Submitted by Eric Peters, CIO of One River Asset Management
Obviously Not Obvious
“A lot of people have started talking about how we are moving away from monetary dominance to fiscal, and thus inflation will start rising,” said the CIO. “Even Germany is seen to be cracking,” he said.
We were talking about asset allocation, which was an easier exercise back when the 10yr treasury yield was double today’s 1.82% and the Shiller PE ratio was half today’s 30.38.
“But it’s not a guarantee. Japan had an extraordinary fiscal deficit for decades. They ended up with no inflation, no GDP growth and no asset price appreciation.”
“So is this just a prescription for no growth in asset prices?” asked the same CIO. “Are we now consigned to zero growth in all asset classes? Or is there an asset allocation that makes sense?” he added. “Some people are arguing for a reflation model. Adding commodities to their portfolios.” Dusting off those playbooks that investors haven’t used since the 1970s.
“But what if you have to pull out the interwar playbook from the 1930s? What if we are at that point in the cycle where the next material move is massive capital destruction?”
“Would you simply put your money in cash and take it out of stocks and bonds?” asked the CIO. “No one alive knows how to navigate that kind of market - one where the politics tear the economic fabric and conflict roils markets so dramatically that the only thing to do is focus on preservation.”
What if it’s not as simple as a monetary handoff that leads to massive fiscal expansion and reflation?
“Predictions that seem obvious are obviously not obvious. How do you build a probability tree for what comes next? What’s the output?”