quality companies a “sell by” date. This can include specialty finance companies funded by wall street, commoditized banks competing on spread, and many fintechs dependent on cheap money. Spacs are for traders, not investors. After dramatic highs in 2021, it would not be a surprise to see subprime auto perform poorly beginning six-twelve months after stimulus.

• Don’t own what everyone else owns. Banks trading outside ETFs are typically less volatile in both directions. A bank like Wayne Savings (WAYN), a consistent little bank trading at book value an 8x earnings with a buyback, dividend, and retail ownership base (no ETFs), has shock absorbers in place.

• Consider investing outside the US: Bank of Butterfield (NTB) is a Bermuda-based bank that lends in wealthy markets around the world. The company benefits materially from higher interest rates, but doesn’t pay US taxes. If anything, the company, which oversees assets in places like Bermuda and Mauritius and runs a segment focused on captive insurers, welcomes higher US tax rates. Mexican banks, operating in a country tied to fiscal discipline due to lack of choice, may finally have their day, especially as manufacturing leaves China.

• Diversify inside financials: Mortgage REITs do well with higher long rates, as do mortgage servicers. Exchanges and market marking brokers can benefit from higher volatility, inflation, and futures on gold and bitcoin.

• Regime change for Private Equity shops and Fintechs. The stocks that have trounced the indices in recent years are low-rate champions. A stock at 60x earnings growing at 20% will be at 50x next year – will it still be growing at 20%? Is 2% earnings yield enough if the 10yr yield rises to 2%? Multiple compression is a cornerstone of rising rate backdrops.