# What Is an Inflationary Bust and Why It Changes Everything About Where You Put Your Money
The Compass portfolio is built on a single idea: the economy is always in one of four possible states, and where you put your money should depend on which state you are in. This framework comes from Charles Gave and Louis-Vincent Darcet, two French economists who spent decades studying what actually drives asset returns across different economic climates. This week, as US consumer confidence hit a record low and the April jobs report disappointed, the framework flagged a clear signal. The global economy is in what Gave and Darcet call an "inflationary bust."
**What the four regimes mean.** Imagine a simple grid. On one axis you have growth: either the economy is growing (boom) or shrinking (bust). On the other axis you have prices: either prices are rising faster than usual (inflationary) or falling toward normal (deflationary). Crossing these two axes gives you four possible states. An inflationary boom is the best environment for most assets: the economy is growing and prices are rising at a manageable pace. A deflationary boom is also good. A deflationary bust is painful but at least central banks can print money to fix it. An inflationary bust is the worst combination of all: the economy is slowing while prices stay high. Central banks cannot simply cut interest rates and stimulate growth, because doing so risks making inflation worse. Investors are stuck. Bonds lose value because inflation erodes fixed payments. Stocks struggle because consumers are squeezed and companies face rising costs. Cash slowly loses purchasing power.
**What the data is saying right now.** The macro snapshot that feeds the Compass reads the global regime as an inflationary bust. US consumer confidence just hit its lowest recorded level, driven by high fuel prices from the ongoing Iran-US tensions and the weight of import tariffs. The April jobs report added 115,000 positions, below what economists expected. Growth is cooling. At the same time, oil remains elevated and inflation pressures have not fully resolved. The US central bank (the Fed) is in a bind: it cannot easily stimulate without risking more inflation. This is the textbook definition of the inflationary bust condition.
**What Gave and Darcet say you should hold in this regime.** The logic follows directly from what each asset class needs to succeed. Bonds need falling interest rates to do well. They suffer in an inflationary bust because rates stay high or keep rising. Equities need growing profits and confident consumers. They struggle when growth stalls and costs stay elevated. What does well? Hard assets. Gold (a physical store of value with no counterparty risk and no yield to erode) tends to preserve or grow real purchasing power when currencies lose value. Energy assets do well when oil prices stay elevated. Non-dollar economies, particularly those that are commodity exporters or that have their own internal growth engines, decouple from the US slowdown and sometimes benefit from higher commodity prices. This is precisely why the Compass holds gold, energy, the Swiss franc, Latin American commodity producers, and Chinese equities instead of US bonds or domestic US stocks.
**China as the counter-cycle.** One of the less obvious ideas in the Gave framework is that different economies can be in different regimes simultaneously. While the US is in an inflationary bust, China's domestic economy showed continued growth through the Golden Week holiday at the start of May, with tourism spending up nearly three percent year over year. Asia is recovering on its own terms, not dependent on the US cycle. A portfolio that holds only US-centric assets misses this entirely. The Compass holds Chinese stocks precisely as a bet that Asia's cycle runs differently from the West's right now.
**The practical implication.** If you hold a standard portfolio of US stocks and US bonds, an inflationary bust is the environment where that standard approach delivers the worst results. Stocks fall. Bonds fall too (because interest rates stay high, which pushes bond prices down). There is nowhere to hide within the conventional mix. The Compass is built to be somewhere else entirely when this happens. That is not a prediction about when the inflationary bust ends. It is a structural positioning: stay in assets that survive this regime, and do not hold assets that depend on it ending quickly.
**What would change this call.** The inflationary bust regime ends in one of two ways. Either inflation finally comes down, which would let central banks cut rates and potentially restart growth (a transition toward a deflationary bust or a new boom). Or growth collapses entirely, at which point the regime becomes more deflationary and the response changes. The Compass watches for early signals of either transition. Until those signals arrive, the current positioning holds. The bias is patience, not action.