Things Fall Apart (Part 3)
October 24, 2018·23 comments·things fall apart
Investors obsess over three major risks that would crater markets by 20 percent. They prepare hedges and watch the headlines. But what if the real threat isn't one of these well-known shocks? What if it's the one thing almost no one is positioned for: a fundamental shift in how the world inflates?
• Everything your portfolio was designed to do assumes deflation wins. Long-term bonds, passive indexing, diversification into abstracted securities. All of it works brilliantly in a deflationary world. None of it works in an inflationary one.
• The Fed accidentally created the conditions for the opposite of what it intended. It flooded money to spur corporate investment and risk-taking. Instead, corporations just bought back stock. Now when rates rise, companies will finally have to take real risks. That creates inflation, not controls it.
• Nobody is talking about the mechanism that would actually allow inflation to take hold. Federal budget deficits are barely mentioned in financial media despite their size. Without narrative, there's no common knowledge shift. Without the shift, politicians never face pressure to actually fight it.
• Even as deflation risks loom, inflation expectations are rising anyway. The Fed, the White House, and Wall Street all want inflation. They're beating the drums for it in financial media. Something is shifting in the background while everyone watches the headlines.
• If inflation does arrive, your biggest portfolio anchor becomes your biggest vulnerability. Long-dated government bonds will stop protecting you. They'll just drain returns while everything else crumbles. The insurance policy becomes the wound.
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DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
