In his seminal work, Thomas Hobbes described the natural state of humanity as a 'war of all against all,' where life is famously 'solitary, poor, nasty, brutish, and short.' While Hobbes was writing about political philosophy in the 17th century, his grim assessment provides a startlingly accurate framework for understanding the current era of global financial markets. For decades, investors lived under a sort of 'monetary Leviathan'—a period of low inflation and central bank intervention that suppressed volatility and enforced a peaceful, predictable order. But as that order fractures, the state of market nature is returning. Today’s investor faces a landscape where traditional correlations have broken down, leaving those who cling to old dogmas exposed to a reality that is increasingly brutish and short.
For the better part of forty years, the 60/40 portfolio—comprised of 60% equities and 40% bonds—was the ultimate social contract of the investing world. It promised that when stocks (the 'nasty' part of the portfolio) suffered, bonds would act as a stabilizing force. However, as we saw in 2022, this covenant is easily broken. When inflation spiked to 9.1% in the U.S., both the S&P 500 and the Bloomberg Aggregate Bond Index plummeted simultaneously. The 'solitary' investor, relying on this two-asset framework, found themselves with nowhere to hide. This failure highlights a fundamental truth: when the sovereign power of the central bank can no longer suppress inflation, the relationship between asset classes reverts to a state of chaos.
The Failure of the Diversification Covenant
The primary mistake most allocators make is assuming that diversification is a static property of an asset. In reality, diversification is a fragile agreement that only holds during periods of stability. When the market enters a 'brutish' phase—characterized by liquidity shocks and rapid deleveraging—correlations tend to move toward 1.0. We saw this during the Great Financial Crisis of 2008 and again during the pandemic-induced crash of March 2020. In these moments, the life of a standard portfolio becomes 'short' indeed, as years of compounding are erased in a matter of weeks. To avoid this, a contrarian approach to asset allocation must move beyond the binary choice of stocks versus bonds.
True protection in a Hobbesian market requires embracing assets that exist outside the traditional 'Leviathan' of the financial system. This means looking toward 'solitary' assets—those whose returns are driven by idiosyncratic factors rather than broad market beta. Commodities, for instance, often thrive when the rest of the market is 'poor.' During the stagflationary 1970s, while the S&P 500 delivered a real return that was essentially flat over a decade, gold and oil experienced massive bull runs. By allocating to real assets and alternative strategies like trend-following or managed futures (which often use tickers like DBMF or KMLM), investors can find a source of return that does not rely on the health of the broader social contract.
Navigating the War of All Against All
To survive a market that is 'nasty and brutish,' one must also rethink the role of liquidity. In a peaceful market, cash is often viewed as a 'poor' asset—a drag on returns that is slowly eroded by inflation. However, in a state of nature, liquidity is the ultimate weapon. It provides the 'sovereign' power to act when others are paralyzed by fear. The contrarian allocator maintains a significant 'dry powder' reserve, not out of pessimism, but as a tactical necessity. When asset prices become 'short' due to forced liquidations, the investor with cash can acquire high-quality businesses at distressed valuations, effectively profiting from the chaos that ruins others.
Consider the energy sector (XLE) during the negative-oil-price event of April 2020. While the market was behaving in a truly brutish fashion, investors who were not forced to sell—and who had the liquidity to buy—captured a generational bottom. This is the essence of contrarian asset allocation: recognizing that the market’s moments of greatest cruelty are also its moments of greatest opportunity. You must be willing to hold positions that look 'solitary' or even 'nasty' to the consensus in order to avoid the 'poor' returns of the herd.
Forging a Durable Covenant with Risk
Ultimately, the goal of asset allocation in a Hobbesian world is not to avoid risk, but to ensure that your portfolio’s life is not 'short.' This requires a shift from 'return maximization' to 'systemic survival.' It means diversifying across different economic regimes—growth, recession, inflation, and deflation—rather than just different ticker symbols. A portfolio that includes significant allocations to gold (GLD), short-term Treasuries (SHY) for liquidity, and specialized value equities (BRK.B) is better equipped for the 'war of all against all' than a standard index fund.
We must accept that the period of artificial market peace is over. The cycles ahead will likely be more volatile, the drawdowns more 'brutish,' and the periods of recovery more 'short' for those caught on the wrong side of the trend. By acknowledging the inherent nastiness of the market state of nature, the contrarian investor can build a fortress of allocation that does not rely on the protection of a central authority, but on the enduring strength of non-correlated, tangible value.